Many promoters are surprised to learn that the cash credit limit on their sanction letter is not the amount they can actually draw. The real operative ceiling, recalculated every month, is the drawing power (DP) — and it is governed by the stock and receivables the business actually holds. If you have ever wondered why your account showed less headroom than your sanctioned limit, drawing power is the answer.
What drawing power is
Drawing power is the maximum a borrower can draw against a working-capital limit at a given point in time, based on the security available — primarily inventory (stock) and book debts (receivables). The bank funds these current assets, but only after applying a margin and excluding ineligible items.
The operative limit at any time is always the lower of the sanctioned limit and the drawing power. A ₹1 crore CC limit is meaningless if your DP this month is only ₹70 lakh.
How DP is calculated
Drawing power is computed from the monthly stock statement the borrower submits:
DP = (eligible stock − margin) + (eligible book debts − margin)
The margins reflect how confidently the bank can realise each asset:
| Security | Typical margin | Eligibility notes |
|---|---|---|
| Raw material / finished goods | ~25% | Paid-for stock only; exclude unpaid (creditor-funded) stock |
| Work in progress | 25–40% | Higher margin — harder to realise |
| Book debts (receivables) | 40–50% | Usually only debts under 90 days; exclude associates |
Two principles drive the eligibility rules:
- Paid stock only. Stock still owed to creditors is already financed by them — funding it again would be double financing. So the unpaid portion is excluded.
- Fresh receivables only. Debtors older than 90 days (or as sanctioned) are treated as doubtful and dropped from the calculation.
A quick example
Suppose this month you report:
- Stock (paid for) = ₹60 lakh → less 25% margin = ₹45 lakh
- Book debts under 90 days = ₹40 lakh → less 40% margin = ₹24 lakh
- Drawing power = 45 + 24 = ₹69 lakh
Even with a ₹1 crore sanctioned limit, you can draw only ₹69 lakh this month. Build stock and collect more debtors next month, and DP rises; let receivables age past 90 days, and it falls.
Your sanctioned limit is the ceiling for the year. Your drawing power is the ceiling for the month — and it is only as strong as the stock and debtor statement you file.
Why DP discipline matters
Banks monitor DP closely because it protects the loan. For the borrower, three habits keep DP healthy:
- File accurate, on-time stock statements. Late or missing statements often trigger a penal reduction in DP.
- Keep receivables current. Every rupee that crosses 90 days drops straight out of your DP.
- Reconcile stock to books. Large gaps between the stock statement and audited figures invite scrutiny and margin tightening.
Drawing power sits inside the wider working-capital assessment — the overall limit is set using MPBF or the turnover method, while DP governs day-to-day operation. If receivables are the constraint, converting them to cash faster through supply chain finance or TReDS lifts both your liquidity and your DP. Our working-capital finance team helps structure limits and the reporting that keeps them fully available.
FAQ
What is drawing power in a cash credit account?
Drawing power is the maximum amount a borrower can draw against a working-capital limit at any given time, based on the eligible stock and book debts held, less the bank’s margin. It is recalculated monthly from the stock statement, and the operative limit is always the lower of the sanctioned limit and the drawing power.
How is drawing power calculated?
Drawing power equals eligible stock minus its margin, plus eligible book debts minus their margin. Typically a 25% margin applies to paid stock and a 40–50% margin to receivables under 90 days. Unpaid (creditor-funded) stock and debtors older than 90 days are excluded.
Why is my drawing power lower than my sanctioned limit?
Because the sanctioned limit is the yearly ceiling, while drawing power reflects the security actually available this month. If your paid stock and current receivables, after margins, add up to less than the sanctioned limit, your drawing power — and therefore what you can draw — is reduced accordingly.
What is the margin on stock and debtors for drawing power?
Margins vary by bank and risk, but commonly around 25% on paid finished goods and raw material, higher on work in progress, and 40–50% on book debts. Only receivables within the sanctioned ageing (usually 90 days) are counted.
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