In its second instalment of relaxations relating to the coronavirus pandemic and the resultant lockdown, the Reserve Bank of India has made some additional important announcements.

The states have been clamouring for more funds from the RBI to tide over the shortfall in revenue as a result of the lockdown and RBI has agreed. The states are now allowed to draw 30% in excess of the limits they had been fixed for borrowing from the central bank. States draw out their budgets and when they fall short in revenues, they borrow from RBI. They are also allowed temporary overdrafts called the ways and means allowances or WMAs. Other measures announced include extension of realization period for export proceeds.

With this announcement, all the states and union territories can now draw funds from RBI under the WMA arrangement by 30% over the limit they had been allowed so far. It is understood that RBI has formed an internal committee to look into the situation the states face and to come up with the solutions. This is the interim solution recommended by the committee. There may be a final recommendation, based on which the RBI may come up with other solutions.

These revised norms will be in place till September 30, 2020. This move may offer some solace to the states in meeting the expenses they are incurring in fighting the COVID-19 menace in their respective states. A few states like Maharashtra, Telangana and Kerala have even gone to the extent of asking their employees to accept lower salaries to enable the states to meet the revenue requirements.

There are clear ways of determining the WMA limits using the three-year average of the state’s revenue and capital expenditure. Whenever the states are in need of funds beyond these limits, they are permitted to avail overdrafts from RBI but it can only be for a period of 14 days. There is also a limit of 36 days in a quarter that the overdrafts can remain. The states have to pay an interest on these overdrafts as well.

The RBI had already raised the short-term borrowing capacity for the central government as well. This announcement made on March 31, says that central government can enjoy a WMA of Rs 120,000 crore, up from Rs 75,000 earlier.

On another issue, the RBI has decided that there was no need to activate the countercyclical capital buffer or CCB yet. The CCB is basically the buffer that the banks are required to keep a portion of their profits to be used in crisis situations.