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RBI RELAXES EXPORT RULES, ALLOWS STATES AND UTS TO BORROW MORE

Why in news?

The Reserve Bank of India (RBI) has announced more measures to fight economic disruptions caused by COVID-19, including extension of the realisation period of export proceeds and allowing States to borrow more.

Details of the Extension of Export Proceeds realisation period

  • In view of the disruption caused by the pandemic, the time period for realisation and repatriation of export proceeds for exports made up to or on July 31, 2020, has been extended to 15 months from the date of export from the 9 months period that existed.

What will this Measure do?

  • It will enable exporters to realise their receipts, especially from COVID-19 affected countries within the extended period.
  • It will also provide greater flexibility to exporters to negotiate future export contracts with buyers abroad.

RBI on Ways and Means Advances Limit for State Governments

  • The central bank has also formed an advisory committee to review the ways and means limit for State governments and union territories.
  • Till the panel submits its report, the central bank has increased the ways and means advances limit by 30% for States and union territories.’
  • The revised limits will come into force with effect from April 1, 2020 and will be valid till September 30, 2020, the RBI said.
  • This limit Increment will enable State governments to tide over the situation arising from the outbreak of the COVID-19 pandemic.

What is Ways and Means Advances?

  • The ‘Ways and Means Advances’ is a scheme that helps meet mismatches in receipts and payments of the government.
  • Under this scheme, a government can avail itself of immediate cash from the RBI.
  • But it has to return the amount within 90 days. Interest is charged at the existing repo rate.
  • If the WMA exceeds 90 days, it would be treated as an overdraft (interest rate on overdrafts is 2 percentage points more than the repo rate).
  • The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically.
  • There are two types of Ways and Means Advances — normal and special.
  • Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state. After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate.
  • The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.
  • The Ways and Means Advances scheme was introduced in 1997.

RBI on CCyB for banks

  • The central bank has also deferred the implementation of counter cyclical capital buffer (CCyB) for banks.
  • Based on the review and empirical analysis of CCyB indicators, it has been decided that it is NOT necessary to activate CCyB for a period of one year or earlier, as may be necessary.

What is Capital Buffer?

  • A capital buffer is mandatory capital that financial institutions are required to hold in addition to other minimum capital requirements.
  • Regulations targeting the creation of adequate capital buffers are designed to reduce the procyclical nature of lending by promoting the creation of countercyclical buffers as set forth in the Basel III regulatory reforms created by the Basel Committee on Banking Supervision.

What is CCyB?

  • The Countercyclical Capital Buffer (CCyB) is part of a set of macroprudential instruments, designed to help counter pro-cyclicality in the financial system.
  • That is, Countercyclical capital buffers require banks to hold capital at times when credit is growing rapidly so that the buffer can be reduced if the financial cycle turns down or the economic and financial environment becomes substantially worse.
  • Banks can use the capital buffers they have built up during the growth phase of the financial cycle to cover losses that may arise during periods of stress and to continue supplying credit to the real economy.
  • The countercyclical capital buffer (CCyB) framework states that foreign institutions should match the CCyB rate of domestic institutions when lending occurs across international borders.
  • This allows for a process referred to as recognition or reciprocation in regard to the foreign exposures of domestic institutions.
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October 2022
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