Many business owners are surprised the first time their bank refuses a cheque even though the cash credit (CC) account is well within the sanctioned limit. The reason is almost always Drawing Power (DP). The sanctioned limit is the maximum the bank has agreed to lend; Drawing Power is the amount your current assets actually support at a point in time. You can draw only up to the lower of the two. Drawing Power is recalculated from the stock and book-debt statement you submit, usually every month. Getting that statement right, on time and consistent with your books and GST returns is one of the simplest ways to keep a CC/OD account healthy. This guide explains how DP is worked out, how debtor ageing and margins affect it, what a stock audit checks, and what happens if your balance runs above DP.
In this guide
1. Sanctioned Limit vs Drawing Power
A cash credit or stock-backed overdraft is secured mainly by hypothecation of your current assets: raw material, work-in-progress, finished goods and receivables (book debts). The bank sets a sanctioned limit after assessing your working capital needs, for example on the turnover method, which RBI describes for smaller MSE limits as at least 20% of projected annual turnover for limits up to ₹5 Crore. But the security behind the limit changes every day as you buy, produce, sell and collect. So the bank links your day-to-day borrowing to the current value of those assets. That figure, after deducting what the bank does not finance, is your Drawing Power. Available to draw = the lower of (sanctioned limit, Drawing Power).
- If DP is higher than the limit, you can still draw only up to the limit.
- If DP falls below the limit (for example, because stock is low or debtors have aged), your usable limit shrinks to DP.
- The account is "within DP" only when the outstanding balance is at or below the lower of the two.
2. How Drawing Power Is Calculated
Every bank has its own sanction terms, but the structure of the calculation is broadly the same: • Start with the value of stock (raw material, WIP, finished goods), usually at cost or market value, whichever is lower. • Deduct unpaid creditors for purchases (sundry creditors). Stock you have not paid for is not financed again by the bank, since that would be double financing. • Apply the stock margin stipulated in your sanction letter to the paid stock. • Add eligible book debts: receivables within the age limit set in your sanction (older debts are excluded). • Apply the book-debt margin stipulated in your sanction. Illustrative example (margins vary by bank and borrower): • Stock ₹80 Lakh less unpaid creditors ₹20 Lakh = paid stock ₹60 Lakh. After a 25% margin: ₹45 Lakh. • Debtors ₹50 Lakh, of which ₹10 Lakh are older than the sanctioned cut-off. Eligible debtors ₹40 Lakh. After a 25% margin: ₹30 Lakh. • Drawing Power = ₹45 Lakh + ₹30 Lakh = ₹75 Lakh. If the sanctioned limit is ₹1 Crore, you can draw only ₹75 Lakh this month. If the limit were ₹60 Lakh, you could draw ₹60 Lakh.
- Margins are set in your sanction letter. 25% is common, but many banks use a higher margin on book debts than on stock, and it can differ by borrower, industry and scheme.
- Some banks deduct creditors only from stock; others adjust against total current assets. Follow the method printed in your sanction.
- Obsolete, slow-moving, damaged or rejected stock, and stock held for others on job work, is normally excluded.
- Advances received from customers and stock covered by a Letter of Credit may also be adjusted, depending on the sanction terms.
3. Ageing of Debtors: Why Old Receivables Stop Counting
Banks finance receivables because they expect them to turn into cash soon. A debt that has been outstanding for months is treated as doubtful security, so sanction letters set an age cut-off beyond which book debts are excluded from DP. The cut-off is a bank decision, not an RBI rule. Many banks use 90 days, and some allow a longer period for industries with long, contractual payment terms. Your own sanction letter is the only reliable reference. This is where slow-paying customers hurt twice: your cash is stuck, and your borrowing capacity shrinks at the same time. It is one more reason to follow up on dues from buyers. Micro and small suppliers have statutory payment protection under Section 15 of the MSMED Act, and buyers can lose an income-tax deduction if they pay late.
- Prepare an age-wise debtor list (0-30, 31-60, 61-90, above 90 days, or the buckets your bank asks for) every month.
- Exclude debts from related parties or sister concerns unless the bank has expressly allowed them.
- Disputed, legal-case and written-off debts should not be shown as eligible.
4. The Monthly Stock Statement and the Stock Audit
Most sanctions require a stock and book-debt statement every month, by a date fixed in the sanction letter (often within the first two to three weeks of the following month). It lists stock by category, creditors, debtors with ageing, and the resulting DP, signed by the borrower. RBI's asset-classification norms state that stock statements relied on to determine Drawing Power should not be older than three months; outstanding based on DP worked out from older statements is treated as irregular. In practice, a late statement often means the branch freezes or reduces DP, and many banks charge a penalty for delayed submission. A stock audit is a physical and documentary check of the stock and debtors you have declared. It is usually done by an external firm appointed by the bank, at intervals and above limit sizes set by the bank's own policy. (RBI's norms make an annual external stock audit mandatory for NPA accounts of ₹5 Crore and above; for standard accounts it depends on the bank.) Auditors typically check:
- Physical stock against the statement and your stock register, including valuation method.
