What is CC loan a/c Drawing power

What is meant by a CC loan account and drawing power, drawing limit, sanctioned limit, outstanding balance, etc? How can this be explained with an example?

1 ANSWER

Sridharan Narasimhan, former Chief Manager (Retired) at State Bank of India (1978-2013)

Answered Nov 27, 2017 · Author has 60answers and 45.5k answer views

Cash Credit is a credit facility sanctioned for meeting working capital needs. Limit is the amount to which the extent of credit stands limited. Normally cash credit facilities are primarily secured by hypothecation of stock of goods are trade receivables. The actual value of such security is known as MVS or Market value of Security. Banks do not finance 100% of the MVS. The borrowers portion of the value of security is known as margin. The extent of margin is factored at the time of assessing the borrowers Working Capital needs and forms part of terms of Sanction. The permissible extent of finance on the security hypothecated to bank is determined as the MVS less the prescribed margin. The value so arrived is called AVS or Advance value of Security. The AVS is called the DP or drawing power. The maximum drawing power is restricted to the sanctioned limit. The borrower is permitted to draw up the the drawing power available in their account. The following example would clarify the terms. In case of a manufacturing unit, the unit will have raw material, semi finished or goods in process, finished goods and trade receivables in respect of sales effected. Consider the unit has one lakh worth of goods in each stage. Let the margin prescribed in each stage be 25%. Then the MVS is Rs.4 lacs. The margin is Rs.1 lac and the AVS/DP is Rs.3 lac. In case the Limit sanctioned for the unit is Rs. 5 lacs, the unit is restricted to draw up to Rs.3 lacs (DP). In case the limit sanctioned to the unit is Rs.2 lacs, the unit is restricted to draw up to Rs.2 lacs even though the AVS is Rs.3 lacs. DP is not normally allowed to exceed Sanctioned limit. However, where exigencies arise and the unit makes a genuine request, to permit excess drawings for a short period banks consider acceding to such requests subject to availability of adequate AVS and permit the unit to draw even exceeding the sanctioned limit.

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