From UPSC perspective, the following things are important :
Prelims level : WMA
Mains level : Tools for countering cash-flow mismatches
The RBI has raised the Ways and Means Advances, or WMA, limit by 30% for all States and UTs to enable them to tide over the crisis caused by COVID-19 outbreak.
What are Ways and Means Advances?
- The RBI gives temporary loan facilities to the centre and state governments as a banker to the government. This temporary loan facility is called WMA.
- It is a mechanism to provide to States to help them tide over temporary mismatches in the cash flow of their receipts and payments.
- It was introduced on April 1, 1997, after putting an end to the four-decade-old system of adhoc (temporary) Treasury Bills to finance the Central Government deficit.
- Under Section 17(5) of RBI Act, 1934, the RBI provides Ways and Means Advances (WMA) to the central and State/UT governments.
How is WMA availed?
- This facility can be availed by the government if it needs immediate cash from the RBI.
- The WMA is to be vacated after 90 days.
- The interest rate for WMA is currently charged at the repo rate.
- The limits for WMA are mutually decided by the RBI and the Government of India.
Types of WMA
There are two types of WMA — (1) Normal and (2) 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. The interest rate for SDF is one percentage point less than the repo rate.
- The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.
How the govt. meets temporary cash needs?
The fund deficit or cash-flow mismatches of the Government are largely managed through:
- Issuance of Treasury Bills
- Getting temporary loans from the RBI called Ways and Means Advances (WMA) and
- Issuance of Cash Management Bills (CMBs)
- Treasury Bills are short term (up to one year) borrowing instruments of the Government of India which enable investors to park their short term surplus funds while reducing their market risk.
- CMBs are short term bills issued by the central government to meet its immediate cash needs. The bills are issued by the RBI on behalf of the government having a maturity of less than 90 days.