Drawing Power

Drawing Power generally addressed as “DP” is an important concept for Cash Credit (CC) facility availed from banks and financial institutions. Drawing power is the limit up to which a firm or company can withdraw from the working capital limit sanctioned. Updating drawing power for working capital by the bank is an important credit monitoring exercise.

Understanding Drawing Power

Drawing Power is calculated after deducting margin from “Stock Less Creditors + Book Debts” for the month. Banks have a practice of updating drawing power based on monthly/quarterly closing stock-book debt and trade creditors’ statement submitted by the firm/company. In order to understand this better, we need to have a better understanding of what is “margin” and how DP is calculated.

An important point to note is that “Stock” considered for calculating DP should be insured stock. Stock not covered under insurance, if considered for drawing power does not reflect the true drawing power since bank runs a huge risk, in the case of any mishappening. Drawing Power Sanctioned by BanksDrawing power is generally a post-sanction credit monitoring tool. After sanction of limits, it helps the bank in keeping a tab on the performance of the firm or company to whom the limits are sanctioned. If the debtors become sticky at any point in time, or if the paid stock shows decreasing trend constantly month on month, it is an alarm bell for the bank.

Drawing-Power-Calculation.pptx

Calculation of Drawing Power

While opening a CC account, DP has arrived basis the stock, book debts and creditors statement based on the closing position of the earlier month. The customer (Firm or the company availing working capital limits from the bank) can utilize these limits for a month i.e. till the time the new statement is prepared for the consequent month-end position.

It is calculated by considering the total value of paid stock (Paid stock=Stock fewer Creditors) plus book debts (not more than 90 days old) and deducting margin from the same. In most of the cases, debtors up to 90 days are considered for calculating DP. But, if the business has a longer credit cycle, more than 90 days debtors might be considered for DP calculation. This is to be done if it is clearly mentioned as part of sanction terms.

The margin is the fund brought in the business by the firm/company itself from long-term sources of finance. In most of the cases, a margin on stock and book debts is 25%, while some banks consider 25% margin for stock and 40% of net debtors (Debtors fewer creditors) since the stock is a more liquid current asset. How much margin is considered is already mentioned as terms of sanction in the “sanction letter” and may vary from bank to bank. Depending upon aggression of bank in lending, the margin is kept. Banks who are more aggressive keep less margin and vice versa. In addition, industry to industry, the margin will vary depending upon operating / working capital cycle.

 

Example of Calculating Drawing Power

If the details are as below:

As on 31.10.2018 $ Mio
Stock 50
Creditors 12
Total Debtors 70
Debtors > 90 Days 10
Stock Covered Under Insurance 44
Margin on Stock 0.25
Margin on Debtors 0.4
Sanctioned Working Capital Limit 70

Drawing Power Calculation

METHOD-I

Particulars INR Mio Allowed for DP Calculation
Stock (Insured Stock) 44
Less: Creditors 12
Paid Stock 32
Less: 25% Margin 8 24
Debtors 70
Less: Debtors > 90 Days 10
Debtors allowed for DP 60
Less: 40% Margin 24 36
Drawing Power 60

Working Capital limit is worked out prior to sanction. Working capital limits are primarily secured against the stock and book debts of the firm or company. It is to be noted that even if the drawing power for some month works out to be more than the sanctioned limit, the maximum withdrawal limit is “Sanctioned Amount”. That means a customer can utilize maximum amount as the limit sanctioned, even if the drawing power arrived is more for a particular month closing. In the above limit, if the sanctioned limit was “$ 50 Mio”, then DP would be restricted to “$ 50 Mio” only.

Sanjay Bulaki Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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51 thoughts on “Drawing Power”

  1. Hi,
    To calculate drawing power, we need to take “paid stock”. For the amount of creditors outstanding, the stock is unpaid to that extent. So, deduction of creditors is done. Bank shall not be funding for something that is not being spent, so creditors are to be deducted.

    Reply
    • DP formula used by Banks are Stock -Margin and Book Debts – Creditors -Margin.But DP formula is Stock – Creditors- Margin and Debtors – Margin.Please elaborate the same ,

      Reply
  2. Hi Atul,
    Not all banks follow the same formula for DP. It differs from bank to bank.
    Some banks follow a more conservative approach, while some follow a lenient approach for credit monitoring.

    Reply
    • When creditors are more than the stock, it means that the stock have been fully funded by creditors and therefore bank finance is not needed. Stock will not qualify for bank finance.
      While calculating DP, the excess of creditors over stock should be treated as finance of debts to that extent by creditors., Only the balance will qualify for bank finance [Debits – excess creditors)]-margin]
      Under normal circumstances, creditors will not exceed stock. If it happens, it should be examined in more detail, before even considering working capital finance.

      Reply
    • When creditors are more than stock, it means that the stock has been fully funded by creditors or firm/company is getting cheaper finance from creditors in comparison to lending institutions, therefore bank finance is not needed.

      Reply
  3. If creditors are more, you won’t be granted the LC and BG limits. If you already have LC and BG limits, same will be deducted from the calculated limits.

