Cash Credit vs Overdraft: Complete Comparison for CFOs & Promoters
A Cash Credit (CC) facility is an RBI-compliant revolving working capital line sanctioned against hypothecation of current assets (stock and receivables under 90 days), with monthly drawing power calculated under Tandon Committee norms. An Overdraft (OD) is a revolving credit line secured against fixed collateral (property, FDs, or shares) or cash flows without monthly stock audit mandates. Both charge interest solely on utilized debit balances, with indicative rates between 8.35% and 10.95% p.a.
For enterprise CFOs and corporate promoters managing turnovers from ₹20 Crore to over ₹500 Crore, choosing between a Cash Credit (CC) limit and an Overdraft (OD) facility determines liquidity flexibility, borrowing costs, and operational compliance overhead. While both are fund-based revolving credit instruments where interest is computed exclusively on daily end-of-day debit balances, their underlying collateral architecture, appraisal mathematics, and statutory regulatory treatments diverge sharply.
Institutional Comparison: Cash Credit (CC) vs Overdraft (OD)
The table below provides a side-by-side benchmark of the operational, regulatory, and credit assessment differences across Indian scheduled commercial banks:
| Feature / Dimension | Cash Credit (CC) Limit | Overdraft (OD) Facility |
|---|---|---|
| Primary Collateral | Hypothecation of Current Assets: Raw materials, WIP, finished goods, and certified book debts (< 90 days). | Mortgage of immovable property (industrial/commercial/residential), pledge of FDs, mutual funds, or clean corporate cash flow. |
| Limit Sizing Methodology | Tandon / Chore Committee MPBF Method II (75% TCA − OCL) or Nayak Committee (20% of projected turnover). | Collateral Valuation LTV (50%–70% of real estate distress value) or multiple of monthly business cash flow (Clean OD). |
| Drawing Power (DP) Linkage | Mandatory monthly DP recalculation. Available withdrawal is capped at the lower of Sanctioned Limit or monthly DP. | Fixed limit availability. Drawing power equals full sanctioned limit throughout the year without monthly stock deductions. |
| Standard Margin Requirement | 25% margin on paid inventory; 30% to 40% margin on approved book debts. | 30% to 50% haircut on property value; 10% to 15% on fixed deposits. |
| Ongoing Compliance | Monthly Stock & Debtor statements, Quarterly Information System (QIS) reports, annual bank stock audit. | Minimal routine compliance; annual review based on audited financial statements and insurance policy renewal. |
| Indicative Pricing Band | 8.35% to 9.85% p.a. (Tier-1 rated corporate) to 10.75% p.a. linked to EBLR / 1-Yr MCLR. | 8.50% to 10.50% p.a. (Secured OD against property); 10.95% to 14.00% p.a. (Unsecured/Clean OD). |
| Target Industry Sector | Manufacturing, engineering, textiles, pharma, chemical processing, agro-trading, and wholesale distribution. | IT services, consulting, healthcare clinics, logistics operators, real estate developers, and corporate holding companies. |
| Tax Treatment | 100% tax deductible as allowable revenue expenditure under Section 36(1)(iii) of the Income Tax Act, 1961. | 100% tax deductible under Section 36(1)(iii) provided funds are utilized strictly for legitimate business purposes. |
When Should an Enterprise Choose Cash Credit (CC)?
Cash Credit is the primary operating debt instrument when working capital requirements expand directly in tandem with sales volumes and inventory holdings:
- Heavy Working Capital Cycles: Manufacturing and trading businesses where substantial capital is locked in raw material stock, works-in-progress, and 60-to-90 day trade credit.
- Higher Loan Sizing via MPBF: Under Tandon Committee Method II, lenders fund up to 75% of eligible net current assets. For a company with ₹40 Crore in eligible inventory and debtors and ₹10 Crore in sundry creditors, the permissible CC limit can reach ₹20 Crore ($0.75 imes [40 - 10]$), which often exceeds what the promoter could secure against standalone property collateral.
- Cost-Effective Borrowing: Because the primary security consists of tangible operational goods, PSU consortia offer prime credit spreads on CC limits for investment-grade rated borrowers (CRISIL/ICRA BBB+ and above).
- Eligible for CGTMSE / Interest Subventions: CC limits up to ₹10 Crore can be structured under the revised CGTMSE CGS-I scheme (Circular 250/2024-25) without third-party collateral.
When Should an Enterprise Choose an Overdraft (OD)?
An Overdraft facility is preferable under corporate operating models where inventory is negligible or compliance friction must be minimized:
- Asset-Light & Service Sectors: IT/ITES firms, software exporters, logistics aggregators, and professional service corporations with minimal physical inventory.
