Drawing Power in Cash Credit — How It Works

Drawing Power (DP) is broadly the amount that a borrower may be permitted to utilise under certain working capital facilities based on the value of eligible current assets and the conditions of the sanction.

In a Cash Credit facility, the bank may take into account assets such as:

• eligible stock
• eligible trade receivables or book debts
• applicable margins
• exclusions or adjustments
• other conditions specified by the lender

Drawing Power is therefore not simply another name for the sanctioned limit.

The bank may have sanctioned ₹1 crore, but current utilisation availability is subject to the ₹80 lakh Drawing Power and other facility conditions. The ₹55 lakh represents what the business has actually utilised.

There is no single universal Drawing Power formula applicable to every Cash Credit facility.

At a simplified conceptual level, the lender may assess:

But the actual calculation can depend on the sanction terms and lender methodology. Factors can include:

• type of inventory
• stock valuation
• inventory ageing
• eligible receivables
• receivable ageing
• customer concentration
• stipulated margins
• creditors or other adjustments where applicable
• insurance requirements
• facility structure
• other sanction conditions

Two businesses with apparently similar stock and receivables may therefore not necessarily have the same Drawing Power.

Depending on the nature of the business and sanction terms, inventory considered by a lender may include categories such as:

• raw materials
• work in progress
• finished goods
• trading stock
• other eligible inventory

Stock appearing in the books does not automatically mean the entire amount is eligible for Drawing Power.

In working capital terminology, book debts broadly refer to amounts receivable from customers arising from business sales or services.

Suppose a business sells goods worth ₹10 lakh on 60-day credit. Until the customer pays, that amount remains a trade receivable.

Receivables can form an important part of working capital because the business may already have:

• purchased material
• manufactured or procured the product
• delivered the goods
• recorded the sale

while still waiting for cash.

However: Total receivables and eligible book debts for Drawing Power are not necessarily the same number.

A lender may examine:

• receivable ageing
• customer concentration
• disputed receivables
• long-outstanding amounts
• related-party receivables
• collection history
• other eligibility conditions

A ₹10 lakh receivable expected to be collected shortly may not carry the same credit quality as a ₹10 lakh receivable that has remained unpaid for a prolonged period.

This is why lenders may analyse receivables by ageing.

A typical ageing analysis can group outstanding receivables according to how long they have remained unpaid. The purpose is to understand:

• How much is outstanding?
• How old is it?
• Who owes it?
• Is it collectible?

Older, disputed or otherwise ineligible receivables may receive different treatment or may be excluded from DP depending on the sanction terms.

A stock statement is information periodically submitted by a borrower to the lender regarding inventory, receivables and other relevant working capital information as required under the facility.

Depending on the lender and facility, it may contain information such as:

• raw materials
• work in progress
• finished goods
• total inventory
• receivables
• receivable ageing
• creditors where applicable
• insurance information
• other prescribed information

The lender can use this information to monitor the assets supporting the working capital facility and determine Drawing Power according to the applicable methodology.

Why Does It Matter?

The bank needs current information.

A sanction may have been approved months earlier, while inventory and receivables can change every day.

The stock statement helps connect the approved working capital facility with the current operating position of the business.

Drawing Power can move up or down because the assets supporting the working capital cycle are themselves constantly changing.

DP may potentially fall when:

• eligible inventory decreases
• receivables are collected
• receivables become older or ineligible
• stock becomes slow-moving or ineligible
• applicable adjustments reduce the eligible asset base
• required statements are delayed or unavailable
• sanction conditions affecting eligibility are not satisfied

Conversely, eligible stock or receivables may increase as business activity grows, although that does not automatically mean the bank must increase DP or the sanctioned limit.

The outstanding is within the overall sanctioned ceiling but is above the stated Drawing Power in this simplified example.

Depending on the facility terms and circumstances, this can create an excess or irregular position requiring attention.

The borrower should understand:

• why DP reduced
• whether submitted statements are current
• whether receivables or inventory became ineligible
• whether the position is temporary
• what the sanction terms require
• what corrective action is expected by the lender

Do not assume that being within the sanctioned limit alone means the account is operating within every condition of the facility.

The objective should not be to artificially maximise DP.

The objective should be to maintain a healthy operating cycle and accurate reporting.