An Industries Guide to Drawing Power

 

If your business uses working capital funding from a bank, understanding Drawing Power (DP) is crucial. DP determines how much of your sanctioned loan limit you can actually use based on your business’s current assets, such as inventory and receivables. It’s a tool used by banks to ensure that funds are used for day-to-day operations and not for long-term or non-business purposes.

DP is relevant only to working capital limit facilities like Cash Credit (CC), not for term loans or overdraft limits.

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Why Banks Use Drawing Power

Banks don’t just release the full credit limit without conditions. They want to ensure that the business has:

• Genuine short-term funding needs
• Some stake (margin) in the operations
• Healthy receivables and inventory turnover

Drawing Power is the mechanism used to monitor and control how much financing a business really needs at any given time.

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How DP is Calculated

To calculate Drawing Power, banks look at the business’s paid inventory and eligible receivables, after deducting creditors (trade payables). Here’s a fresh example:

Particulars	Amount (Rs.)
Raw Material Inventory	300
Work-in-Progress (WIP)	150
Finished Goods Inventory	250
Total Inventory	700
Less: Creditors (Trade Payables)	220
Net Inventory	480
Add: Receivables	180
Total Working Capital Assets	660

In this case, banks will only evaluate the net Rs.660 for potential funding — not the gross asset value of Rs.880 — because the business has already received Rs.220 worth of credit from suppliers.

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Promoter’s Margin Requirement

Banks expect the borrower to contribute a portion of the working capital — commonly referred to as the promoter’s margin. This reduces credit risk for the bank and ensures the business owner is invested.

Typical margin rates:

• 25% on inventory
• 10%–40% on receivables, depending on customer quality and aging

Let’s assume the following:

• Margin on inventory: 25%
• Margin on receivables: 30%

Component	Value (Rs.)	Margin %	Promoter’s Share	Bank Funding
Net Inventory	480	25%	120.00	360.00
Receivables	180	30%	54.00	126.00
Total	660		174.00	486.00

So, even though the working capital need is Rs.660, the maximum funding from the bank will be Rs.486, and the business owner must fund the remaining Rs.174.

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Cover Period: Age of Receivables Matters

Not all receivables are eligible. Banks generally apply a cover period — usually 90 days — beyond which any outstanding invoice is excluded from DP.

If out of Rs.180 in receivables, only Rs.120 are within 90 days:

Component	Value (Rs.)	Margin %	Promoter’s Share	Bank Funding
Net Inventory	480	25%	120.00	360.00
Eligible Receivables (≤90d)	120	30%	36.00	84.00
Total	600		156.00	444.00

Now, the revised Drawing Power becomes Rs.444 — this is the Maximum Permissible Bank Finance (MPBF).

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Drawing Power vs Sanctioned Limit

Think of your sanctioned limit as a credit ceiling, say Rs.600. But if your DP based on asset assessment is only Rs.444, you can only use Rs.444, even though the bank has technically approved more.

You cannot draw more than your DP, no matter what your sanctioned limit is.

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Monthly DP Statement Submission

If you’ve availed a Cash Credit facility, your bank will require a monthly DP (or Stock) Statement, usually submitted within 7–15 days of each month’s end.

This statement includes:

• Item-wise inventory details
• Age-wise breakup of receivables
• Details of creditors
• Supporting documents (invoices, ledger summaries, etc.)

If you delay submission or misreport data:

• The bank may charge a penalty
• Your drawing limit may be reduced temporarily
• You may be asked to bring in funds if you’ve overdrawn

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What About Overdraft (OD) Limits?

For businesses with smaller or more predictable cash flow needs, an Overdraft (OD) limit may be preferable. OD facilities usually:

• Don’t require monthly DP statements
• Are based on the creditworthiness and balance sheet of the business
• Offer more flexibility but less borrowing capacity

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Key Takeaways

• Drawing Power (DP) defines how much you can draw from your Cash Credit limit, based on your current business assets.
• Banks fund a portion of inventory and recent receivables, adjusted for creditors and promoter margin.
• A cover period applies to receivables — only recent invoices count.
• Monthly DP submission is mandatory for CC accounts.
• You can never exceed your DP, even if your sanctioned limit is higher.

Plastic & Packaging, Iron & Steel, sugar, Coal, Yarn & Textile, Auto & Auto Part, Chemical Additives, Cement & Construction, Adhesives & Paint, Grain & Pulses, Oil, Traders, Agro & Fertilizer, HealthCare, Manufacturer, Gems & Jewellery, Heavy Machinery, Consumer Durable, Export & Import, Food processing, Logistics, Paper, Base Metal, Financial Services, Pharma