Banking Awareness: What Is Ways & Means Advances?

Reserve Bank Of India Governor Shaktikanta Das recently announced in a press conference that RBI will be increasing the WMA Limit for States by another 30%. As per an article published by The Economic Times-” This move is likely to rein in states borrowing costs as they would not bunch up auctioning of bonds. This is estimated to create a space for RS. 12000 crore for the state governments looking to raise money. The term to be notice here is WMA. To understand this news and to understand the impact of it, the basic understanding of this term is require. In this article, we will be discussing all about Ways And Means Advances (WMA), a term you must have read multiple times in newspaper but have hardly understood its impact.

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What is Ways & Means Advances?

Ways & Means advances is a basically a mechanism which is  used by Reserve Bank of India (RBI) under the  Section 17(5) of the Reserve Bank of India Act, 1934. This is basically a loan which is given by RBI to state government repayable in each case not later than three months from the date of making that advance’. This in no way means financing the state government. This mechanism is use to provide support to the state government in times of temporary financial emergency. It is used by RBI  to provide a cushion to the States to carry on their essential activities despite mismatches on fiscal transactions and to avoid disruptions to the normal and necessary financial operations of the State.

There are no such provisions related to the maximum amount of the advance or the rate of interest to be charged on WMA. These matters are regulated between the RBI which act as their banker and the state government.  Except Kashmir and Sikkim, all the State Governments have signed such agreements with RBI.

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Types of WMA

There are two types of WMA namely- Normal WMA and Special WMA.  Normal WMA are refer to clean advances, while Special WMA are refer to  secured advances provided against the pledge of government of India–dated securities.  Special WMA operational limit  for a state is subject to its holdings of central government dated securities up to a maximum of limit sanctioned.  The RBI had already determined limits for normal and special WMA for each state as multiples of the prescribed minimum balance required to be maintained with the RBI by that state. These limits have been revised periodically as per the situation and requirement.

Given below is the table which states the Ways and Means Advances Limit of different State Government.

 Ways and Means Advances Limits of the State Governments

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Interest Rate

The interest rate on WMA is set to be at or around bank rate (with small adjustment for different kinds of WMA for State Govt.) Overdrafting  if any carries 2% higher interest. The time Duration is  10 consecutive working days for Central Govt. and 14 days for State Govt. The Amount ceiling Limits on WMA are fixed at the beginning of a fiscal year by RBI.

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Minimum Balances

The minimum balance required which is fixed and  to be maintained by Govt. on Fridays and at the close of the Govt.’s or RBI’s financial year shouldn’t be less than Rs.100 cr and on any other working day not less than Rs.10 cr. as well as, when 75% of WMA is utilised, the RBI may consider fresh flotation of market loans depending on the market conditions.

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