Thiruvananthapuram: A Reserve Bank of India (RBI) committee has recommended tightening restrictions on state governments relying on overdrafts (OD) when facing treasury cash shortfalls. Currently, states can remain in OD for 14 consecutive days; the panel recommends reducing this to 10 days.
In addition, it has proposed cutting the maximum allowed OD days per quarter from 36 to 30. The advisory committee, appointed by the RBI, was chaired by S N Prasad, former Additional Chief Secretary of Karnataka. K R Jyothilal, Additional Chief Secretary of the Finance Department in Kerala, is also a member.

The committee stated that these restrictions aim to prevent state governments from over-relying on RBI facilities without taking adequate precautions to manage financial crises. This move will heavily impact states like Kerala that face severe financial stress. Kerala frequently relies on the RBI's Ways and Means Advances (WMA) and overdraft facilities.

 

Ways and Means, Overdraft

Under the agreement with the RBI, the state government must maintain a daily minimum balance of ₹1.66 crore. If this falls short, the state can draw a Special Drawing Facility of up to ₹3,362.9 crore based on the size of its Consolidated Sinking Fund and Guarantee Redemption Fund. If that proves insufficient, it can borrow up to ₹2,308 crore as a Ways and Means Advance (WMA). Should the liquidity crunch persist, the OD facility is available at a higher interest rate.

 

Only an 8.5 per cent increase for Kerala

Another recommendation is to determine the WMA limit based on total revenue receipts rather than total expenditure. Lottery revenue has been excluded from these revenue calculations. Kerala's revenue receipts dropped from ₹1.32 lakh crore in 2022–23 to ₹1.25 lakh crore in 2024–25.

Accordingly, the committee recommends raising Kerala's WMA limit from ₹2,308 crore ₹2,503 crore, an increase of just 8.5 per cent. Although there is a proposal to increase the Special Drawing limit from 50 per cent to 75 per cent of the Sinking Fund, Kerala lacks a sufficient Sinking Fund to benefit from it.