Drawing power calculator

What drawing power means

A cash credit limit is the maximum a bank has sanctioned. Drawing power (DP) is how much of that limit the borrower can use right now. It is worked out from the current assets the limit is secured against, usually stock and receivables, after keeping a margin. The borrower can draw the lower of drawing power and the sanctioned limit.

How to use this calculator

1. Enter stock as per the latest stock statement.
2. Enter sundry creditors for goods. Stock bought on credit hasn't been paid for, so it is deducted.
3. Enter eligible receivables: debtors within the age limit set in the sanction, often 90 days.
4. Enter the stock margin and receivables margin from the sanction letter.
5. Enter the sanctioned limit to see how much can actually be drawn.

The formula

DP = (Stock − Creditors) × (1 − stock margin) + Eligible receivables × (1 − receivables margin)

Worked example

Stock of ₹80 lakh, creditors of ₹20 lakh and eligible receivables of ₹50 lakh, with a 25% margin on both, against a sanctioned limit of ₹75 lakh:

• Paid stock: 80 − 20 = ₹60 lakh, and DP on stock: 60 × 75% = ₹45 lakh
• DP on receivables: 50 × 75% = ₹37.5 lakh
• Total drawing power: ₹82.5 lakh

Drawing power is higher than the limit, so the borrower can use the full ₹75 lakh. If stock fell to ₹50 lakh, DP would drop to ₹60 lakh, and only ₹60 lakh could be drawn even though ₹75 lakh is sanctioned.

What banks check in practice

• The stock statement is current. Borrowers usually submit it every month. Under RBI's asset classification norms, drawing power worked out from a stock statement older than three months makes the account irregular.
• Only good stock counts. Obsolete, slow-moving or damaged stock, and stock not owned by the borrower, is excluded.
• Receivables are aged. Debts older than the limit in the sanction letter are left out.
• Stock audits and inspections test whether the statement matches what is actually in the godown and the books.

Frequently asked questions

What happens if the outstanding balance is higher than drawing power? The account is overdrawn against DP. The borrower is asked to bring the balance down or show more stock and receivables. If it stays that way, the account can slip into irregularity.

Why are creditors deducted from stock? Stock bought on credit belongs, in effect, to the supplier until it is paid for. The bank only lends against the borrower's own stake in it.

Are margins the same for every borrower? No. Margins are set in each sanction, based on the type of stock, how easily it can be sold and the borrower's risk profile.

To see how the limit itself is sized in the first place, try the MPBF calculator.