Drawing power: why your cash credit limit isn't all yours to use
Many business owners are surprised the first time it happens. The bank has sanctioned a cash credit limit of, say, ₹75 lakh, but the account won't let them draw more than ₹60 lakh. The reason is drawing power.
Sanctioned limit and drawing power are not the same
- The sanctioned limit is the maximum the bank has agreed to lend.
- The drawing power (DP) is how much of that limit is actually backed by the current assets you have today: your stock and your receivables.
You can draw the lower of the two. If your stock and debtors fall, your drawing power falls with them, even though the sanctioned limit hasn't changed.
How drawing power is worked out
Every month (or as the sanction terms require), the borrower submits a stock statement showing stock, receivables and creditors. The bank then calculates:
DP = (Stock − Creditors) × (1 − stock margin) + Eligible receivables × (1 − receivables margin)
Three ideas sit inside that formula:
- Paid stock. Stock bought on credit and not yet paid for is financed by your suppliers, not by you. So creditors for goods are deducted from stock first.
- Margins. The bank finances only part of the asset's value, often around 25% margin, so the borrower has some of their own money in the business. Margins are set in the sanction letter.
- Eligible receivables. Debtors older than the age limit in the sanction (commonly 90 days) are left out, because old receivables may never be collected.
A worked example
| Item | ₹ lakh |
|---|---|
| Stock | 80 |
| Sundry creditors for goods | 20 |
| Receivables within 90 days | 50 |
| Stock margin | 25% |
| Receivables margin | 25% |
| Sanctioned limit | 75 |
Paid stock = 80 − 20 = 60. DP on stock = 60 × 75% = 45. DP on receivables = 50 × 75% = 37.5. Total drawing power = 82.5 lakh.
Since DP (82.5) is more than the sanctioned limit (75), the borrower can use the full ₹75 lakh. If stock drops to 60 next month, DP falls to 67.5, and only ₹67.5 lakh can be drawn.
Why drawing power drops
- Stock levels fall after a busy season.
- Customers pay late, so more receivables cross the age limit.
- Creditors rise because you're buying more on credit.
- The stock statement is submitted late, and the bank applies the last available figures or restricts the account.
Practical tips for MSME owners
- Submit stock statements on time, every time. Late statements are one of the most common reasons for account irregularity.
- Track debtor ageing. Chasing payments before they cross 90 days protects your drawing power.
- Watch creditor levels in your stock statement; they reduce paid stock directly.
- Talk to your bank before a seasonal peak. If your business has predictable busy months, ask about a peak and non-peak limit rather than running short when you need funds most.
For bankers, drawing power is the day-to-day control on a working capital account. For business owners, understanding it means fewer surprises and a healthier relationship with the bank.
All content is for educational purposes only and isn't financial or investment advice.
