States find ways & means to shun loan overdraft

NEW DELHI: State governments seem to be doing better fiscally. Latest data shows the number of states borrowing from the Reserve Bank of India (RBI) beyond their specified limits fell substantially in the last fiscal. Only two states, Kerala and Nagaland, used the overdraft facility in 2006-07 compared to eight states in 2005-06, implying a 75% fall.

“States have done much better in the last fiscal. A lot of it has to do with the economic boom and rising profits of domestic companies, all of which has translated into a better fiscal position as well,” according to Crisil principal economist DK Joshi. “While all the states may not have been able to get rid of deficits, they are not cash-starved. Hence, they are not seeking overdraft,” Mr Joshi added.

There are two reasons for the healthier fiscal situation of states: their own revenues have been buoyant, and the Centre’s revenue collections have been rising steadily. Since states get a portion of revenues collected by the Centre, increased transfers from the central government have contributed to the cash surplus being experienced by many state governments.

According to the data, many states, including Maharashtra, Uttar Pradesh, Assam, Manipur, Meghalaya and Uttarakhand, which used the overdraft facility in 2005-06, avoided it in 2006-07. Also, the average utilisation of the ways & means advances (WMA) by state governments was lower and happened on fewer occasions in the last fiscal compared to 2005-06.

State governments, just like the central government, meet temporary mismatches between receipts and expenditure through WMAs, provided by RBI. The amounts drawn beyond WMA limits set for individual state governments are treated as overdrafts.

The total WMA limit for all states for 2006-07 was Rs 9,875 crore. RBI revises the limits every year. The interest rate levied on WMAs vary according to the prevailing repo rate, which is the rate at which the central bank lends to commercial banks. On WMAs for a period of 90 days, the interest rate is the applicable repo rate. Beyond 90 days, the rate is 1% higher than the repo rate.

According to the overdraft regulation scheme, no state is allowed to be in overdraft for more than 36 working days in a quarter. Moreover, the interest rate on an overdraft up to 100% of WMA limit is 2% above the repo rate while it is 5% above the repo for an overdraft above 100% of WMA limit.