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Businesses with a cash credit limit find they cannot draw the full limit and do not understand why the bank keeps changing the available amount.
Drawing power equals eligible stock plus eligible debtors less the bank's margin, capped at the sanctioned limit, recalculated from each stock and debtors statement.
Submit stock and debtors statements on time, exclude old debtors, apply the margins in the sanction letter and keep use within drawing power.
A drawing power figure that matches the bank's calculation and an account that stays regular.
Drawing power (DP) is the amount you may actually draw from a cash credit account today. It is worked out from your eligible stock and debtors less the bank’s margin, and it can never exceed the sanctioned limit. If your stock falls or your customers pay late, drawing power falls too, even though the limit itself has not changed.
How is drawing power worked out from the stock and debtors statement?
Each month, or at the interval in your sanction letter, you submit a stock and debtors statement. The bank then follows these steps:
- Take paid stock. Raw material, work in progress and finished goods, valued as the sanction letter says, usually at cost or market value, whichever is lower. Stock bought on credit and not yet paid for is often deducted, because the supplier is funding it.
- Take eligible debtors. Amounts customers owe you, excluding debts older than the bank’s cut-off, often 90 days.
- Apply the margin. Deduct the margin the sanction letter sets, commonly 25 percent for stock and 25 to 40 percent for debtors, though each bank decides.
- Cap at the limit. Drawing power is the lower of the result and the sanctioned limit.
Under RBI asset classification norms, drawing power should rest on a reasonably current stock statement. If the statement used is more than three months old, the account is treated as irregular.
Worked example: ₹14,00,000 stock and ₹9,00,000 debtors
A spare-parts distributor in Ludhiana has a CC limit of ₹20,00,000. Its latest statement shows:
| Item | Amount |
|---|---|
| Paid stock | ₹14,00,000 |
| Debtors under 90 days | ₹9,00,000 |
| Total eligible | ₹23,00,000 |
| Less 25 percent margin | ₹5,75,000 |
| Drawing power | ₹17,25,000 |
Check: ₹23,00,000 × 25 ÷ 100 = ₹5,75,000, and ₹23,00,000 − ₹5,75,000 = ₹17,25,000. That is below the ₹20,00,000 limit, so drawing power is ₹17,25,000.
The account balance is −₹18,40,000, meaning ₹18,40,000 is drawn. ₹18,40,000 − ₹17,25,000 = ₹1,15,000 over drawing power. The business is within its limit but over its drawing power, and the bank will ask it to bring ₹1,15,000 into the account or show more stock.
Last month the same business had ₹16,00,000 of stock. With debtors unchanged, drawing power then was (₹16,00,000 + ₹9,00,000) × 75 ÷ 100 = ₹18,75,000. The ₹2,00,000 fall in stock cut drawing power by ₹1,50,000.
What happens when use exceeds drawing power?
- Irregular account. The bank flags the account and often stops further debits until the excess is cleared.
- Penal charges. Many banks levy penal charges on the excess amount, as set out in the sanction terms.
- Stock statement queries. The bank may question whether stock is overstated and may arrange a stock audit.
- Asset classification. If the balance stays above drawing power continuously for 90 days, the account can be classed as a non-performing asset (NPA), which damages the business’s credit history.
How do you keep drawing power healthy?
Submit statements on time, chase debtors before they cross the cut-off, avoid valuing slow-moving stock at full price, and keep a buffer between use and drawing power. If sales are seasonal, ask the bank in advance about a peak-season limit.
Is drawing power the same at every bank?
No. The method is broadly the same, but the details sit in your sanction letter: which stock counts, how it is valued, the debtor age cut-off, the margins and how often statements are due. Two banks can give the same business different drawing power from the same stock and debtors. Read the sanction letter’s drawing power clause before you compare offers.
How does an analyst spot over-drawing in the statement?
A cash credit statement shows the running balance every day. Balances that sit at or beyond the limit for weeks, repeated interest debits on an overdrawn balance, and returned cheques are the usual signs of stress. These patterns are covered in MSME working capital assessment from bank statements and financial distress signals in bank statements.
What to read next
- Next in this series: MSME working capital assessment from bank statements
- Financial distress signals in bank statements
- Bank statement analysis for MSME lenders
TransactIQ reads CC account statements for lenders and surfaces utilisation and over-drawing patterns among its 40+ engineered credit signals.