Drawing Power and CMA Data
The limit is a ceiling. Drawing power decides what the borrower can actually draw this month. Here is the calculation.
A cash credit limit is a ceiling, not an entitlement. On any day the borrower can draw only up to the drawing power: the value of the stock and receivables backing the account, minus the bank's margin. A credit officer works this out every month from the borrower's stock statement.
CMA data does a different job. It is the set of past and projected financial statements the bank uses to fix the limit in the first place. One sets the ceiling; the other checks, month by month, how much of the ceiling is actually backed by security.
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Four Terms That Get Mixed Up
- Sanctioned limit
- The maximum the bank has agreed to lend, fixed at sanction after assessing the working capital need.
- Drawing power (DP)
- Value of eligible stock and receivables minus the stipulated margin, worked out from the latest stock statement.
- Drawing limit
- What the borrower can actually draw: the lower of the sanctioned limit and the drawing power.
- Margin
- The share of the security's value the bank will not lend against. The borrower funds it, and it protects the bank if the security loses value.
How Drawing Power Is Calculated
- 1
Take the latest stock statement
Borrowers submit statements of stock and receivables, usually monthly. RBI says the statement used for DP should not be older than three months.
- 2
Value the stock correctly
Inventory is valued at cost or market price, whichever is lower.
- 3
Keep only eligible receivables
Banks set an age cut-off for book debts. Corporation Bank's 2019 policy, for example, lent only against book debts outstanding for not more than 90 days.
- 4
Deduct the margin on each item
Each class of security carries its own margin, as set in the sanction.
- 5
Compare with the limit
The drawing limit is the lower of the sanctioned limit and the DP.
Worked Example: Drawing Power
Margins used here are from one bank's 2019 policy: 25% on stocks, 30% on book debts up to 90 days old. Your bank's sanction may differ. Figures in ₹ lakh.
Stock (at lower of cost or market)
Value
50
Margin
25%
Eligible for DP
37.5
Book debts up to 90 days old
Value
40
Margin
30%
Eligible for DP
28
Book debts older than 90 days
Value
12
Margin
Not eligible
Eligible for DP
0
Drawing power
Value
Margin
Eligible for DP
65.5
| Item | Value | Margin | Eligible for DP |
|---|---|---|---|
| Stock (at lower of cost or market) | 50 | 25% | 37.5 |
| Book debts up to 90 days old | 40 | 30% | 28 |
| Book debts older than 90 days | 12 | Not eligible | 0 |
| Drawing power | 65.5 |
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Drawing Power Against the Limit
The same borrower with a DP of ₹65.5 lakh, under two different sanctioned limits.
₹60 lakh
Drawing power
₹65.5 lakh
Drawing limit
₹60 lakh
Why
The limit is lower, so it caps drawings
₹80 lakh
Drawing power
₹65.5 lakh
Drawing limit
₹65.5 lakh
Why
Security backs only ₹65.5 lakh, so DP caps drawings
| Sanctioned limit | Drawing power | Drawing limit | Why |
|---|---|---|---|
| ₹60 lakh | ₹65.5 lakh | ₹60 lakh | The limit is lower, so it caps drawings |
| ₹80 lakh | ₹65.5 lakh | ₹65.5 lakh | Security backs only ₹65.5 lakh, so DP caps drawings |
When a Cash Credit Account Turns Irregular
These come from RBI's IRAC master circular and are a favourite source of situation questions.
- check_circleDrawings based on a stock statement older than three months are treated as irregular.
- check_circleIf such irregular drawings continue for 90 days, the account becomes an NPA, even if the unit is working and the borrower is otherwise sound.
- check_circleA CC or OD account is 'out of order' if the balance stays above the sanctioned limit or DP continuously for 90 days.
- check_circleIt is also out of order if the balance is within the limit but there are no credits for 90 days continuously, or credits do not cover the interest debited over the previous 90 days.
- check_circleLimits not reviewed or renewed within 180 days of the due date (or of an ad hoc sanction) make the account an NPA.
- check_circleBefore that, SMA tags apply: a CC or OD account over the limit or DP, whichever is lower, for more than 30 days is SMA-1, and for more than 60 days is SMA-2.
What CMA Data Is and How a Banker Reads It
CMA (Credit Monitoring Arrangement) data is a report of the borrower's past and projected performance. It shows how the business raised and used funds in recent years and how it plans to in the coming years. The bank uses it to assess the working capital need, for example under the MPBF method, and to fix the sanctioned limit.
A credit officer reads CMA data for three things. First, are the projected sales and holding levels of stock and receivables realistic against past actuals? Second, does the borrower's own contribution (net working capital) meet the method the bank uses? Third, do the projections leave the liquidity and leverage ratios within the bank's benchmarks?
After sanction, the monitoring tools take over: stock and book-debt statements for drawing power, quarterly information system returns, and monthly cash budgets where the limit was set on a cash budget. The Tandon Committee introduced these reporting duties for large borrowers.
Early Warning Signs Banks Watch
Corporation Bank's 2019 credit policy lists, among signs of stress for tagging an account SMA-0: a delay of 90 days or more in submitting stock statements, actual sales or operating profit falling 40% or more short of the projections accepted at sanction, and a drop in drawing power of 20% or more after a stock audit. A big gap between CMA projections and stock-statement reality is itself a red flag.
FAQs
What is the difference between drawing power and drawing limit?expand_more
Drawing power is the value of stock and receivables minus the margin. Drawing limit is what the borrower can actually draw: the lower of the drawing power and the sanctioned limit.
How old can a stock statement be for drawing power?expand_more
Under RBI's IRAC norms, not older than three months. Drawings based on an older statement are treated as irregular, and 90 days of such drawings make the account an NPA.
What is CMA data in banking?expand_more
Credit Monitoring Arrangement data: the borrower's past and projected financial performance in a standard format, which the bank uses to assess and sanction working capital limits.
Is stock valued at cost or market price for drawing power?expand_more
At cost or market price, whichever is lower.
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