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Recently, the Reserve Bank of India has decided to allow 60% higher borrowing as compared to 30th March 2020, under the Ways and means advances for states like Kerala, Punjab, and Haryana. The main aim to increase the limit is to counter the losses faced by the states due to the Covid 19 pandemic. These borrowings act as temporary relief and will only have a marginal impact on the fiscal crisis that is faced by the state.
This move by RBI facilitates the situation where state expenditure to battle the spread of coronavirus. The availability of these funds will help the state government to deal with their short term expenditure over and above its long term market borrowing.
In simple terms, it means a credit facility provided by the Reserve bank of India to the governments to enable it to meet momentary mismatches between expenditure and revenue. The government who borrowed the money has to make an interest repayment to the Reserve Bank of India.
The rate of interest will remain the same as the repo rate; however, the tenure will be of 3 months. Furthermore, the limits for the WMA are collectively decided by the reserve bank and the Indian government.
As per the section 17(5) of RBI Act, they are not the source of finance, the authorities of the reserve bank lends money to the union government and the state government subject to being there repayable “not more than the 3 months from the date of making advance”.
The ways and advance scheme of the union government were first introduced on 1st April 1997, after putting an end to the 40 years old system of the treasury bills to finance the central government losses.
There are two types of WMA:-
The Special ways and means advance it is also known as a special drawing facility is provided against the collateral of the securities of the government held by the states. After the state has worn out the limit of SDF, it gets Normal Ways and means advance. The interest rate for SDF is one percentage point less than the repo rate.
The number of loans under normal Ways and advances is based on a 3 year average of tangible revenue and capital expenditure of the state.
Some of the key features of the WMA are:
The state and centre have different limits and overdraft conditions:
The WMA limit for the central government during the 1st half of year 2020-21 has been fixed at Rs. 1,20,000 crore. This amount is about 60% higher than the earlier limit which was Rs. 75,000 crore limits for a similar time period 2019-20. The limit fixed for the 2nd half of the last fiscal year i.e. October-March was 35,000 crore.
The total of the WMA limit was around Rs 32,225 crore till March 31, 2020. On the 1st of April, 2020 the RBI declared a 30% hike in this limit, which has now been improved to 60%, taking it to Rs 51,560 crore. The superior limit will be applicable until September 30.
The Central bank, on the 7th of April, also increased the period for which a state can be in overdraft from 14 to 21 uninterrupted working days, and from 36 to 50 functioning days during a quarter.
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