News Excerpt
India’s Central bank recently announced an increase in the Ways and Means Advances (WMA) limits to States. For the first half of FY21, WMA limit of States has been increased by 60 percent.
Pre-Connect
• WMA is a mechanism used by the RBI to fund States to help them to tide over temporary mismatches in cash flows. Borrowings through WMA are to be repaid within three months and usually offered at the repo rate.
• When managing money, we know that cash outflows often overshoot inflows. When businesses face this, they approach banks to get working capital loans. But State governments in India either go for market borrowings by issuing securities or seek short-term funding from the RBI.
• There are two types of WMAs — Normal Ways & Means Advances; and Special Drawing Facilities against government securities held by States as collateral. Any amount drawn by a State in excess of the normal WMA is an overdraft. There is a State-wise limit for the funds that can be availed via WMA.
• These limits depend on many factors, including total expenditure, revenue deficit and fiscal position of the State. WMA limits are revised periodically and the previous utilisation rates are considered while determining revised limits.
• The rate of interest applicable for normal WMA funding from RBI is the repo rate (now 4.4 percent), while overdrafts are given at repo plus 2 percent respectively.
• The interest levied for special WMAs could be lower than the repo rate due to the backing of government securities. A look back at the usage of WMA reveals that while few States availed WMA/overdrafts from the RBI frequently, some resorted to WMA only occasionally.
Analytica
Why is it important?As frontline fighters against Covid-19, many States are in need of immediate and large financial resources to deal with challenges, including medical testing, screening and providing income and food security to the needy.
Increased WMA limit for States to borrow short-term funds from the RBI provides a financial cushion when there’s uncertainty in revenue collections due to stressed economic conditions.
WMA can be an alternative to raising longer-tenure funds from the markets, issue of State government securities (State development loans) or borrowing from financial institutions for short-term funding.
WMA funding is much cheaper than borrowings from markets.
Not all States were pleased with this announcement. Some voiced concerns that increasing WMA limits would not be sufficient and demanded a moratorium on loans and interest for nine months, while others complained about the short window to repay (90 days).
Conclusion
The higher limit will be valid till September 30. The central bank has extended the period for which a state can be in overdraft from 14 to 21 consecutive working days and from 36 to 50 working days during a quarter.
PEPPER IT WITH
UCBs, Registrar of Cooperative Societies, CRR, SLR, OMO