Banking Awareness: Ways and Means Advances (WMA)

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Ways and Means Advances

Introduction: The Reserve Bank makes advances to the Central and state governments to remove the temporary mismatch in the cash flows. Such advances are termed as ‘ways and means advances’ (WMA).

It is defined in Section 17(5) of RBI Act, 1934 and must be repaid not later than three months from the date of the making of the advance.

How it works: Central or State govt departments maintain accounts with the RBI. As the general public has an account in Commercial banks, government departments have an account in RBI. RBI makes receipts and payments on behalf of these departments. Suppose Department A has an account with RBI.  After RBI made some payment on behalf of Department A, its balance is exhausted. So RBI will automatically credit the account of this Department A with some amount in form of WMA, and charge interest on it as applicable at that time.

Ways and Means Advances for State Government:

  • The Reserve Bank has been extending WMA to State Governments since 1937
  • The WMA scheme for the State Governments has provision for:
    • Special Drawing Facility (SDF) and
    • Normal WMA.
  • The SDF (Earlier known as special WMA) is extended against the collateral of the government securities held by the State Government.
  • After the SDF limit is exhausted, the State Government is provided a normal WMA. The normal WMA limits are based on a three-year average of actual revenue and capital expenditure of the state. It is not collateral-based. 

Overdraft in WMA: WMA limits are if exceeded, is called overdraft.

WMA Limit: Each state a different limit on the amount of advance under WMA. The total WMA for all states in total is Rs. 47,010 crores. The new limit is based on the recommendation of a committee headed by Shri Sudhir Shrivastava.

  • Interest rate on WMA (Before 3 months): Repo Rate
  • Interest rate on WMA (Beyond 3 months): Repo Rate +1%

Overdraft Maximum tenor (State Govt): 14 consecutive working days with a limit of 36 days in a quarter. (Increased to 21 working days with a limit of 50 days in a quarter in wake of COVID-19- Valid till September 30, 2021)

  • Interest Rate on Overdraft up to 100 percent of WMA limit: Repo Rate + 2%
  • Interest Rate on Overdraft exceeding 100 percent of WMA limit: Repo Rate + 5%

Surplus balances of State Governments are invested in the Government of India 14-day Intermediate Treasury Bills automatically in accordance with the instructions.

Ways and Means Advances for Central Government:

A scheme of ways and means advances (WMA) by the RBI to the Central government is being introduced to accommodate temporary mismatch es in the government’s receipts and payments in 1997. With this, the system of ad hoc Treasury Bills to finance the budget deficit was discontinued.

Limit of WMA for Central Government: This limit is fixed every quarter: Click here to check this limit

The interest rate on WMA/overdraft will be:

  • WMA: Repo Rate
  • Overdraft: Two percent above the Repo Rate

Overdrafts beyond ten consecutive working days will not be allowed.

The Reserve Bank may trigger fresh floatation of market loans when the Government of India utilizes 75 percent of the WMA limit.

Important Questions:

  1. WMA is defined under which section of RBI Act?
  2. Types of WMA for state govt?
  3. Interest rate on WMA for State Govt and Central Govt
  4. Inter Rate on Overdraft on WMA for Central and State Govt?
  5. Overdraft tenor for Central and State Govt for WMA?
  6. Surplus balances of State Governments are invested in?
  7. The Reserve Bank may trigger fresh floatation of market loans when the Government of India utilises ____  per cent of the WMA limit.

 

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