How Banks Calculate Drawing Power in Cash Credit

Getting a Cash Credit (CC) limit sanctioned does not necessarily mean that the borrower can withdraw the entire sanctioned amount at all times. The amount actually available for utilisation may depend on the Drawing Power (DP) calculated by the bank.

For businesses using working-capital finance, understanding DP is important because changes in inventory, receivables and creditors can directly affect the amount available for withdrawal.

What is Drawing Power?

Drawing Power is broadly the amount that a borrower is permitted to draw against eligible current assets after applying the margins and other conditions stipulated by the lender.

RBI guidance emphasizes that drawings in working-capital accounts should be supported by adequate current assets and that drawing power should be determined on the basis of current stock statements.

Illustrative Calculation

If the sanctioned CC limit is ₹120 lakh but calculated DP is ₹105 lakh, utilisation would ordinarily be restricted to the lower available amount, subject to the lender's sanction terms and methodology.

What Does a Bank Normally Examine?

• Stock: raw material, work-in-progress and finished goods, depending upon the nature of business and sanction terms
• Receivables: only eligible debtors may be considered. Receivables older than the permitted ageing period may be excluded
• Creditors: depending on the bank's DP methodology, unpaid stock/creditors may need adjustment so that the same asset is not effectively financed twice
• Margin: the borrower is normally required to bring a stipulated contribution or margin against eligible assets

Why Can DP Fall Even When Sales Are Increasing?

DP can fall because inventory has reduced; receivables have become old or ineligible; creditors have increased; stock statements were not submitted on time; the bank has excluded non-moving or obsolete stock; certain receivables are related-party or otherwise ineligible; or stipulated margins have changed.

Sanctioned Limit vs Drawing Power

Sanctioned Limit = maximum credit facility approved by the lender.

Drawing Power = amount currently supported by eligible assets under the bank's stipulated methodology.

Therefore, sanction of a ₹2 crore CC limit does not automatically mean ₹2 crore will always be available for withdrawal.