Components of WMAs

Components of WMAs

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WMA is an apparatus that aims to improve states' cashless liquidity. Both the central and state governments can get short-term loans from the Reserve Bank of India (RBI). A type of financing is a means and means advance. On behalf of the government, the RBI distributes these. The WMA program was developed to address the disparities in the government's earnings and expenditures and went into effect in 1997. The majority of WMA borrowing is repaid within three months. When the government needs to borrow money to cover its expenses and its cash balances are low, the WMA is typically utilized. The RBI can issue a WMA to the government, and it will then provide the necessary funds. Depending on the state of the government's cash flow, the WMA is typically repaid within a few weeks or months.

Ways and Means Advances - States and the federal government pay repo rate-linked interest on WMA withdrawals. The RBI is available to the government if it requires immediate cash. However, the loan must be paid back within 90 days. Interest is computed using the current repo rate. An overdraft occurs when the WMA exceeds this 90-day limit. Overdraft interest rates are calculated to be 2% higher than repo rates. Because they are paid during the fiscal year, WMA is not covered by the FRBM (Fiscal Responsibility and Budget Management Act). There are two types of Ways and Means Advances: special and normal WMA

1. Normal WMAs - are unsecured advances, whereas secured WMAs are advances made against the promise of dated securities issued by the Indian government. An average of the state's actual revenue and capital expenditures over the previous three years determines the number of loans granted under the standard WMA type.

2. Special WMAs - also referred to as Special Drawing Rights (SDF), are issued in exchange for state-held government securities. The state's operating limit for special WMA is contingent on its securities holdings with the Central Government dating back to the sanctioned limit. The repo rate is higher than the SDF interest rate by one percentage point. The state returns to normal WMA when it reaches the limit.