RBI extends States’ Ways and Means credit to Sept.

#GS2 #ECONOMY # RBI 

TELEGRAM LINK: https://t.me/believersias

Context: 

The Reserve Bank of India (RBI) decided to continue with the existing interim Ways and Means Advances (WMA) scheme limit of 51,560 crore for all States/ UTs shall for six months i.e., up to September 30, given the prevalence of COVID-19.

Recommendations of the Advisory Committee

  •  Based on the recommendations of the Advisory Committee on WMA to State Governments, 2021 (chaired by Sudhir Shrivastava) the RBI had revised the WMA Scheme of States and Union Territories (UTs).
  •  The WMA limit arrived at by the Committee based on total expenditure of States/ UTs, works out to ₹47,010 crore.
  •  The RBI would review the WMA limit thereafter, depending on the course of the pandemic and its impact on the economy.
  •  The Special Drawing Facility availed by State Governments/ UTs shall continue to be linked to the quantum of their investments in marketable securities issued by the Government of India, including the Auction Treasury Bills.

BIASA BASICS 

Ways and Means Advances (WMA) scheme

  • In 2020, RBI had announced an increase in the Ways and Means Advances (WMA) limits to States enabling them “to undertake COVID-19 containment and mitigation efforts” and “to better plan their market borrowings”.
  • For the first half of FY21, WMA limit of States had been increased by 60 per cent over the level as on March 31, 2020.
  • The Reserve Bank of India (RBI) gives temporary loan facilities to the central and state governments. This loan facility is called Ways and Means Advances (WMA).
  • When managing money, we know that cash outflows often overshoot inflows.
Insights into Editorial: Reserve Bank of India is easing Financial Stress  amidst the COVID-19 Lockdown - INSIGHTSIAS
  • When businesses face this, they approach banks to get working capital loans.
  • But State governments in India either go for market borrowings by issuing securities or seek short-term funding from the RBI.
  • Such Borrowings through WMA are to be repaid within three months and usually offered at the repo rate.
  • In that sense, they aren’t a source of finance per se, thus not a part of Fiscal Deficit.
  • Section 17(5) of the RBI Act, 1934 authorises the central bank to lend to the Centre and state governments subject to their being repayable “not later than three months from the date of the making of the advance”.

Types of WMAs and Interest rates

  • There are two types of Ways and Means Advances - normal and special.
  • Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state.
  • After the state has exhausted the limit of SDF, it gets normal WMA.

Ways and Means Advances limit

  • The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically, usually half-yearly.
  • There is a State-wise limit for the funds that can be availed via WMA.
  • These limits depend on many factors, including total expenditure, revenue deficit and fiscal position of the State.
  • WMA limits are revised periodically and the previous utilisation rates are considered while determining revised limits.

Way forward 

  • The Reserve Bank will review the WMA limit thereafter, depending on the course of the pandemic and its impact on the economy, the central bank said.
  • It further said Special Drawing Facility (SDF) availed by state governments and UTs will continue to be linked to the quantum of their investments in marketable securities issued by the Government of India, including the Auction Treasury Bills (ATBs).
  • The net annual incremental investments in Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF) will continue to be eligible for availing of SDF, without any upper limit. CSF and GRF are reserve funds maintained by some State Governments with the Reserve Bank of India.
  • 'A uniform hair cut of 5 per cent shall be applied on the market value of securities, for determining the operating limit of SDF on a daily basis,' the RBI said.

     

SOURCE: THE HINDU 

 

Print Friendly and PDF
blog comments powered by Disqus