The Telegraph
Since 1st March, 1999
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Stronger cash props for states

Mumbai, March 4: Bengal won a 17 per cent increase in the amount it gets from the Reserve Bank (RBI) to cope with temporary shortfalls in cash, under a liberalised funds-support scheme announced for all states today.

State governments can now borrow 19 per cent more under the system — called ways-and-means advances (WMA) — at Rs 7,170 crore, up from Rs 6,035 crore.

Authorities at Writers’, wrestling with ways to paper over an ever-widening chasm in Bengal’s faltering finances, can now ask for loans up to Rs 420 crore under this head compared with Rs 360 crore earlier.

There are two types of WMAs — normal and special. While the first is a clean advance, the second is secured against Government of India securities.

Amounts drawn in excess of WMAs is called an overdraft. No state can run an overdraft with the Reserve Bank for more than 12 consecutive working days. Overdrafts beyond that period can lead to a payment freeze. The Reserve Bank and its agencies also stop payment if a state’s overdraft exceeds 100 per cent of the WMA limit for more than five consecutive working days.

The scheme announced today is based on the recommendations of a committee on state finances headed by C. Ramachandran, former secretary (expenditure) in the finance ministry. It sets the interest rate on normal WMA for 1-90 days at the bank rate; WMAs for more than 90 days will have to be serviced at the benchmark rate (6.25 per cent), plus one percentage point. The minimum amount under normal WMAs has been retained at Rs 50 crore for all states.

The special WMA scheme, RBI said, will continue to be linked to investments made by states in dated securities and treasury bills of the Government of India. However, a lower and uniform margin of 5 per cent will be imposed on the market value of securities to fix the ceiling for loans under special WMA. At present, these margins are in the range of 10 per cent to 15 per cent.

The Reserve Bank said states could remain in overdraft for 14 consecutive working days. If they fail to get their act together within the time, the apex bank and its agencies will stop payments of the state concerned.

“No state will be allowed to be in overdraft for more than 36 working days in a quarter. If this condition is not met, payments will be stopped. This regulation will be applicable from April 2003,” the RBI said.

It further added that the rate on overdraft up to 100 per cent of normal WMA limit and beyond 100 per cent would be 3 per cent and 6 per cent above the bank rate respectively. Currently, a uniform rate of 2 per cent above the benchmark rate was charged. The existing norm of restricting overdraft to 100 per cent of the normal WMA limit will continue, but if a state overshoots this limit for five consecutive working days for the first time in a financial year, the apex bank will advise it to bring it down within the 100 per cent limit. If it happens again in the same year, the central bank would stop payments, an RBI release said said.

According to the Reserve Bank, the revised normal WMA limits of Rs 7,170 crore has been firmed up considering the average of revenue receipts for the three fiscal years 1999-2000, 2000-2001 and 2001-2002 and then applying to this average, a multiplication factor of 3.18 per cent for the non-special category states and 3.84 per cent for the special category states respectively.

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