Quick Summary — What You Need to Know
- Your sanctioned limit and your usable limit are two different numbers: the sanctioned limit is the ceiling the bank has approved in principle; Drawing Power (DP) is what you can actually withdraw right now, and DP is almost always the binding constraint day to day.
- DP is recalculated monthly from your own stock and book-debts statement: submit a lower stock value or an ageing receivables book one month, and your DP can drop below your outstanding balance — even though your sanctioned limit hasn't changed at all.
- The underlying formula is conservative by design: banks typically apply Method 2 of the Tandon Committee's MPBF approach — 75% of current assets, minus current liabilities other than bank borrowings — meaning you're expected to fund roughly 25% of your working capital cycle from your own margin, not the bank's.
- Drawing beyond your DP, even within your sanctioned limit, is treated as an irregularity: an account that stays "out of order" — utilisation continuously exceeding DP or sanctioned limit — for 90 consecutive days gets classified as a Non-Performing Asset, regardless of how good your broader relationship with the bank has been.
- Interest is calculated daily on the closing balance, only on what's drawn: this is genuinely the facility's core advantage over a term loan, but it only helps if you understand DP well enough to plan drawdowns against it rather than against the sanctioned limit on your letter.
- Important takeaway: the stock and book-debts statement you submit monthly isn't paperwork — it's the single document that determines how much of your own facility you can actually use next month.
Table of Contents
- What a Cash Credit Facility Actually Is
- Drawing Power vs. Sanctioned Limit — The Real Ceiling
- The MPBF Formula Behind Your Limit
- Worked Example: How DP Can Drop Below Your Outstanding
- Comparison: Cash Credit vs. Overdraft vs. Term Loan
- What "Out of Order" Actually Means — and How It Escalates
- Insider Insight: Why Your Stock Statement Deserves as Much Care as Your Balance Sheet
- Decision Matrix: Which Facility Fits Your Situation
- Free Calculators
- Myth vs. Fact
- Frequently Asked Questions
- Related Reading
- Conclusion & Next Steps
What a Cash Credit Facility Actually Is
Cash credit is secured through hypothecation of current assets — stock-in-trade and book debts — with possession remaining with the borrower while the bank holds a charge over them. It's designed for the ordinary working capital gap every trading or manufacturing business faces: buying raw materials or stock before customer payments arrive. Tenure is typically 12 months, renewable annually based on the bank's review of business performance.
Drawing Power vs. Sanctioned Limit — The Real Ceiling
This is why two businesses with identical sanctioned limits can have very different day-to-day access to funds — the one with well-maintained, accurately reported stock and current receivables has a DP close to its sanctioned limit; the one with ageing stock or slow-moving receivables can find its real usable limit meaningfully lower, even with an unchanged sanction letter.
The MPBF Formula Behind Your Limit
The 25% you don't get financed is your own margin contribution — banks expect you to fund roughly a quarter of your working capital cycle yourself, not through the CC facility. This margin requirement is exactly why banks describe CC as supplementing working capital, not fully funding it: the facility is built around genuine skin-in-the-game from the borrower, verified every month through the stock and book-debts statement.
Worked Example: How DP Can Drop Below Your Outstanding
The Situation
A trading business had a sanctioned CC limit of ₹1 Crore, comfortably utilising ₹75 Lakh through a normal season with healthy stock turnover and current receivables.
The Shift
A slowdown in a key customer segment left the business holding slower-moving stock and an ageing receivables book. The month's stock and book-debts statement reflected this honestly, reducing the calculated Drawing Power to ₹68 Lakh.
The Gap
With ₹75 Lakh still outstanding against a newly calculated DP of ₹68 Lakh, the account was technically "out of order" — over its usable limit — despite the sanctioned limit of ₹1 Crore having plenty of headroom on paper.
The Resolution
CreditCares helped the business arrange a short-term working capital bridge to regularise the account while the receivables book was actively worked down, avoiding an extended out-of-order period and the classification risk that comes with it.
Comparison: Cash Credit vs. Overdraft vs. Term Loan
| Factor | Cash Credit | Overdraft | Term Loan |
|---|---|---|---|
| Security | Stock and book debts (hypothecation) | Often unsecured or FD-backed | Fixed asset or property |
| Real usable limit | Drawing Power, recalculated monthly | Sanctioned limit, generally stable | Full disbursed amount |
| Interest basis | Daily closing balance utilised | Daily closing balance utilised | Full principal from disbursal |
| Best suited for | Businesses with a stock/receivables cycle | General short-term liquidity needs | One-time capital expenditure |
| Ongoing compliance | Monthly/quarterly stock statement required | Minimal ongoing reporting | None post-disbursal |
What "Out of Order" Actually Means — and How It Escalates
| Duration Out of Order | What Typically Happens |
|---|---|
| A few days, self-corrected | Usually routine; often resolves with next drawdown or repayment |
| Persisting across a stock statement cycle | Bank may flag for review; relationship manager typically follows up |
| Continuously out of order for 90 days | Account classified as Non-Performing Asset (NPA) under RBI norms |
| Post-NPA classification | Fresh credit becomes difficult across other lenders; recovery process may initiate |
Insider Insight: Why Your Stock Statement Deserves as Much Care as Your Balance Sheet
Decision Matrix: Which Facility Fits Your Situation
| If your situation is... | Consider | Learn More |
|---|---|---|
| Regular stock/receivables cycle, need ongoing working capital | Cash Credit Facility | Cash Credit |
| Comparing CC against a fixed-tenure alternative | Cash Credit vs. Term Loan comparison | Cash Credit or Term Loan |
| Unsure if your business qualifies | Review eligibility criteria | Cash Credit Eligibility Guide |
| DP has fallen below your outstanding balance | Short-term regularisation or limit review | Talk to an Advisor |
| Exploring all working capital options before choosing | Overview of CC, OD, and government-backed schemes | Best Cash Credit Options 2026 |
Free Calculators
Estimate your MPBF-based eligible limit and check your current Drawing Power headroom below. For a full assessment based on your actual financials, talk to our advisory desk.
MPBF Eligibility Estimator
Drawing Power Headroom Check
Myth vs. Fact on Cash Credit Facilities
Frequently Asked Questions
Trusted Across West Bengal
Conclusion & Next Steps
A cash credit facility in 2026 works exactly as advertised — interest only on what you use, flexible drawdown against your working capital cycle — but only if you're managing against the right number. Your sanctioned limit is the ceiling on paper; Drawing Power, recalculated every month from your own stock and receivables reporting, is the ceiling in practice. Treating your monthly statement with the seriousness it deserves is the simplest, highest-leverage habit for keeping your facility genuinely usable.
CreditCares has facilitated over ₹2,000 Crore in loan disbursals for 500+ clients across 80+ banks and NBFCs, with zero upfront fee — headquartered at Godrej Waterside, Sector V, Kolkata, and structuring cash credit and working capital facilities across West Bengal and India.
Ready to Set Up or Review Your Cash Credit Facility?
Let CreditCares review your working capital cycle, structure the right facility, and help you keep your Drawing Power aligned with what your business actually needs.
Official References
Reserve Bank of India (RBI) · CIBIL · Income Tax Department
Regulatory Disclosure: This content is educational and does not constitute financial or legal advice. Worked examples use illustrative figures for explanatory purposes only. MPBF methodology, Drawing Power norms, NPA classification rules, and loan terms are set by the RBI and individual lenders, and are subject to change and vary by lender. Always confirm current terms directly with your lender and a qualified financial advisor. Loan approval, sanction amount, and terms remain at the sole discretion of the lending institution.