Book Debt

What Is a Book Debt?

A receivable is an asset that exists only as a promise, which is what makes it awkward as security. There is nothing to count and nothing to inspect; its value depends entirely on whether the customer pays, and that becomes less likely the longer the amount stays outstanding. Lenders manage this through ageing, treating receivables within a defined period as eligible and excluding older ones altogether, so a business with slow collections finds that a substantial part of its debtor book supports no borrowing at all.

Verification therefore looks different from a stock count. The exercise tests whether the invoices are supported by orders and despatch documents, whether the balances agree to the ledger, whether credit notes and returns have been properly recorded, and whether any customer disputes the amount. Balances owed by related parties are usually excluded, as are amounts already assigned or factored elsewhere. What emerges is an eligible figure that is frequently well below the debtor total the accounts show.

Where Book Debt Appears in a Sanction Letter

Receivables are dealt with separately from stock, usually in the same clauses but on their own terms.

• The security description, which extends the charge to present and future receivables rather than only those existing at sanction.
• The eligibility clause, stating the age beyond which a receivable is excluded from the computation entirely, commonly expressed in days.
• The margin clause, which frequently applies a different percentage to receivables than to stock, reflecting that one can be counted and the other cannot.
• The exclusions, naming balances owed by associate concerns, amounts already factored or discounted elsewhere, and anything under dispute.
• The submission covenant, requiring an aged analysis rather than a single total, which is why a statement giving only a debtors figure is returned rather than processed.

Book Debt Under Indian Law

Position: no regulation prescribes how drawing power is computed or which receivables are eligible. The Reserve Bank does not lay down a formula, an ageing cut-off or a margin percentage for book debts. Each of those is set by the individual bank's board-approved credit policy and appears in the borrower's sanction letter.

• Common practice applies an ageing exclusion, frequently at ninety or one hundred and twenty days, and a margin distinct from the one applied to stock. Both vary by bank, by industry and by borrower rating.
• Source: the bank's own loan policy and the sanction letter, not any RBI circular.
• Note: a borrower told that a ninety day cut-off is a regulatory requirement is being told something incorrect. It is a negotiable term of the facility.

How Book Debt Works in Practice

1. Goods are supplied on credit and an invoice is raised. The amount enters the sales ledger as a receivable and stays there until the customer pays.

1. The balance is aged, grouping each amount by how long it has been outstanding, because the likelihood of collection falls as time passes.

1. Receivables beyond the period the sanction permits are excluded, as are amounts owed by related parties, balances already factored or assigned, and anything the customer is disputing.

1. What survives those exclusions is the eligible figure, and the lender applies its own margin to it before the amount contributes to what may be drawn.

1. At verification the surviving balances are tested against orders, despatch records and the ledger, and confirmations may be sought from customers directly, which is the only evidence that does not originate inside the business.

Book Debt: A Worked Example

A Pune auto-components supplier reports Rs 3.55 crore of receivables in its monthly statement. Only Rs 2.40 crore of that reaches the drawing power calculation.

Three separate exclusions do the work, and they are cumulative rather than alternative. Ageing removes Rs 80 lakh. The related-party filter removes a further Rs 35 lakh that was inside the ninety-day window and would otherwise have qualified. Borrowers frequently report the gross figure in good faith and are surprised when the eligible number lands a third lower. Reading the sanction letter for which exclusions apply, before the statement is filed rather than after, avoids a correction that looks like misreporting when it was only an oversight.

Common Mistakes With Book Debt

Receivables are where borrowers most often overstate what is genuinely available to them.

• Reporting a single debtors total with no ageing, which cannot be used without further work and is usually returned. Supply the ageing with the statement.
• Including balances owed by group or related parties, which are almost always excluded from the eligible figure. Identify and remove them before reporting.
• Carrying invoices that have already been factored or assigned elsewhere, so the same receivable supports two arrangements. Exclude anything already pledged.
• Leaving credit notes and returns unprocessed at the period end, which inflates the balance by amounts the customer will never pay. Post them before the cut-off.
• Assuming a disputed invoice still counts because it has not been formally written off. A customer contesting the amount is not an eligible receivable.

Related Stock Audit Terms

Where several banks share the same security, the reporting runs through one of them, so consortium banking is the entry to read next. Every other term in this cluster is listed in the A-Z of stock audit terms, grouped by the part of the work it belongs to.