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📅 Published: 2026 🔄 Last Updated: 04 August 2026 ⏱ 13 min read ✍ Reviewed by Anirban Roy, FCA
Cash Credit & Drawing Power · 2026 Edition
AS Written by Ananya Sharma, Senior Credit Advisor · AR Reviewed by Anirban Roy, FCA

Cash Credit Facility 2026: How It Works, and Why Your Real Limit Isn't What You Think

Your sanction letter says ₹1 Crore. Most business owners read that as "₹1 Crore is available whenever I need it." It isn't. The number you can actually draw — Drawing Power — is recalculated every month against your current stock and receivables value, and it can sit well below your sanctioned limit without any warning beyond a stock statement you may not have looked at closely. Understanding how Drawing Power actually works is the difference between a cash credit account that quietly supports your business and one that suddenly goes "out of order" at the worst possible time.

📍 CreditCares — Godrej Waterside, Sector V, Kolkata — structuring cash credit and working capital facilities across 80+ banks and NBFCs for manufacturers, traders, and service businesses across West Bengal and India

25%
Typical own-margin banks deduct from current assets
Monthly
How often Drawing Power is recalculated
90 days
"Out of order" past this triggers NPA classification
8–30%
Typical interest rate range, charged only on amount drawn
What is a cash credit facility? A revolving working capital line secured against a business's stock and book debts, letting the borrower draw funds up to a sanctioned limit and repay as cash comes in, with interest charged only on the amount actually utilised — not the full sanctioned limit.

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.
01 · The Basics

What a Cash Credit Facility Actually Is

How is cash credit different from a regular business loan? A term loan disburses a fixed amount once, with interest on the full principal from day one; a cash credit facility is a revolving line against your stock and receivables, where you draw, repay, and redraw as needed, paying interest only on the daily outstanding balance.

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.

02 · The Non-Obvious Driver

Drawing Power vs. Sanctioned Limit — The Real Ceiling

💡 Strategic Insight Most explanations of cash credit stop at "you get a limit and pay interest only on what you use." That's true, but it skips the mechanism that actually governs day-to-day usability: Drawing Power. Your sanctioned limit is fixed at the time of annual review — it's the ceiling the bank has approved in principle. Drawing Power is recalculated monthly (sometimes quarterly for smaller limits) based on the stock and book-debts statement you submit, and it can be, and often is, lower than your sanctioned limit. The bank will fund you only up to whichever of the two is lower — never beyond DP, even if your sanctioned limit has plenty of headroom left. A business that assumes "I have ₹1 Crore sanctioned, so ₹1 Crore is available" is missing the number that actually decides what they can draw next week.

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.

03 · The Formula

The MPBF Formula Behind Your Limit

MPBF (Method 2) = 75% of Total Current Assets − Current Liabilities (other than bank borrowings) Tandon Committee methodology — the standard most Indian banks apply for CC limit assessment

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.

04 · Worked Example

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.

05 · Side by Side

Comparison: Cash Credit vs. Overdraft vs. Term Loan

FactorCash CreditOverdraftTerm Loan
SecurityStock and book debts (hypothecation)Often unsecured or FD-backedFixed asset or property
Real usable limitDrawing Power, recalculated monthlySanctioned limit, generally stableFull disbursed amount
Interest basisDaily closing balance utilisedDaily closing balance utilisedFull principal from disbursal
Best suited forBusinesses with a stock/receivables cycleGeneral short-term liquidity needsOne-time capital expenditure
Ongoing complianceMonthly/quarterly stock statement requiredMinimal ongoing reportingNone post-disbursal
Unsure whether your Drawing Power matches your sanctioned limit right now?
06 · The Risk

What "Out of Order" Actually Means — and How It Escalates

Duration Out of OrderWhat Typically Happens
A few days, self-correctedUsually routine; often resolves with next drawdown or repayment
Persisting across a stock statement cycleBank may flag for review; relationship manager typically follows up
Continuously out of order for 90 daysAccount classified as Non-Performing Asset (NPA) under RBI norms
Post-NPA classificationFresh credit becomes difficult across other lenders; recovery process may initiate
07 · Insider Insight

Insider Insight: Why Your Stock Statement Deserves as Much Care as Your Balance Sheet

⚡ Insider Insight Business owners often treat the monthly stock and book-debts statement as routine paperwork, delegated to whoever handles day-to-day accounting. In practice, it's the single document that determines next month's usable limit. Overstating stock or receivables to keep DP artificially high isn't just risky at the periodic bank audit or inspection — inflated figures caught during a stock and debtor inspection can trigger a full limit review, not just a correction. Understating figures out of excess caution has the opposite problem: it needlessly shrinks your own usable limit. The statement deserves the same care as a balance sheet, because functionally, for as long as your CC facility is active, it effectively is one — recalculated every month, with real consequences either way.
08 · Decision Matrix

Decision Matrix: Which Facility Fits Your Situation

If your situation is...ConsiderLearn More
Regular stock/receivables cycle, need ongoing working capitalCash Credit FacilityCash Credit
Comparing CC against a fixed-tenure alternativeCash Credit vs. Term Loan comparisonCash Credit or Term Loan
Unsure if your business qualifiesReview eligibility criteriaCash Credit Eligibility Guide
DP has fallen below your outstanding balanceShort-term regularisation or limit reviewTalk to an Advisor
Exploring all working capital options before choosingOverview of CC, OD, and government-backed schemesBest Cash Credit Options 2026
09 · Interactive Tools

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

Method 2, Tandon Committee approach. Illustrative — actual sanction depends on lender policy.

Drawing Power Headroom Check

Simplified illustration. Actual DP formula and eligible security vary by lender.
10 · Myth vs. Fact

Myth vs. Fact on Cash Credit Facilities

Myth"My sanctioned limit is what I can draw at any time."
FactDrawing Power, recalculated monthly from your stock and receivables statement, is the real ceiling — the bank funds up to whichever is lower, DP or sanctioned limit.
Myth"The monthly stock statement is just a formality the bank asks for."
FactIt directly determines your usable limit for the following period — inaccurate figures, in either direction, distort what you can actually draw.
Myth"Going slightly over my Drawing Power for a few days is a serious problem."
FactBrief, self-corrected irregularities are common and usually routine; the serious consequence — NPA classification — is specifically tied to remaining continuously out of order for 90 days.
11 · FAQ

Frequently Asked Questions

A revolving working capital line secured against stock and book debts, letting a business draw and repay funds up to a sanctioned limit, with interest charged only on the amount actually utilised.
Sanctioned limit is the ceiling approved at your annual review. Drawing Power is recalculated monthly against your actual stock and receivables value, and is the number that actually governs how much you can draw.
Most banks use the Tandon Committee's Method 2: 75% of total current assets, minus current liabilities other than bank borrowings, leaving roughly 25% as your own required margin contribution.
Brief irregularities are usually routine, but an account continuously out of order for 90 days gets classified as a Non-Performing Asset under RBI norms, which can affect access to future credit.
No. CreditCares charges zero upfront advisory fees; the service fee is processed only upon successful sanction and disbursal of the facility.

Trusted Across West Bengal

₹2,000 Cr+
Disbursed since 2012
500+
Clients funded, statewide
80+
Bank & NBFC partners
13 · Conclusion

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.

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