Ways And Means Advance refer to a facility in India that permits various sections of the government and centre to borrow a sum of money from the Reserve Bank of India. These sections of the government must be administered to finance and budget deficits.
Section 17(5) of the RBI Act, 1934 ensures that the central and state government can avail of Ways And Means Advance of India under the condition that it should be repaid within three months. This sum of money is issued at the rate of the repo.
The sum of money borrowed by the RBI is purely meant to help and overcome the mismatch between the flow of cash and expenditures.
Ways And Means Advance [WMA] History
Ways And Means Advance is a system that aims to boost the liquidity of cashless amounts to the states. The Reserve Bank Of India gives this amount of money on behalf of the associated government. This borrowed money is meant to be recovered within three months. The scheme was introduced and implemented in the year 1997.
The WMA scheme aims to overcome and reduce the discrepancies between the government's revenue and its expenditures.
The Reserve Bank of India declared an increase of 60% in the limit of state governments of the Ways And Means Advance (WMA). The reason for such a step was to enable the state governments "to undertake COVID-19 containment and mitigation efforts" and "to plan their market borrowings better".
Ways And Means Advance - RBI Charges
The RBI's repo rate is the interest rate on the WMA. This is the interest rate at which money is lent to the other banks. The present interest rate is 4.4%. Governments are also allowed to draw some more money from their WMA limits.
The interest rate on this overdraft is 2% more than the repo rate.
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Ways And Means Advance Schemes
- WMA Scheme for Central Government
It was introduced by the RBI on April 1, 1997, by replacing ad-hoc Treasury Bills. The aim was to cover the finance requirements of the government at the central level. Under this scheme, the central government can request money from the RBI. The WMA should be retired after the outstanding period of 90 days.
- WMA scheme for the State Government
There are two ways for states to obtain resources from the Ways And Means Advance Scheme. The first way is through normal Ways And Means Advance (WMA), and the other way is through a special drawing facility (SDF).
The main difference between these two ways of allocation of resources is that the repayments of loans lie in their specific interest rates. The interest rate for SDF is one percentage point less than the repo rate.
The total funds received through Ways And Means Advance are limited to each state. These limits and restrictions are decided based on the state's revenue shortfall, overall spending, and fiscal situation. The parameters of the scheme are reviewed and changed regularly.
Ways And Means Advance Significance
The significant points of the Ways And Means Advance scheme are as follows:
- Many state governments face financial problems due to the pandemic. There was a significant impact on the revenue and economic conditions of the states.
- The increased limit helped the states borrow more money and improve their financial status.
- Since the interest rate is lower in the WMA scheme, states prefer to borrow money from the RBI.
Ways And Means Advance is an initiative by the Indian Government and RBI to help the state government borrow money at a low-interest rate and improve their financial problems. They provide support for temporary difficulties that come up due to a mismatch or shortfall in revenue or other receipts to meet government liabilities.
FAQs on Ways And Means Advance [WMA]
Q.1. How much interest does the RBI charge on the Ways And Means Advance?
The present interest rate is 4.4%. Governments are also allowed to draw more money from their Ways And Means Advance limits.
Q.2. What is the motive behind Ways And Means Advance?
Ways And Means Advance refer to a facility in India that permits various sections of the government and centre to borrow a sum of money from the Reserve Bank of India.
Q.3. When was Ways And Means Advance introduced?
Ways And Means Advance was introduced and implemented in the year 1997.
Q.4. What did the RBI declare about Ways And Means Advance?
The Reserve Bank of India declared an increase of 60% in the limit of state governments of the Ways And Means Advance (WMA)
Q.5. What are the benefits of Ways And Means Advance?
Ways And Means Advance helped the states to borrow more money and improve their financial status. Also, the interest rate is lower in the WMA scheme. Therefore, states prefer to borrow money from the RBI.