Ways And Means Advances-state Agreements: Key Provisions

By voluntarily signing an agreement pursuant to Section 21A of the Reserve Bank of India Act, 1934, a State entrusts the RBI with the management of its banking operations. In order to conduct general banking activity in India, including payments, receipts, collection, remittance of funds, management of public debt, and issuance of new loans, 23 States signed into such arrangements with the RBI. 

Jammu & Kashmir and Sikkim are two States that solely have arrangements with the RBI for the specific purpose of controlling their public debt. Other than potential benefits from retaining their cash balances without having to pay interest on them, the RBI is not entitled to receive compensation for conducting routine banking transactions. Such interest-free balances must be maintained in accordance with recurring agreements between the States and the RBI. At the end of each working day, the RBI informs the States of their daily cash balance.

 

The RBI offers Ways and Means Advances (WMA) to the States banking with it in accordance with Section 17(5) of the RBI Act, 1934, to assist them in overcoming brief inconsistencies in the cash flow of their receipts and payments. According to the Act, these advances must be paid back "in each case not later than three months from the date of making that advance." 

 

Special WMA are secured advances issued against the promise of Government of India dated securities, whereas normal WMA are clean advances. The amount of Central Government-dated securities that a State holds, up to the sanctioned level, determines the operative limit for special WMA for that State. Additionally, each State's regular and special WMA limitations have been established by the RBI as multiples of the stipulated minimum balance that State must maintain with the RBI. These restrictions have occasionally been updated. 

 

The current limits, in force as of August 1, 1996,  and total Rs. 3,085.60 crore, of which Rs. 2,234.40 crore (normal WMA) and Rs. 851.20 crore are combined (special WMA). The ceilings for normal and special WMA were set at 168 times and 64 times, respectively, of the minimum balance of Rs. 13.30 crore at the time of the latest amendment in 1996.

 

On April 1, 1937, the first minimum balances and restrictions for WMA (at amounts equal to their respective minimum balances) of States were established. Prior to the creation of provincial autonomy, the limitations were established based on the ratio of their total revenue and expenditure to the comparable total of the Center. The restrictions went into force on April 1, 1938, when the provincial governments of the time were given control over their own position in terms of ways and means. 

 

The minimum balances were updated following the establishment of the Part B States in 1953 to reflect the growth in revenue receipts and expenditure during that time. In the same year, a new special WMA facility against the pledge of Central Government assets was launched, and the WMA limitations were liberalised to double the revised amounts. Each State has a standard limit of Rs. 2 crore for the special WMA. 

 

Following 1953, the minimum balances were increased in the two revisions that followed—in 1967 and 1972—as a multiple of the minimum balances set in 1953, and the WMA limits were loosened by raising the multiples of the new minimum balances. The minimum balances remained unchanged starting in 1976, while the WMA limits were raised in a series of modifications by raising the multiple.  

 

An overdraft is any sum that a State draws that is greater than WMA. No State was permitted to maintain an overdraft with the RBI for longer than seven consecutive working days under the Overdraft Regulation Scheme, which took effect on October 2, 1985. The RBI and its agencies halted payments on the State's behalf if an overdraft developed in the account and persisted for more than seven consecutive working days. The time period for clearing an overdraft was extended from seven consecutive working days to ten consecutive working days with effect from November 1, 1993, following a subsequent review of the Overdraft Regulation Scheme in 1993. This status is maintained. 

 

The RBI has decided to set a limit on Assam's and Manipur's overdrafts at Rs. 252 crore and Rs. 10 crore, respectively. The RBI stops making payments on behalf of these State Governments if this cap is exceeded, even within the ten consecutive working days allowed by the Overdraft Regulation Scheme. 

 

The Internal Debt Management Cell (IDM Cell), RBI, regularly monitors the situation of WMA actually used and overdrafts of various States on a daily basis after receiving the position from the Central Accounts Section (CAS), RBI, Nagpur. A State is advised to take corrective action to prevent the appearance of an overdraft in its account if it uses WMA in excess of 75% of the aggregate limit (aggregate = normal plus operative limit for special WMA). 

 

Every time a State experiences an overdraft after using regular and special WMA, the IDM Cell notifies the State via facsimile message of the situation and requests that it pay down the overdraft within ten consecutive working days. The RBI stops making payments on a State's behalf until the overdraft is paid if the account is still overdrawn on the eleventh consecutive working day.

 

Interest Rate For Overdrafts, SDF And WMA (Current I.E As Of 31st March 2022)

The interest rates on SDF, WMA, and OD will continue to be correlated with the Reserve Bank's policy rate, or the Repo Rate. There will be interest added for each day the advance is unpaid.

 

SDF -When used in conjunction with net annual additional investments in CSF and GRF

 

Repo rate MINUS 2%

If used in conjunction with G-sec or ATB investments

 

Repo rate MINUS 1%.

WMA- if unpaid upto three months from the date of making advance;

 

Aq, to repo rate

 

If outstanding for more than three months after the advance repo rate plus 1%

 

OD- If availed up to 100 per cent of WMA limit

 

Repo rate plus 2 per cent

 

If exceeds 100 per cent of WMA limit

 

Repo rate plus 5 per cent

 

The State's surplus funds are only invested through the RBI. A state's excess cash balance that exceeds the level it specifies is automatically invested in 14-day intermediate Treausury bills, The States are also free to invest their durable excess in non-competitive bidder roles in the 14-day and 91-day Treasury bill auctions.