Ways and Means Advance (WMA)–What is it?

Ways and Means Advance (WMA) is a mechanism through which RBI extends funding support to states and central government to enable them to tide over temporary cash flow mismatches. This can be considered similar to a bank extending credit facility to a business to overcome cash flow mismatches. Utilisation within WMA limits is an indicator of the fiscal prudence of the state/ centre. WMA was introduced in 1997.

What are the general terms for availing of Ways and Means Advance (WMA)?

• WMA advances shall be repaid within three months (90 days).
• Advances under WMA will attract interest at Repo rate
• Delay in repayment beyond 3 months and drawing beyond WMA limit attract additional interest of 200 bps.

The facility is extended under section 17(5) of the RBI Act, 1934 that authorises the central bank to lend to the centre and state governments.

What are the types of Ways and Means Advance (WMA)?

There are two kinds of WMA:

1. Normal WMA – These are state wise limits fixed considering parameters like total revenue, expenditure, revenue deficit and fiscal position of the state etc. WMA limits are revised periodically. Previous utilisations patterns are examined while finalising revised limits. Any amount drawn in excess of the fixed limit is treated as an overdraft.

2. Special Drawing facilities– This ceiling is fixed against collateral of government securities held by the states. Advances under Special Drawing facilities are extended at a lower rate compared to WMA and it is 1 percent lower than Repo rate. Because, lower interest rate, states avails of eligible amount under Special Drawing facility before drawing from normal WMA.

States can borrow money from financial institutions for short term or from market by issuing state government securities known as State Development Loans (SDLs). However, the interest rate to be paid for market borrowing is much higher compared to that for WMA. The rate of interest for market borrowing increases substantially if the financial position of the state is not stable. Further, if the revenue of the state is less, it may be forced to pass on the interest burden to the citizens of the state by way of various kinds of taxes.  Please refer WMA limit enhancement – How much? for more details.