RBI caps Ways and Means Advances limit for the Government at Rs 35,000 Cr. per week for the first half of FY 2015

RBI has set the upper limit for the WMA (Ways and Means Advances) for the central government at Rs 35,000 crore per week for the first half of the FY 2015. If the government utilises 75% of WMA limit, RBI may further activate fresh flotation of market loans. The second half limit will be fixed in September 2014. If the prevailing circumstances demand, there exists flexibility with the RBI to revise the limits at any time after discussions with government.

Interest rate on WMA/ overdraft: 2% above the repo rate
Minimum balance required to be maintained by the government with the Reserve Bank:

  • On Fridays: Not be less than Rs 100 crore
  • On the date of closure of government’s financial year:  Not be less than Rs 100 crore on
  • On June 30 (closure of the annual accounts of the RBI): Not be less than Rs 100 crore on
  • Other Days: Not less than Rs 10 crore

Duration:

For Central Government: 10 consecutive working days i.e. Overdrafts beyond 10 consecutive working days will not be allowed.

What is WMA (Ways and Means Advances) and how this facility is utilized?

Via an agreement under Section 21A of the Reserve Bank of India Act, 1934, the RBI acts as a banker to various State Governments in India. At present all Indian States (except Jammu & Kashmir’ and ‘Sikkim’) have entered into such agreements with the RBI in order to undertake general banking business in India (including payments, receipts, collection, remittance of money, management of public debt and issue of new loans). ‘Jammu & Kashmir’ and ‘Sikkim’ have entered into agreements with the RBI, ONLY for the limited purpose of managing their public debt.

The various States maintain a minimum reserve balance with the RBI. But these minimum balances are not fixed; these minimum balances depend upon the economy of the state and its budget.

Thus, RBI has with it an account balance for each state and RBI conducts ordinary banking business for the state without any remuneration. Since RBI doesn’t asks for any remuneration from States, RBI is doesn’t have any obligation to pay any interest on such balances. RBI keeps on advising the States about their daily cash balance at the close of each working day.

Now, there are times when these balances maintained by States with RBI have a temporary mismatch in the cash-flow of receipts and payments of the State Governments.

To meet these temporary mismatches, Under Section 17(5) of RBI Act, 1934, the RBI provides Ways and Means Advances (WMA) to the States in order to assist them to overcome these temporary mismatches in the cash flow of their receipts and payments. Thus, WMA is a mechanism used by RBI under its credit policy. It is a temporary in character and used to bridge any gap arising from short periods between expenditure and receipt of the State Governments. WMA are not a source of finance but are meant to provide provide a cushion to the States, so that they can carry on their necessary activities in spite of mismatches on fiscal transactions.

  • Time Period of WMA facility: Maximum 90 days i.e. WMA is repayable in each case not later than 3 months from the date of making the advance.

Note:

 i) Section 17(5) of RBI Act allows RBI to make WMA both to the Central and State Governments. 

ii) In a period of natural calamity or disaster, ad hoc WMA limits are granted to the States to facilitate transactions in government accounts.

 

What are the various types of WMA (Ways and Means Advances)?

There are 2 types of WMA – i) Normal and ii) Special

  1. Normal WMA: These are Unsecured Advances i.e. Clean Advances. In this arrangement, a State Government provides no securities. Normal WMA facility is based on the State’s latest three years’ average of revenue receipts and capital expenditure.
  2. Special WMA: These are Secured advances. In this arrangement, a State Government takes WMA facility by pledging Government of India dated securities and Treasury Bills held by the State Governments with. The operative limit for special WMA for a State is subject to its holdings of Central Government dated securities upto a maximum of limit sanctioned. State Governments are permitted Special WMA to the extent of around 85% to 90% of the market value of their holdings of Government of India dated securities and Treasury Bills after providing for margins against price risk, with a higher margin for securities of residual maturity in excess of 10 years.
What is an Overdraft Facility? What is Maximum duration of an Overdraft Facility?

Any amount drawn by a State in excess of WMA is called an overdraft.

Maximum Duration of Overdraft:

  • For Central Government: 10 consecutive working days
  • For a State: 14 consecutive working days and 36 working days in a quarter.

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