- Debtor and creditor balances against your ledgers, with ageing.
- Insurance of hypothecated stock, with the bank's clause, for the right location and value.
- Bank name-boards at the premises and the declared godown addresses.
- Variance between the stock statement and the audited or provisional balance sheet.
5. What Happens If Utilisation Exceeds Drawing Power
A balance above DP is an overdrawn, irregular position even if it is below the sanctioned limit. Banks may allow a temporary excess at their discretion, but it is watched closely. RBI's early-warning framework classifies a CC/OD account as SMA-1 when the outstanding stays continuously above the sanctioned limit or DP (whichever is lower) for more than 30 and up to 60 days, and SMA-2 for more than 60 and up to 90 days. If it remains continuously above the limit or DP for 90 days, the account is treated as "out of order" and becomes a non-performing asset (NPA). RBI also says an account should not be classified as NPA merely because of a temporary deficiency such as inadequate DP, but irregular drawings continuing for 90 days do trigger NPA status. Typical consequences of running above DP:
- Penal charges on the overdrawn amount, as set out in the sanction terms.
- Cheques and payments returned for want of funds, which hurts your banking record.
- SMA reporting to credit information companies, visible to every other lender you approach.
- Reduction, freeze or recall of the limit, and pressure at the next renewal.
6. Reconciling Stock Statements with GST and Your Books
Banks increasingly cross-check stock statements against other data they already hold: GST returns (GSTR-1 sales and GSTR-3B), the bank statement, and audited financials. Large or unexplained gaps are a common audit observation and can lead to questions about inflated stock or debtors. A simple monthly routine helps: • Sales in the stock statement should tie to GSTR-1 for the month, with reconciling items (credit notes, exports, non-GST supplies) noted. • Purchases should broadly match inward supplies reflected in your records and GSTR-2B. • Closing debtors and creditors should match your ledgers. • The March stock statement should be close to the closing stock in the audited balance sheet; explain any difference in writing. • Credits routed through the CC account should broadly track your declared sales. Routing sales through other accounts weakens your case at renewal.
Key takeaways
- You can draw only up to the lower of your sanctioned limit and your Drawing Power.
- DP comes from paid stock and eligible debtors, less the margins in your sanction letter. Margins and debtor age cut-offs are bank terms, not fixed rules.
- Submit the stock statement on time every month; RBI treats DP based on statements older than three months as irregular.
- A balance continuously above DP is reported as SMA from 31 days and becomes NPA at 90 days.
- Keep stock statements consistent with GST returns, ledgers and audited accounts; mismatches are a common stock-audit finding.
Frequently asked questions
What is Drawing Power in a cash credit account?
Drawing Power is the amount you can actually withdraw from a CC/OD account at a given time, based on the value of your paid stock and eligible book debts after deducting creditors and the margins set by the bank. You can draw only up to the lower of Drawing Power and the sanctioned limit.
What is the difference between sanctioned limit and Drawing Power?
The sanctioned limit is the maximum the bank has agreed to lend for the year. Drawing Power is recalculated periodically from your stock statement and can be lower than the limit when stock or eligible debtors fall.
Why are debtors older than 90 days excluded from Drawing Power?
Banks treat older receivables as weaker security, so sanction letters exclude debts beyond a stated age. Many banks use 90 days, but the exact cut-off is set by each bank and can differ by industry, so check your own sanction terms.
What happens if I do not submit my stock statement on time?
Banks usually charge a penalty and may freeze or reduce your Drawing Power. Under RBI norms, Drawing Power based on a stock statement older than three months is treated as irregular, which can lead to the account being flagged.
Is a stock audit compulsory for every CC account?
Not for every account. For standard accounts, whether and how often a stock audit is done depends on the bank's own policy and the size of the limit. RBI requires an annual external stock audit for NPA accounts of ₹5 Crore and above.
Can my account become NPA if I exceed Drawing Power only for a few days?
A short, temporary excess does not by itself make an account NPA. But if the balance stays continuously above the limit or Drawing Power, the account is reported as SMA-1 after 30 days, SMA-2 after 60 days, and becomes NPA if the irregularity continues for 90 days.
Official sources
General information only, not advice for your specific situation. Scheme rules and bank policies change; check the official source or talk to us before acting on it. Lending and subsidy decisions are made by banks, NBFCs and government agencies.