Context:
Reserve Bank of India (RBI) has increased the Ways and Means Advance (WMA) limit of States/UT to ₹60,118 crores from existing ₹47,010 crores.
About Ways and Means Advance (WMA):
- Provided by RBI
- Advances to States/UTs to meet temporary mismatches in the cash flows of receipts and payments.
- Also available for the Union Government.
- If the WMA exceeds 90 days, it would be treated as an overdraft (the interest rate on overdrafts is 2 percentage points more than the repo rate).
- Number of loans under normal WMA is based on – 3-year average of actual revenue and capital expenditure of the state.
- Types –
- Normal WMA: A fixed limit is set, and borrowing within this limit is charged at the repo rate.
- Special WMA [now known as Special Drawing Facility (SDF)]: Additional borrowing over and above the normal WMA, backed by the government securities held by the state government.
- Procedure –
- First, a state/UT is provided with a special WMA and after its exhaustion, it gets a normal WMA.
- Special WMA has lower interest rate than Normal WMA
- Interest rates are linked to Repo rate
Apart from WMA, Special Drawing Facility (SDF), and Overdraft (OD) facility are important financial accommodation instruments availed by States/UTs which are governed under the RBI Act, 1934.
About Special Drawing Facility (SDF):
- Availed by State against the collateral of Consolidated Sinking Fund (CSF), Guarantee Redemption Fund (GRF), Auction Treasury Bills (ATBs), etc.
- CSF and GRF are reserve funds maintained by some State with the RBI.
About Overdraft Facility:
- Facility is provided whenever financial accommodation to a State exceeds its SDF and WMA limits.
- Generally, State Governments/UTs can avail overdraft on 14 consecutive days (relaxation can be provided by RBI).
Auction Treasury Bills:
- Money market instruments issued by the Government of India.
- A promissory note with guaranteed repayment at a later date.
- Uses – meets short term requirements of the government, reduces the overall fiscal deficit of a country.
Consolidated Sinking Fund:
- Set up in 1999-2000 by the RBI
- Purpose – To meet redemption of market loans of the States.
- Initially, 11 States set up sinking funds. Later, the 12th Finance Commission (2005-10) recommended that all States should have sinking funds for amortisation of all loans, including loans from banks, liabilities on account of National Small Saving Fund (NSSF), etc.
- Administered by – Central Accounts Section of RBI Nagpur.
- Conditions –
- The fund should be maintained outside the consolidated fund of the States and the public account.
- It should not be used for any other purpose, except for redemption of loans.
- As per the scheme, State governments could contribute 1-3% of the outstanding market loans each year to the Fund.
Guarantee Redemption Fund:
- Established in the Public Account of India from 1999-2000
- Purpose – For redemption of guarantees given to Central Public Sector Enterprises (CPSEs), Financial Institutions, etc. by the Union Government whenever such guarantees are invoked.
- Fed through budgetary appropriations with an annual provision in the Budget Estimates (BE).
- Conditions –
- Maintained outside the consolidated fund of the States in the public account
- Not to be used for any other purpose, except for redemption of loans.
Source: The Hindu
Previous Year Question
With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of:
[UPSC Civil Services Exam – 2024 Prelims]
(a) Bond market
(b) Forex market
(c) Money market
(d) Stock market
Answer: (c)
