Cash Credit (CC) Limit Explained: MPBF Calculation, Drawing Power, Stock Audit & Consortium Norms
Definitive underwriting guide for Managing Directors and CFOs navigating multi-bank CC facilities, Tandon Committee Method II working capital gap sizing, monthly drawing power compliance, and Inter-Creditor Agreement (ICA) consortium migration.
What is a Cash Credit (CC) limit and how does it function in corporate banking?
A Cash Credit (CC) facility is a continuous revolving fund-based credit line granted by commercial banks to finance an enterprise's day-to-day operational working capital gap. Borrowers draw funds as needed and pay interest only on the daily utilized balance, not on the entire sanctioned ceiling. CC limits are secured by a primary hypothecation charge on current assets (raw materials, WIP, finished goods, and trade receivables) and governed dynamically by monthly Drawing Power (DP) statements.
Cash Credit (CC) vs Overdraft (OD) vs Working Capital Demand Loan (WCDL)
Structural comparison of institutional short-term credit instruments under RBI guidelines.
| Feature | Cash Credit (CC) | Overdraft (OD) | Working Capital Demand Loan (WCDL) |
|---|---|---|---|
| Primary Security Backing | Hypothecation of Stock & Debtors | Fixed Deposits / Real Estate Collateral | Pari-passu charge on Current Assets |
| Interest Calculation | Daily utilized balance only | Daily utilized balance only | Fixed rate over fixed tranche tenor |
| Mandatory RBI Loan Component | Max 40% (For limits > ₹150 Cr) | Exempted / Collateral-linked | Min 60% (Under Loan Delivery Framework) |
| Tenor & Renewal | 12 Months (Annual Audit Review) | 12 Months (Annual Renewal) | 7 to 365 Days per Tranche |
How Banks Size Limits: Tandon Committee Method II MPBF
Indian banks utilize the Tandon Committee Method II formula for corporate exposures exceeding ₹5 Crore.
- Total Current Assets (TCA) = Inventory + Eligible Debtors + Cash & Operating Balances
- Other Current Liabilities (OCL) = Sundry Creditors + Statutory Dues + Customer Advances
- Working Capital Gap (WCG) = TCA − OCL
- Minimum Stipulated Net Working Capital (NWC) = 25% of TCA
- Maximum Permissible Bank Finance (MPBF) = WCG − (0.25 × TCA)
Under this prudential method, the borrower must maintain a minimum Current Ratio of 1.33:1, confirming that at least 25% of current assets are financed by long-term surplus capital or tangible net worth.
Mandatory Quarterly Stock Audits & Unit Inspection Norms
For all Cash Credit limits exceeding ₹5 Crore, banks appoint empanelled Chartered Accountant firms to conduct independent stock and receivable audits. Key scrutiny areas include: physical verification of factory raw materials, checking FIFO/weighted-average inventory valuation, reconciliation of GST-1 vs stock registers, and purging book debts older than 90 days.
Frequently Asked Questions: Cash Credit Facilities
Can a company hold Cash Credit accounts with multiple banks simultaneously? ▼
Under RBI circulars on opening current and CC accounts, an entity with aggregate banking exposure of ₹50 Crore or more cannot operate uncoordinated multiple banking accounts. It must enter into a formal Consortium Lending arrangement or an Inter-Creditor Agreement (ICA) led by the lead bank, with all cash flows routed through designated collection and escrow accounts.
What causes an annual CC limit renewal to be delayed or rejected? ▼
Common causes include: delayed submission of audited balance sheets, declining sales turnover resulting in limit underutilization, negative stock audit observations, deterioration in Current Ratio below 1.33x, or delayed monthly stock statements beyond 30 days.
How does CreditCares assist corporates facing working capital constraints? ▼
CreditCares re-engineers your CMA data, restructures creditors via non-fund LC facilities to release cash drawing power, introduces new consortium member banks to share credit risk, and negotiates sub-MCLR spreads across public and private banks.
Structure & Enhance Your Corporate Cash Credit Facility
Consult CreditCares' Senior Ex-Bankers. We evaluate your working capital cycle, eliminate drawing power bottlenecks, and syndicate multi-bank consortium facilities across 45+ institutional lenders.