Also accounted for 80 pc of incremental period of OD usage by all states together
THIRUVANANTHAPURAM: Kerala may have used the short-term liquidity management tools offered by the Reserve Bank of India (RBI) the most number of days during FY24.
The Reserve Bank of India (RBI) provides financial accommodation to 27 states governments (except) Sikkim and two union territories (UT) through special drawing facility (SDF), ways and means advances (WMA) and overdraft facility (OD) to address temporary mismatches in their receipts and payments.
In FY2024 the frequency of tapping SDF, WMA and OD facilities stood at 2506 days (16 states), 2029 days (14 states) and 749 days (11 states/UT) respectively surpassing the FY21-23 levels.
In fact, Kerala has utilized all three facilities – viz. SDF, WMA and OD in a big way to bridge the gap between payments and receipts and thus avoid financial deadlocks, accoding to informed sources.
Moreover, Kerala alone has accounted for 80 per cent of the 81-day increase in the overdraft (OD) facilities usage by the states during FY2024 relative to FY2023, according to ICRA, the leading rating agency.
Again, the increase in the number of days of SDF usage (by 741 days) in FY24 relative to FY21-23 was led by Kerala, Uttarakhand, Mizoram and Punjab. Additionally, the increase in the usage of WMA facility by 311 days in FY2024 from FY2023 was mainly led by Kerala and Punjab.
States in India use Overdraft (OD) facilities offered by the Reserve Bank of India (RBI) to manage short-term liquidity mismatches in their accounts. Relying on ways and means advances (WMA) and OD are generally viewed as last resorts in public finance.
The overdraft facility is typically allowed for a limited period, often up to 14 days. If a state exceeds this duration, it may face restrictions or penalties.
High-cost tools
The interest rates on ODs are typically higher than the normal borrowing rates in order to discourage prolonged use of the facility. WMAs are generally less expensive than overdrafts. States may use WMAs as a first resort to avoid the higher interest rates associated with overdrafts.
On the other hand, SDF provides short-term funds against the pledge of government securities and hence SDF facility typically comes at a lower interest rate compared with both WMA and OD, due to the collateralized nature of the facility.
“Kerala has for the past few years been going through a rough patch as far is its finances are concerned and this has even landed the state in a stand-off with the Centre after the latter decided to include the state’s off-balance sheet borrowings or the loans guaranteed by the state within its net borrowing ceiling (NBC), further exacerbating its financial position,” said a public finance expert while talking to businessbenchmark.news.
Birds of same feather..
The contraction in grants from the Centre in FY2024 compared with the year-ago levels for both Kerala and Punjab along with the reported cut in Kerala’s borrowing limit in FY24 seem to have tightened the liquidity position of these two states, increasing their reliance on WMA and/or OD facilities.
