Calculating Drawing Power for Cash Credit Account: Simplified
Understanding Cash Credit Limit: Banks offer cash credit facilities to businesses for daily operations and expansion, with limits sanctioned annually.
Definition of Drawing Power: Drawing power is the maximum amount a borrower can withdraw within the cash credit limit.
Calculation Formula: Drawing Power = Net Stock Value + Net Debtors Value
Components of Calculation:
Net Stock Value: Total Stock - Creditors
Net Debtors Value: Total Debtors - Debtors > 90 days
Applying Margins: Margins, typically around 25% for stock and 40% for debtors, are deducted from the net values to determine Drawing Power.
Example Calculation:
Total Stock: Rs. 14,00,000
Total Debtors: Rs. 5,00,000
Creditors: Rs. 3,00,000
Debtors > 90 days: Rs. 1,00,000
Drawing Power on Stock: Rs. 8,25,000
Drawing Power on Debtors: Rs. 2,40,000
Total Drawing Power: Rs. 10,65,000
Compliance with RBI Guidelines: Drawing Power is determined based on recent stock statements, preferably not older than three months, to ensure accuracy and compliance with regulations.