Ways and Means Advances (WMA)

• Ways and Means Advances (WMA) refer to the temporary advances provided by the Reserve Bank of India (RBI) to States/Union Territories (UTs) and the Union Government to address temporary mismatches in their cash inflows and outflows. 
• This facility acts as a short-term borrowing mechanism to help governments meet their immediate financial requirements when there is a shortfall in revenue.

Key Points

Availability

• The WMA facility is available not only to the Union Government but also to States and Union Territories (UTs).
• It provides temporary financial assistance to bridge the gap between the government's receipts and payments, ensuring smooth functioning without disruptions due to short-term liquidity issues.

Types of WMA

• Normal WMA: This is the basic form of advance, which is provided when there is a temporary liquidity shortfall in the state/UT or the Union Government.
• Special WMA (now known as Special Drawing Facility - SDF): This is a special form of WMA offered with lower interest rates than the normal WMA. It is extended to States/UTs first, and once exhausted, they may then avail normal WMA.
• Special WMA is typically provided against specific collateral like the Consolidated Sinking Fund (CSF), Guarantee Redemption Fund (GRF), or Auction Treasury Bills (ATBs).

Interest Rates

• The interest rates for WMA and SDF are linked to the Repo Rate, which is the rate at which the RBI lends to commercial banks.
• Therefore, the cost of borrowing under these facilities may change with fluctuations in the Repo Rate.

Special Drawing Facility (SDF)

• The Special Drawing Facility (SDF), previously known as Special WMA, is extended against collateral like CSF, GRF, or ATBs. 
• These are specific funds maintained by states with the RBI to meet long-term liabilities and serve as collateral for accessing the SDF.

Overdraft Facility (OD)

• If the financial accommodation under WMA and SDF exceeds the prescribed limits, the Overdraft Facility (OD) becomes available.
• States/UTs can avail the Overdraft Facility for up to 14 consecutive days. 
• If the overdraft is needed beyond this period, relaxation may be granted by the RBI.
• The overdraft facility is considered a last resort, used only when other options are exhausted.

Governance

• The WMA, SDF, and Overdraft facilities are governed under the RBI Act of 1934, which provides the legal framework for the RBI's role in managing government finances, including offering these financial accommodations.

Collateral and Security

• To avail the SDF, states/UTs are required to pledge specific forms of collateral, such as CSF, GRF, and ATBs, which are reserve funds maintained with the RBI to meet long-term liabilities.