Drawing power from the stock statement
A cash-credit limit is a ceiling. On any day you can draw only up to the drawing power (DP) worked out from the latest monthly stock and book-debt statement. The usual method takes stock at the lower of cost and market value and deducts creditors for goods, because the bank will not finance stock you have not paid for. It then applies the stock margin and adds receivables within the age limit, usually 90 days, after the receivable margin. Related-party, disputed and over-age debtors are left out. Banks require the statement by a set date, often the 10th or 20th of the following month. Late statements can bring penal charges or a frozen DP. If the limit is large, expect a periodic stock audit.
Cash conversion cycle
CCC = inventory days + receivable days − payable days. It tells you how long each rupee spent on goods takes to come back as cash. A long cycle means a larger limit, more interest and more DP pressure in months when stock or debtors drop.
How banks size the limit
Tandon Committee (1975): maximum permissible bank finance (MPBF) under the second method is 75% of current assets less current liabilities other than bank borrowings. The borrower funds 25% of current assets from long-term sources. RBI made the method optional in 1997, but many banks still use it for larger borrowers.
Nayak Committee turnover method: for MSME borrowers with working capital limits up to ₹5 crore from the banking system, RBI's MSME lending directions ask banks to compute the limit at a minimum of 20% of projected annual turnover. That is a working capital requirement of 25% of turnover, with the borrower bringing 5%. If the operating cycle is longer than about three months, banks can assess more.
Common questions
Why is my DP lower than my sanctioned limit?
DP depends on the paid stock and eligible receivables in your latest statement. If stock is low, creditors are high or debtors have aged past the cut-off, DP falls below the limit, and you can draw only up to DP.
Are debtors over 90 days ever eligible?
That depends on the sanction letter. Many banks allow 90 days, some 120 or 180 days for government receivables. Exports and government contracts may have separate limits.
What happens if the account is over DP?
Drawings above DP make the account irregular, attract penal charges and must be regularised. Under RBI's income recognition norms, a CC account whose outstanding stays above DP or the limit for 90 days is classed as out of order and becomes an NPA.