How to calculate the drawing power of a Cash Credit account?

The Cash Credit limit (known as working capital limit) is sanctioned by banks and financial institutions to industrial and trading establishments for their investment on various types of current assets used in the operating cycle. This facility offers the borrowers flexibility and comfort to withdraw funds from the bank as per their financial requirement from time to time. The working capital facility is sanctioned for a period of one year and same may be renewed by the bank (or financial institution) every year with the same limit or enhanced limit or reduced limit to the borrower firm/company which is assessed on the basis of firm’s financial result of the preceding (reporting) year as well as on projected balance sheet for the ensuing (subsequent) year.
Drawing power (DP) is an important concept for fund based working capital financing facilities. It is the limit up to which a borrower can withdraw funds within the Cash Credit limit. The drawing power is arrived on the basis the stock, book debts and creditors statement submitted by the borrower based on the closing position of the earlier month. The borrower is allowed utilize the funds from the cash credit account within the sanctioned cash credit limit or drawing power arrived by the bank for the particular month whichever is less. The purpose of arriving DP every month is keeping a tab on the performance of the firm or company to whom the limits are sanctioned. The calculation of DP every month also reveals the health of the concerned firm/company month on month. If bills are not paid in time and become sticky or the amounts of creditors are increasing due to unpaid stock it gives early warning to the bank about the unit. In such an event, the concerned Bank has to take a timely step towards safeguarding its exposure.
Calculation of DP:
Drawing Power is calculated as under;
[{Fully insured total Stock minus unpaid stock (Creditors) minus margin} plus {Book Debts* minus margin}]
Usually, book debts of not more than 90 days old are considered for DP calculation. However, if the business has a longer credit cycle, more than 90 days debtors might be considered as per sanction terms. Margin is the owner’s contribution to the business. In most of the cases, a margin on the stock is 25% and for book debts 40% of net debtors which may vary from bank to bank and industry to industry.
Illustration:
ABC company enjoying CC limit of Rs.1200000/-. The details of stock and book debts statement as at the end of July are as under.
Total stock Rs.1500000/-, creditors, Rs.300000/-, total book debts Rs.50000/-, Stock more than 90 days old is Rs.100000/- (as per sanction 90 days old are considered for DP).

From the above detail, we have to find out the drawing power for the month of August on the basis of a stock statement submitted by ABC Company.

DP available to ABC Company is Rs.1140000/- against sanctioned limit of Rs.1200000/-. So ABC Company can withdraw funds up to Rs.1140000/ (maximum outstanding) within the Cash Credit limit of Rs.1200000/-
Under the revised ‘Loan System for Delivery of Bank Credit’ the total fund-based working capital limit is bifurcated into working capital loan component and cash credit component at the proportion of 60 percent and 40 percent respectively for those large borrowers who enjoy aggregate fund based working capital limit of ₹1500 million. The above revision is applicable from July 1, 2019. These in view of many large corporates do not utilize or under-utilize the working capital sanctioned to them. This would cause loss to lender banks as they do not earn interest income on the idle funds reserved for the facility sanctioned to these borrowers.
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