Context: Recently,The Reserve Bank of India has raised the limit for short term credit that the government can borrow from the central bank.The limits for this credit facility, known as ‘Ways and Means Advances’, has been raised sharply to Rs 1.2 lakh crore for the first half of 2020-21.

• The increased limit comes at a time when government expenditure is expected to rise as it battles the fallout of a spreading Coronavirus. The availability of these funds will give the government some room to undertake short term expenditure over and above its long term market borrowings. On Tuesday, the government announced that it will borrow Rs 4.88 lakh crore or 62 percent of its planned borrow.
• The Reserve Bank of India (RBI) gives temporary loan facilities to the central and state governments. This loan facility is called Ways and Means Advances (WMA).

When was Ways and Means Advances introduced?

• The WMA scheme for the Central Government was introduced on April 1, 1997, after putting an end to the four-decade old system of adhoc (temporary) Treasury Bills to finance the Central Government deficit.

Purpose of the WMA scheme

• The WMA scheme was designed to meet temporary mismatches in the receipts and payments of the government. This facility can be availed by the government if it needs immediate cash from the RBI. The WMA is to be vacated after 90 days. Interest rate for WMA is currently charged at the repo rate. The limits for WMA are mutually decided by the RBI and the Government of India.

How does it work?

• The government can avail of immediate cash from the RBI, if required. But it has to return the amount within 90 days. Interest is charged at the existing repo rate.
• If the WMA exceeds 90 days, it would be treated as an overdraft (interest rate on overdrafts is 2 percentage points more than the repo rate).

What is WMA limit?

• The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically. For the second half of the 2019-20 financial year, RBI set Rs 35,000 crore as limit for Ways and Means Advances.

Types of WMA

• There are two types of Ways and Means Advances — normal and special.
• Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state. After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate.
• The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.