The Reserve Bank of India (RBI) on Tuesday relaxed norms for state governments facing short-term mismatches by extending the duration of overdraft facility available until 30 September.

This is the second time in a week that the central bank has relaxed states’ ability to borrow, after increasing their ability to borrow short-term loans on 31 March.

In a circular, RBI said that the number of days for which a state or union territory (UT) can avail of an overdraft facility has been extended to 21 working days from the current 14 days. Similarly, the number of days for which a State/UT can be in overdraft in a quarter has been eased to 50 working days from 36.

“Increasing overdraft facility to 21 days from 14 days provides greater flexibility to state governments to time their borrowing,” said Naveen Singh, senior vice-president, ICICI Securities Primary Dealership.

The central bank had recently increased the Ways and Means Advances or WMA limit by 30% for all states and Union territories to enable them to tide over the crisis caused by the COVID-19 outbreak.

WMA is a temporary liquidity arrangement with the central bank, which enables the Centre and states to borrow money up to 90 days from RBI, to tide over their liquidity mismatches.

Typically, the government can avail of the immediate cash from RBI at the existing repo rate under the WMA facility. But it has to return it within 90 days. If the WMA exceeds 90 days, it would be treated as an overdraft. RBI has now extended this overdraft facility by 7 days.

The central bank’s two successive circulars within a week underline the important frontline role being played by states and Union territories in combating the spread of COVID-19.

Last week, RBI also increased WMA for the Centre to ₹1.2 trillion for the first half of 2020-21, up from ₹ 75,000 crores in the first half of 2019-20, and ₹35,000 crores for the second half of 2019-20 originally announced.

On Tuesday, RBI also published the auction results of state government bonds which saw a spike in bond yields, despite a cut in the policy rate and liquidity infusion by RBI. Of the ₹37,500 crores worth of state government bonds that were auctioned, a total of ₹32,560 crores was raised, the highest-ever fundraise.

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