Ways and Means Advances 

#GS3 #Economy 

Context: The Reserve Bank of India (RBI), announced a 60% increase in the Ways and Means Advances (WMA) limit of state governments over and above the level as on March 31, with a view to enabling them “to undertake COVID-19 containment and mitigation efforts” and “to better plan their market borrowings”.  

Analysis :  

  • The fund deficit or cash-flow mismatches of the Government are largely managed through: o Issuance of Treasury Bills,  
    • Getting temporary loans from the RBI called Ways and Means Advances (WMA) and  
    • Issuance of Cash Management Bills. 

Ways and Means Advances (WMA)  

  • The Reserve Bank of India gives temporary loan facilities to the centre and state governments as a banker to government.  
  • This temporary loan facility is called Ways and Means Advances (WMA).  
    • In that sense, they aren’t a source of finance per se.  
  • The WMA is a loan facility form the RBI for 90 days which implies that the governments has to vacate the facility after 90 days (Section 17(5) of the RBI Act, 1934).  
  • The interest rate for WMA is currently charged at the repo rate, which is basically the rate at which it lends short term money to banks.  
  • The limits for WMA are mutually decided by the RBI and the Government of India.  
  • The governments are, however, allowed to draw amounts in excess of their WMA limits.  
    • If the WMA is extended for more than 90 days, it will be treated as an overdraft.  

Overdraft

  • Overdrafts are not allowed beyond 10 consecutive working days.  
  • The interest rate on overdrafts would be 2 percent more than the repo rate.  

WMA scheme for the State Governments  

  • Under the WMA scheme for the State Governments, there are two types of WMA:  
  • Special Drawing Facility or SDF (Special WMA in the past) and  
  • Normal WMA.  
  • SDF is extended against the collateral (mortgaging) of the government securities held by the State Government.  
    • Interest rate for SDF is 1% less than the repo rate.  
  • If the state is not finding enough money, it can opt for the normal WMA which has a higher interest rate.  
  • The amount of loans under normal WMA are based on three-year average of actual revenue and capital expenditure of the state.  

Treasury Bills (T-bills) :  

  • Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 days, 182 days and 364 days.  
  • Treasury bills are zero-coupon securities and pay no interest.  
  • Instead, they are issued at a discount and redeemed at the face value at maturity.  
  • For example, a 91 days Treasury bill of ₹100/- (face value) may be issued at say ₹ 98.20, that is, at a discount of say, ₹1.80 and would be redeemed at the face value of ₹100/-.  

Cash Management Bills (CMBs)  

  • Cash Management Bills (CMBs) are short-term instruments introduced to meet the temporary mismatches in the cash flow of the Government of India.  
  • The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.  

Other Provisions  

  • At some point, the Centre, at least, might have to invoke Section 5(3) of its Fiscal Responsibility and Budget Management Act, 2003.  
    • That overriding provision in the Act – which otherwise bars the RBI from lending to the government, except for meeting temporary cash flow mismatches – allows the central bank to “subscribe to the primary issues of Central Government securities” under very specified grounds.  
    • Those cover, among other things, “act of war” and “national calamity”.  
  • Apart from monetisation of deficits – which is what this provision effectively entails – the RBI may, in the coming day, also have to undertake increased secondary market purchases and sales of Central as well as state government securities.  
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