Context: The Reserve Bank of India has raised the limit for short term credit that the government can borrow from the central bank.
The limits for this credit facility, known as ‘Ways and Means Advances’, has been raised sharply to Rs 1.2 lakh crore for the first half of 2020-21.
The increased limit comes at a time when government expenditure is expected to rise as it battles the fallout of a spreading Coronavirus. The availability of these funds will government some room to undertake short term expenditure over and above its long term market borrowings.
They are temporary loan facilities provided by RBI to the government to enable it to meet temporary mismatches between revenue and expenditure.
The government makes an interest payment to the central bank when it borrows money.
The rate of interest is the same as the repo rate, while the tenure is three months.
The limits for WMA are mutually decided by the RBI and the Government of India.
The WMA scheme for the Central Government was introduced on April 1, 1997, after putting an end to the four-decade old system of adhoc (temporary) Treasury Bills to finance the Central Government deficit.
What if the government needs extra money for extra time?
When the WMA limit is crossed the government takes recourse to overdrafts, which are not allowed beyond 10 consecutive working days.
The interest rate on overdrafts would be 2 percent more than the repo rate.
There are two types of Ways and Means Advances — normal and special.
Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state. After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate.
The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.
