Panel proposes raising states' RBI overdraft limits to ₹67,839 crore
An RBI advisory committee recommends an 11.2% rise in the short-term credit RBI gives state governments, yearly revisions capped at 4%, and tighter limits on staying in overdraft.
Official title: Report of the Advisory Committee on Ways and Means Advances to State Governments · Press Release 2026-2027/1211
What happened
State governments sometimes run short of cash for a few days because taxes and central transfers arrive later than salaries and bills fall due. RBI, as their banker, covers these gaps. First comes the Special Drawing Facility (SDF), backed by the state's savings in two RBI-managed funds and its Treasury bill holdings; then Ways and Means Advances (WMA), an unsecured limit to be repaid within three months; and once that is used up, an overdraft (OD). A committee chaired by I S N Prasad, former Additional Chief Secretary of Karnataka, with finance secretaries from six states, reviewed these facilities. It submitted its report on September 4, 2026, and RBI will now examine it.
Main recommendations: raise the total WMA limit for states from ₹61,008 crore to ₹67,839 crore (up 11.2%), with each state's limit based on its revenue receipts instead of total spending, using 2022-23 to 2024-25 accounts. Revise limits every year, with increases capped at 4% and no state's limit cut. Make overdrafts stricter: a state could stay in overdraft for at most 10 consecutive working days (now 14) and 30 working days in a quarter (now 36). Let RBI decide the interest rates on SDF, WMA and OD.
On the two reserve funds, the Consolidated Sinking Fund (savings for repaying loans) and the Guarantee Redemption Fund (for guarantees that get called), it suggests letting states borrow up to 75% of their sinking fund investments under SDF, up from 50%, to encourage contributions until each fund reaches 5% of the state's debt or guarantees. Above 5%, states could freely withdraw or move money between the funds; below it, only for their intended use. The committee also says RBI support is for short-term gaps, not for funding deficits; states should spread their market borrowing through the year instead of bunching it in January to March, and avoid hoarding idle cash. It found the move to the 'just-in-time' SNA-SPARSH system for central scheme funds has not caused a lasting cash squeeze. The next review should follow the Seventeenth Finance Commission's report.
What it means for you
No direct effect on households. Indirectly, if adopted, states get a slightly bigger short-term buffer for paying salaries, pensions and suppliers on time, while the tighter overdraft rules push them to manage cash more carefully.
What it means for businesses
Contractors and suppliers to state governments could benefit from fewer payment delays caused by cash shortfalls. For bond investors, states spreading their borrowing more evenly through the year could mean less crowding in state bond (SDL) auctions in the last quarter.
Links in this release, explained
- Report of the Advisory Committee on Ways and Means Advances (WMA) to State Governments
The full report in nine chapters: state finances and the Sixteenth Finance Commission, the history of RBI credit to states since 1938, cash management trends, use of SDF, WMA and overdraft, the SNA-SPARSH system, the sinking and guarantee funds, the formula for state-wise WMA limits and the recommendations (Chapter IX). Annexures compare past committees and show historical limits and interest rates. For state finance officials, fiscal researchers and SDL investors.
www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=1329
Read the original
Press release on rbi.org.in ↗ Official PDF ↗
This explainer simplifies the official text. If anything here differs from the RBI's release, the release is right.