All you wanted to know about Ways and Means Advances

Satya Sontanam | Updated on April 21, 2020

As a part of its Stimulus 2.0 to deepen the availability of credit, 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 per cent over the level as on March 31, 2020.

What is it?

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.

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.

There are two types of WMAs — normal Ways and 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 WMA limit for all the States put together since February 1, 2016 ( supposed to continue till March 31, 2020) stands at ₹32,225 crore. States with higher WMA limits include Uttar Pradesh (₹3,550 crore), Maharashtra (₹3,385 crore) and Tamil Nadu (₹2,475 crore). ICRA estimates that enhanced WMA limit for FY21 after the hike is about ₹51,600 crore.

The rate of interest applicable for normal WMA funding from RBI is the repo rate (now 4.4 per cent), while overdrafts are given at repo plus 2 per cent 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.

Why is it important?

The cash flow problems of State governments, which were already under stress, have been aggravated by the impact of Covid-19. 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. A comparison of the cost of funds for individual States on market borrowings versus SDF, WMA and overdrafts by CARE shows that for 2018-19, the average cost of SDF borrowings across States was on an average 213 basis points lower than weighted average cost of market borrowings.

Having said that, 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).

Why should I care?

Worried if your State has enough money to add to hospital beds and keep emergency services going? Well, WMA funding can help fill the gap, though only partly. WMAs also help rein in borrowing costs of States, helping their finances in the long run. Lower borrowing costs of your State imply lower local tax collections from you.

The bottomline

It may be too much to call it a bazooka. But when crisis hits, any kind of weaponry helps.

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Published on April 21, 2020

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