WMA Full Form-Ways and Means Advance

Introduction 

Ways and Means Advances (WMA) is a temporary funding arrangement provided by the Reserve Bank of India (RBI) to the central and state governments to help them manage short-term cash flow mismatches. This overdraft facility ensures that the government can meet its expenditure obligations even when revenues are delayed. 

Introduced under Section 17(5) of the RBI Act, 1934, WMA is a key tool for fiscal management, preventing liquidity crunches and ensuring smooth governance operations. 

Types of Ways and Means Advances 

The RBI provides two types of WMA to governments: 

1. Normal WMA 

• A fixed borrowing limit set by the RBI. 

• Charged at the repo rate. 

• The borrowing limit is reviewed periodically based on government finances. 

2. Special WMA (Special Drawing Facility – SDF) 

• Available against the pledge of government securities held by the state. 

• Interest rate is linked to the repo rate minus a specific margin. 

• Acts as a collateral-based borrowing mechanism. 

Once the normal WMA limit is exhausted, the government can access an overdraft facility but at a higher interest rate. 

How Does WMA Work? 

1. Government Shortfall → When a government faces a cash flow deficit, it requests WMA from the RBI. 

2. RBI Approval → The RBI sanctions WMA within the prescribed limits. 

3. Repayment → The government must repay the amount within the stipulated 90-day period. 

4. Overdraft Scenario → If repayment is not made within 90 days, it is treated as an overdraft, leading to higher interest rates. 

WMA Limits for Central & State Governments 

1. Central Government WMA Limits 

• The RBI sets a separate WMA limit for the central government. 

• The limit is periodically revised based on revenue and expenditure projections. 

2. State Government WMA Limits 

• The RBI sets individual WMA limits for each state government. 

• Limits are based on historical revenue and expenditure trends. 

• States with higher fiscal discipline may get higher WMA limits.  

Interest Rates on WMA & Overdraft 

• Normal WMA: Charged at the repo rate. 

• Special WMA: Interest rate is lower than repo rate, as it is backed by government securities. 

• Overdraft: If WMA remains unpaid beyond 90 days, an additional 2% interest above the repo rate is charged.  

Significance of WMA 

WMA plays a crucial role in managing government finances effectively: 

1. Prevents Liquidity Crisis 

• Provides governments with short-term funding to meet urgent expenses. 

• Helps in managing mismatches between revenue collection and expenditure. 

2. Reduces Dependence on Market Borrowing 

• Governments can avoid issuing high-interest bonds for short-term needs. 

• Allows them to manage fiscal deficits without disrupting the bond market. 

3. Supports Fiscal Stability 

• Ensures that governments can continue to fund public welfare schemes. 

• Helps avoid disruption in developmental and social sector programs. 

Challenges & Risks of WMA 

Despite its benefits, WMA has certain challenges: 

1. Over-Reliance on RBI Support 

• Continuous use of WMA could indicate poor fiscal management. 

• Leads to higher debt burden and difficulty in repayment. 

2. Higher Interest Costs in Overdraft 

• If WMA is not repaid within the stipulated period, it turns into an overdraft. 

• Overdraft carries higher interest rates, increasing fiscal costs. 

3. Fiscal Indiscipline 

• Easy availability of WMA may lead to irresponsible spending by governments. 

• Could lead to long-term budgetary deficits.  

Recent Developments & Future Trends in WMA 

1. Revised WMA Limits Due to COVID-19 

• The RBI increased WMA limits during the COVID-19 pandemic to help governments tackle fiscal pressures. 

• The central government’s WMA limit was temporarily doubled to meet rising expenses. 

2. Digitalization in Fiscal Management 

• Improved tax collection systems reduce the need for WMA. 

• Governments are adopting real-time revenue tracking to plan expenses efficiently. 

3. Strengthening State Finances 

• States are encouraged to reduce reliance on WMA by implementing better fiscal discipline measures. 

• Alternative funding sources, such as municipal bonds, are being explored. 

4. RBI’s Role in Managing Inflation 

• RBI closely monitors WMA to ensure that excess borrowing does not fuel inflationary pressures. 

• Stricter limits may be imposed to maintain fiscal stability. 

Ways and Means Advances (WMA) serve as a critical financial tool for governments to manage short-term liquidity needs efficiently. By offering an overdraft facility with controlled interest rates, the RBI ensures that the fiscal machinery functions smoothly. 

However, excessive reliance on WMA can lead to fiscal indiscipline and higher borrowing costs. Governments must use WMA judiciously, focusing on enhancing revenue collection and controlling expenditures.