- Fluctuating Receivables with Unpredictable Ageing: In Cash Credit, debtors exceeding 90 days are strictly eliminated from Drawing Power. In an Overdraft against commercial property or deposits, your drawal limit remains 100% unaffected by customer payment delays.
- Zero Stock Statement Headaches: No monthly certified stock audits, CA certificates, or physical stock verifications by bank-appointed empanelled auditors.
- Drop-Line Overdraft for Capital Capex: A structured variant where the sanctioned limit systematically amortizes monthly over 5 to 10 years, combining term debt discipline with revolving overdraft flexibility.
Drawing Power (DP) vs Sanctioned Limit: The Decisive Factor
The single most common operational pitfall CFOs face with Cash Credit is the distinction between the Sanctioned Limit and Drawing Power (DP):
The Regulatory Drawing Power Formula:
$$ ext{Drawing Power} = ( ext{Paid Inventory} imes [1 - 0.25]) + ( ext{Debtors } < ext{90 Days} imes [1 - 0.35]) - ext{Sundry Creditors}$$
*Even if your bank sanction is ₹20 Crore, if your computed monthly Drawing Power drops to ₹14 Crore due to high unpaid suppliers or delayed debtor collections, checks drawn beyond ₹14 Crore will bounce under RBI IRAC prudential norms.
By contrast, in an Overdraft account backed by immovable property or fixed deposits, the Drawing Power is always equal to the Sanctioned Limit, giving corporate treasuries absolute certainty when issuing supplier disbursements.
Taxation & Balance Sheet Impact: Section 36(1)(iii)
From an Indian taxation and accounting perspective:
- Interest Deduction: Interest paid on both CC and OD accounts is 100% tax-deductible as business expenditure under Section 36(1)(iii) of the Income Tax Act, 1961, provided the funds are utilized exclusively for business operations and not diverted into non-business advances or promoter personal drawings.
- GST on Charges: Processing fees, annual review charges, and mortgage stamp duties attract 18% GST, which is fully creditable as Input Tax Credit (ITC) for GST-registered entities.
- Current Ratio Presentation: In corporate balance sheets audited under Ind AS / IGAAP, both CC and OD are classified as Short-Term Borrowings under Current Liabilities, impacting the company's Current Ratio ( ge 1.33:1$) under Tandon committee appraisal.
Frequently Asked Questions: CC vs OD
Can a company hold both a Cash Credit and an Overdraft facility simultaneously? ↓
Yes. A company can maintain a Cash Credit facility for raw material procurement and receivables financing while concurrently utilizing an Overdraft against commercial property or fixed deposits to manage seasonal capex or liquidity buffers, provided both facilities are fully disclosed and covenanted across all lenders under the RBI Multiple Banking / Consortium guidelines.
Which facility has lower interest rates: Cash Credit or Overdraft? ↓
For investment-grade manufacturing and trading companies, Cash Credit limits generally carry slightly lower interest spreads (8.35% to 9.75% p.a.) because banks hold primary hypothecation charges over liquid current assets. Secured Overdrafts against prime commercial property command comparable rates (8.50% to 10.25% p.a.), while unsecured Clean Overdrafts are priced significantly higher (10.95% to 14.00% p.a.).
What happens if my debtors exceed 90 days in Cash Credit? ↓
Under RBI Master Circulars on Working Capital, all book debts exceeding 90 days from the invoice date (or contractual credit term) are categorized as ineligible and deducted from the Drawing Power computation. If this causes your outstanding balance to exceed the revised DP, the account falls into a Drawing Power deficit and will be flagged under IRAC SMA guidelines if not regularized within 30 days.
What is the renewal cycle for CC and OD limits? ↓
Both Cash Credit and Overdraft facilities are sanctioned for a tenure of 12 months and require an annual credit renewal. The renewal process entails submitting the latest audited financial statements, provisional figures, GST returns, and updated CMA projections. If performance metrics conform to initial sanction covenants, the line is renewed for another 12-month period.
Is CreditCares a direct lender for Cash Credit or Overdrafts? ↓
No. CreditCares Capital Advisors Private Limited is an independent corporate debt syndication advisory firm and corporate Direct Selling Agent (DSA). CreditCares structures financial models, CMA data, and bank appraisal dossiers across 80+ partner Scheduled Commercial Banks and NBFCs. Final underwriting, rate approval, limit sanction, and disbursal rest exclusively with the lending institutions.
Can a Cash Credit account be converted into an Overdraft or Term Loan? ↓
Yes. Under the RBI Working Capital Loan component guidelines, enterprises with aggregate limits above ₹150 Crore must carve out at least 60% of their working capital limit as a Working Capital Term Loan (WCTL). For mid-market companies, CreditCares regularly structures restructurings to convert volatile CC lines into fixed Drop-line Overdrafts or structured Term Debt to reduce monthly stock compliance burdens.
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