State governments rely on multiple borrowing mechanisms to manage cash flow mismatches efficiently. The RBI provides three key facilities:
1) Ways and Means Advances (WMA):
• A short-term credit facility offered by RBI to state governments to cover temporary revenue shortfalls.
• Each state has a specific WMA limit based on past revenue trends.
2) Special Drawing Facility (SDF):
• This facility allows states to borrow against their collateral holdings of government securities (G-Secs).
• It offers cheaper borrowing rates compared to WMA and overdrafts.
3) Overdraft (OD):
• If a state government exceeds its WMA limit, it can access an overdraft facility to continue borrowing.
• Overdrafts beyond 14 consecutive days are not permitted by RBI.
4) Market Borrowings (MB):
• States can issue State Development Loans (SDLs) to raise funds from the market.
• This is a longer-term borrowing option compared to WMA and SDF.
Study Notes
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