    Reply
  4. My Query is Treatment of Group Creditors while Calculating DP, Should we deduct it also from the Paid Stock..??
    As we have not been taking Group Debtors so this should not be deducted…???
    Reply

    Reply
  5. My query is regarding the Creditors. If a company receives easy credit for stocks provided by its Parent / group company and total creditors which includes parent co also exceeds stock, can we consider Parent company credit for less than say 3-4 months only.

    Reply
  6. Why Bank not consider available balance of last month in DP calculation system.
    if I have limit of 30 cr.
    i.e if our stock is 20 cr after margin = 17 cr in dp
    debtors 10 cr after margin = 7.5 cr in dp
    total = 24.5 cr in dp
    less
    creditors 1 cr = 1.0 cr
    total dp as per calculation is = 23.5 cr
    But in may case available balance was Rs. 8 cr. in C.C. limit but bank not consider the same & deduct our DP by 6.5 cr.

    Reply
    • Dp must be greater than sanction limit.If it has low then you can not use your balance and it was automatically show in overdue.

      Reply
  7. If a borrower has availed cc limits, letter of credit – both usance and Sight, margin for cc limits is 25% and for LC is 10%. how to calculate DP? What is the impact of usance LC with respect to DP. Kindly explain with examples please

    Reply
    • CENVAT Credit eventually is the part of DP because it is paid to Suppliers for the stock and is the part of stock although we treat the same separately in the books of accounts.

      Reply
  8. Hy. Thanks for providing us so many information regarding calculation of DP.But still i have a query regarding calculation of net paid stock that whether combustible and non combustible stock should be reduced from stock or not???

    Reply
  9. How to set stock insurance limit if working capital sanction Rs 25 crores , stock shown in stock statement Rs 8 crores and debtors Rs 26 crores then what is the limit of stock insurance of the firm please suggest.

    Reply
    • General norms, Stock insurance is to be taken for the highest estimated/expected stock level. And if actual the stock is higher than the insured amount at any point of time then limit of insurance should be increased immediately.

      Reply
  10. If creditors is more the stock then how to calculate dp. for example stock 40 lac creditors 60 lac debtors 75 lac.

    Reply
  11. Re: Drawing power for Export Finance: A while ago it was explained to us that DP did not include creditors for Running PCFC A/c in Foreign currency. As:
    1. Export Finance was order driven & would only be disbursed to a maximum of 90% of the order.
    2. Further Margin of 10%(in our case) would be deducted from the stock,which was secondary.
    As under Running account PCFC -since export orders often required advances for bulk raw material or pre purchase of inputs, the prime driver of DP calculation for a running account would be the export order.
    Branch auditors insist that this is wrong & there is no difference between the norms for regular CC & Running PCFC accounts & DP is only to be calculated by way of traditional Stock- creditors= DP.
    How True is this?

    Reply
  12. Is it mandatory to allocate DP to the multiple banks if DP is less than the sanctioned limit, also is there any RBI guidelines regarding the DP allocation
    Is the below declaration sufficient instead of given bank wise DP allocation:
    “The working capital utilization from the entire banking system (all banks including your bank) will not exceed Drawing power as per Drawing Power Statement submitted to you”

    Reply
  13. Hi Sachin,
    Yes, apparently the declaration is enough in terms of multiple banking arrangements (i.e. “The working capital utilization from the entire banking system (all banks including your bank) will not exceed Drawing power as per Drawing Power Statement submitted to you”). However, it depends on the bank whether they ask you to submit any additional document along with the DP statements. Some stringent/conservative banks try to follow some additional checks to ensure the correctness of this declaration.

    Reply
  14. Hi All,
    If Company made provision for slow moving non-moving stock and doubtful debtors also, can above provision reduced from Total Stock and Total Debtors while working drawing power calculation.
    If Yes, is it mandatory or provided in any guidelines issued by RBI/Banks.

    Reply
  15. Hi,
    i have availed a cash credit facility.
    I have a modest 15% margin(my own investment)
    My purchases are in cash whereas my sales are credit sales.This results in me having given more credit than my CC limits. I normally keep very less stock due to the nature of my business.
    What should i do to use my CC limits completely every month?
    If i have more debtors than stock while submitting the statements, will my withdrawal limit be reduced(even though my debtors owe much more than the limit)?
    kindly explain.

    Reply
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    Reply
  17. I’ve discovered It absolutely useful and it has helped me out loads. I am hoping to contribute to other customers as it has helped me. Great job.

    Reply
  18. I like the helpful information you provide in your articles. I’ll bookmark your blog and check again here frequently. I’m quite sure I’ll learn plenty of new stuff right here! Best of luck for the next!

    Reply
  19. Our c/c limit document given by bank. Jisme mention hai ke margin= 25% of stock+debtor(less than 90 days)-creditor. Iska kya matlab hai pls clear???

    Reply
  20. Whether CC , DEPOSITS RELATED TO OFFICE PREMISES AND COST RELATED TO CONTRACT ACQUISITION ARE CONSIDERED AS PART OF DP CALCULATION

    Reply
  21. Hi,
    Please let me inform what is the bank provisions? if i will submit two months (March & April) stock statement at once in May and the DP as per March is less than the DP of April. And the March DP is also less than my Feb DP, which is being utilised.
    Is there any Penal provision by bank or RBI?

    Reply

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