If you run a business on cash credit (CC), you have probably had this moment: the limit says ₹1 crore, but the bank lets you draw only part of it. The gap is drawing power (DP). It is recalculated every time you submit a stock statement, and it decides both how much cash you can use and whether your account stays regular.
This guide explains how banks calculate DP, the paperwork behind it, and what happens when the balance runs ahead of it. For how cash credit differs from term loans and overdrafts, see our guide on term loan vs cash credit vs overdraft.
Sanctioned limit vs drawing power
- The sanctioned limit is the maximum the bank has approved, usually for a year at a time.
- Drawing power is the value of your current assets that the bank will lend against right now, after its margins.
You can draw the lower of the two. If stock and receivables are high, DP may exceed the limit, and the limit caps you. In a lean month, DP can fall well below the limit, and DP caps you.
How drawing power is calculated
Step 1: Stock, from the stock statement
Banks take the stock you hold, usually by category: raw material, work in progress (WIP), finished goods and sometimes stores and spares. Typical points:
- Stock is usually valued at cost or market value, whichever is lower.
- Obsolete, damaged or slow-moving stock is often excluded or given a higher margin.
- Stock must be insured, with the bank's interest noted, if your sanction requires it.
Step 2: Deduct sundry creditors to get paid stock
Goods bought on credit have not been paid for. If the bank lent against them, it would effectively be financing your supplier's money. So most banks deduct sundry creditors for goods from stock to arrive at paid stock. Some sanctions don't require this, for example where purchases are covered by a letter of credit.
Step 3: Apply the stock margin
The margin is the share of stock value you fund yourself. There is no single regulatory margin: each bank sets it in its policy and your sanction letter. A margin of 25% on stock is common, and HDFC Bank, for example, says it funds dealers against stocks and book debts with a minimum 25% margin. WIP and slow-moving stock often carry a higher margin, and some banks do not finance WIP at all.
Step 4: Book debts, with an age cut-off
Receivables count only if they are younger than the cut-off in your sanction letter. 90 days is common, but 60, 120 or 180 days also appear. Banks then apply a book-debt margin, commonly 25% to 40%. They often also exclude:
- debts from group or associate concerns
- debts already discounted or factored elsewhere
- disputed or doubtful debts
Some banks also cap book debts at a share of the total limit.
Step 5: Add up and compare with the limit
DP is stock DP plus book-debt DP. Your available amount is the lower of DP and the sanctioned limit.
A worked example
A manufacturer has a cash credit limit of ₹1 crore. Figures and margins are illustrations only; your sanction letter governs. For simplicity, one 25% margin is used for all stock.
| Item | Amount |
|---|---|
| Raw material | ₹40 lakh |
| Work in progress | ₹10 lakh |
| Finished goods | ₹30 lakh |
| Total stock | ₹80 lakh |
| Less: sundry creditors for goods | –₹20 lakh |
| Paid stock | ₹60 lakh |
| Less: 25% margin | –₹15 lakh |
| DP on stock | ₹45 lakh |
| Book debts up to 90 days | ₹50 lakh |
| Book debts over 90 days (not counted) | ₹10 lakh |
| Less: 40% margin on eligible debts | –₹20 lakh |
| DP on book debts | ₹30 lakh |
| Drawing power | ₹75 lakh |
Even with a ₹1 crore limit, this business can draw only ₹75 lakh this month. If its balance today is ₹82 lakh, it is ₹7 lakh over DP. That excess is irregular, even though the account is well within the sanctioned limit.
Notice what moved the number: ₹20 lakh of unpaid creditors and ₹10 lakh of old debts. Paying suppliers on time and collecting from slow buyers raise DP faster than adding stock. If some of those buyers are slow-paying corporates, a registered micro or small supplier can claim interest under the MSMED Act; our guide to Udyam registration and MSME loan benefits explains how.
Our drawing power calculator runs the same steps with a margin for each stock category, a choice of debtor cut-off and a check on how old your statement is.
Stock statements: monthly, accurate and current
- Frequency. Most sanction letters ask for a monthly stock and book-debt statement, filed by a set date. Larger borrowers may also file quarterly information as part of their limit review.
- Age. Under RBI's asset-classification directions, stock statements a bank relies on for DP should not be older than three months. An outstanding based on DP worked out from an older statement is treated as irregular.
- Consistency. The statement should match your books, GST returns and audited accounts. Large gaps between the stock you declare and what your balance sheet shows are a common reason for DP cuts at renewal.
Stock audits
Banks check what you declare. RBI requires banks' Board policies to cover the appointment of external stock auditors, and for NPA accounts of ₹5 crore and above it calls for stock audits at annual intervals. For standard accounts, the threshold and frequency are set by each bank.
As one published example, Tamilnad Mercantile Bank's Stock Audit Policy 2025-26 covers working capital limits of ₹3 crore and above where the primary security is stock or book debts, once a year. The auditor checks whether physical stock matches the statement, whether the stock is paid for, and the age of debtors. Where the audit finds a shortfall in DP, the bank reduces DP after giving the borrower notice, and further drawings can be restricted if the borrower does not co-operate with the audit.
What happens if you go over drawing power
An excess over DP is irregular from day one. How long it lasts decides what happens next.
| Situation | What RBI's rules say |
|---|---|
| Balance above the lower of limit and DP continuously for more than 30 days and up to 60 days | Account is SMA-1 (special mention account) |
| Same, more than 60 days and up to 90 days | Account is SMA-2 |
| Balance above the limit or DP continuously for 90 days, or no credits for 90 days, or credits not enough to cover the interest debited | Account is out of order, and an out-of-order CC or OD account can be classified as an NPA |
| Limits not reviewed or renewed within 180 days of the due date | Account can be classified as an NPA |
For borrowers with aggregate exposure of ₹5 crore and above, banks report SMA status to RBI's central credit database (CRILC) every month. Even before an account becomes an NPA, an SMA history makes renewals, enhancements and new loans harder. Our guide on why loan applications get rejected lists other red flags lenders look for.
Banks may also levy penal charges for breaching material terms of the sanction, as set out in your loan documents. Under RBI's 2023 rules these must be disclosed charges, not extra interest added to your rate.
How to keep your drawing power healthy
- File the statement on time, every month, and keep it consistent with your books and GST data.
- Watch ageing. Chase debts before they cross the cut-off; one large overdue buyer can wipe out lakhs of DP.
- Manage creditors. Rising unpaid creditors reduce paid stock and DP.
- Bring the balance down or file an updated statement quickly if you go over DP. Don't let an excess run past 30 days.
- Renew on time. Send audited financials, projections and stock data well before the review date.
- Match the facility to the need. Don't fund machinery or long-term assets out of cash credit. If you need a term loan, our guide to DSCR and what lenders want shows how banks test whether you can repay it.
- Ask for an enhancement if your turnover has grown and DP keeps exceeding the limit.
How Biz Corp Solutions helps
We help MSMEs, traders, manufacturers and contractors size their working capital, prepare renewal and enhancement proposals with clean stock and debtor data, and approach suitable banks and NBFCs for cash credit and other facilities. Lenders decide limits, margins and terms. Explore our working capital and inventory funding services.
This article is based on RBI directions and published bank policies available up to 21 October 2026. Margins, cut-offs and audit rules vary by bank; your sanction letter governs.