Why in news?

The Reserve Bank of India (RBI) has increased the Ways and Means Advances (WMA) limits of State governments and Union territories to ₹60,118 crore from ₹47,010 crore.

This decision is based on the suggestions from a group formed by the Reserve Bank, which included some state Finance Secretaries, and after reviewing the states' recent spending data. This increase will come into effect from July 1, 2024.

The RBI further said that Special Drawing Facility (SDF) availed by State Governments/ UTs will continue to be linked to the quantum of their investments in marketable securities, issued by the Government, including Auction Treasury Bills (ATBs).

What’s in today’s article?

• Special Drawing Facility (SDF)
• Auction Treasury Bills
• Ways and Means Advances (WMA)

Special Drawing Facility (SDF)

• SDF is a type of short-term borrowing arrangement provided by RBI to state governments and Union Territories (UTs).
• This facility is intended to help them manage temporary mismatches in their cash flows, similar to the Ways and Means Advances (WMA) but with different terms and conditions.
• SDF is provided against the collateral of government securities held by the state governments or Union Territories.
• The amount available under SDF is directly linked to the value of these securities.

Auction Treasury Bills

• Auction Treasury Bills (T-Bills) are short-term debt instruments issued by the government to meet its immediate financial needs.
• They are sold through a competitive bidding process, also known as an auction, conducted by RBI on behalf of the government.

Ways and Means Advances (WMA)

• About
  • Ways and Means Advances (WMA) are temporary loan facilities provided by the RBI to the central and state governments to help them manage temporary mismatches in their receipts and expenditures.
  • These borrowings are meant purely to help them to tide over temporary mismatches in cash flows of their receipts and expenditures.
  • The WMA scheme was introduced on April 1, 1997.
• Legal provision
  • Section 17(5) of the RBI Act, 1934 authorizes 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
  • Normal WMA: A fixed limit is set, and borrowing within this limit is charged at the repo rate.
  • Special WMA or Special Drawing Facility: Additional borrowing over and above the normal WMA, backed by the government securities held by the state government.
    • After the state exhausts the limit of SDF, it gets normal WMA.
• Key features
• Duration: The advances are typically short-term, with a duration of up to 90 days.
  • If the amount is not returned within this period, it would be treated as an overdraft.
  • The interest rate on overdrafts is 2 percentage points more than the repo rate.
• Interest Rates: Interest rates on WMA are linked to the repo rate.
  • For Normal WMA: interest rate = repo rate
  • For Special WMA: interest rate = one percentage points less than repo rate
  • For overdraft: interest rate = 2 percentage points more than the repo rate
• Limits: The RBI, in consultation with the government, sets limits for WMA for both the central and state governments. These limits are reviewed periodically.
• Number of loans: Number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.
• Benefits of WMA
  • Liquidity Management: Helps the government manage its day-to-day liquidity requirements, ensuring that short-term cash flow mismatches do not disrupt essential spending.
  • Fiscal Discipline: Encourages better fiscal management as the governments are expected to repay the advances within a stipulated period, promoting timely receipt and disbursement of funds.
  • Interest Cost Savings: The interest rate on WMA is typically lower than market borrowing rates, reducing the interest burden on the government.
  • Flexible Funding: Provides a flexible source of funds for immediate and unforeseen expenditures without having to resort to market borrowings, which might be time-consuming and more expensive.
  • Market Stability: By avoiding sudden large borrowings from the market, WMA helps in maintaining stability in the government securities market.
• Limitations and Risks
  • Short-Term Solution: WMA is only a short-term solution and cannot be relied upon for long-term fiscal issues.
  • Repayment Pressure: The need to repay within a short period might create additional pressure on the government’s finances.
  • Interest Costs: While the interest rate is lower than market borrowings, prolonged use of WMA can still add to the interest burden if not managed properly.