The RBI has increased the borrowing limit of all states and Union territories under the WMA facility by 30% from the existing limit
The RBI has also extended the realization period for export proceeds
RBI, coronavirus, coronavirus pandemic, fight against covid-19 crisis, borrowing limit extended, WMA limits, realization period for export proceeds
The central bank on Wednesday announced steps to help states cope with the fallout of the covid-19 pandemic, including allowing a higher borrowing limit. This also acknowledges the states’ frontline role in mitigating the impact of the pandemic.
The Reserve Bank of India (RBI) has increased the borrowing limit of all states and Union territories under the ways and means advances (WMA) facility to help them overcome the mismatch between revenue and expenditure flows because of the unprecedented 21-day nationwide lockdown.
The other measures announced by RBI include an extension of realization period for export proceeds and deferring implementation of countercyclical buffers.
RBI said that pending submission of the final recommendations by an advisory committee, it has decided to increase WMA limit by 30% from the existing limit for all states and Union territories to allow them to tide over the current crisis. The revised limits, it said, will come into force from 1 April and will be valid till 30 September.
RBI, as banker to the central and state governments, provides financial accommodation to tide over temporary mismatches in the cash flow of their receipts and payments as WMA, which is intended to provide a cushion to the states to carry on their essential activities and normal financial operations. The increased limits are expected to help state governments spend on fighting the fallout of covid-19 outbreak. Maharashtra, Telangana and Kerala have already announced salary cuts for its employees as state revenues suffer.
According to RBI rules, the normal WMA limits are based on a three-year average of the state’s actual revenue and capital expenditure and withdrawing beyond the limit is considered an overdraft. Under the prudential rules, a state government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter. States pay interest linked to the repo rate on WMA withdrawals. The increase in WMA limits will obviate states’ need to resort to overdrafts.
The increase in WMA limits will also allow states to not only meet targeted expenditure commitments in the absence of revenue flows but step in with emergency funding to meet the exigencies arising out of the pandemic.
On 31 March, RBI raised the short-term borrowing limit of the central government as well. It said that the limits for WMA for the first half of the financial year 2020-21 will be ₹1.2 trillion, from ₹75,000 crore in the first half of last financial year.
Meanwhile, the central bank said that the framework on countercyclical capital buffer (CCB) was put in place on 5 February 2015. The guidelines say that CCB would be activated as and when circumstances warranted. “Based on the review and empirical analysis of CCB indicators, it has been decided that it is not necessary to activate CCB for a period of one year or earlier, as may be necessary," it said.
CCB was introduced as part of Basel-III, as an additional risk mitigation measure, in the aftermath of the 2008 financial crisis and required banks to salt away a portion of their profits as reserves even in boom times.
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