Ways and Means Advances

Now, we know that RBI works as a banker to the State Governments by agreement. But there is no fixed minimum reserve balance for the State Governments. All state Governments are required to maintain a minimum reserve balance with RBI, but it depends upon the size of the economy of the state and its budget.

However, there are times, when there is a temporary mismatch in the cash flow of the receipts and payments of the State Governments. To handle this mismatch, there is a WMA scheme / facility which refer to Ways and Means Advances.

  • RBI makes WMA to the state governments for a period of 90 Days.
  • If the state government take WMA against the collateral Government securities, it is called Special WMA.
  • If they are not against the security, then they are provided WMA based upon the three-year average of actual revenue and capital expenditure of the state. This is called normal WMA.
  • WMA limits are if exceeded, is called overdraft.
    • A state Government can withdraw an overdraft for maximum of 14 days consecutively.
    • A state Government can withdraw an overdraft for maximum 36 days in a quarter.
    • The rate of interest is linked to repo rate.

Management of Public Debt:

  • RBI helps both the central government and state governments to manage their public debt, float new loans, issue and retirement of rupee loans, interest payment on the loan and operational matters about debt certificates and their registration. RBI’s debt management policy aims at minimizing the cost of borrowing, reducing the roll-over risk, smoothening the maturity structure of debt, and improving depth and liquidity of Government securities markets by developing an active secondary market.