Cash Credit Limit

What Is a Cash Credit Limit?

A cash credit account works as a running facility rather than as a loan with a repayment schedule. The borrower draws as working capital requires and repays as collections arrive, so the balance moves continuously and interest is charged only on what is actually outstanding. That flexibility is what makes it suit a trading business whose cash requirement rises and falls through the year.

What is sanctioned is a maximum and not a promise: the sum genuinely at the borrower's disposal on any given day is whichever is smaller, the sanctioned figure or the drawing power derived from the most recent stock and receivables position. A borrower who assumes the sanctioned figure is available has misread the facility, and the gap between the two becomes apparent when an independent verification revises the position downward. The account is also expected to be operated, with regular credits from sales, since a balance that sits permanently near the limit without turnover suggests the facility is funding something other than working capital.

Where Cash Credit Limit Appears in a Sanction Letter

This is the facility the letter is about, so it is named at the top and qualified throughout.

• The facility clause, stating the amount sanctioned, the purpose it may be used for and the period until review.
• The drawing power clause, which is where the practical ceiling actually lives, because entitlement is capped by whichever comes out smaller, the approved amount or the calculated one.
• The interest clause, setting the rate, how it is reset, and the penal rate applying where the account is irregular.
• The operations covenant, requiring the account to be routed with sales proceeds and to show turnover, which is what distinguishes a working capital facility from a standing loan.
• The renewal clause, fixing the date by which the facility must be reassessed and the papers the borrower has to submit for it.

Cash Credit Limit Under Indian Law

Position: the assessment of working capital limits is not prescribed. The Maximum Permissible Bank Finance framework derived from the Tandon and Chore committees, including the three methods of lending, ceased to be mandatory in 1997. Banks set their own assessment methodology under board-approved policy.

• Many continue to use approaches derived from that framework, including turnover-based methods and projected cash flow assessment, but they do so by choice rather than by direction.
• Source: the RBI circular of April 1997 withdrawing the Maximum Permissible Bank Finance framework.
• Note: what binds the borrower is the sanction letter. Assessment methodology explains how the limit was arrived at; the covenant explains what must now be done to keep it.

How Cash Credit Limit Works in Practice

1. A ceiling is approved against current assets and a charge registered over them. What opens is a revolving account, not a sum paid out in one go.

1. Drawings rise and fall with trading, collections push the balance back down, and interest attaches only to whatever sits unpaid on each particular day.

1. Each period the stock and receivables position is reported, and the lender computes the drawing power from it after exclusions and margin.

1. What may actually be taken is whichever is lower, the sanctioned figure or that computed drawing power, so the ceiling moves with the security even though the sanction does not.

1. The account is expected to turn over, with regular credits from sales. A balance parked near the limit with few credits invites a review, because it points to money being applied somewhere the approval never envisaged.

Cash Credit Limit: A Worked Example

An Aurangabad packaging company holds a Rs 5 crore facility. Its September statement supports a computed drawing power of Rs 5.70 crore.

The last two lines are the ones to read carefully. Drawing is capped at the lower of the computed figure and the sanctioned limit, so the borrower may draw Rs 5 crore and not a rupee more. The Rs 70 lakh of headroom above the limit buys nothing on its own; it only provides a cushion, so that a fall in stock next month does not immediately pull the permitted drawing below what is already outstanding. Two deductions are easy to miss in the first line. Unpaid creditors come off before the margin is applied, and applying the margin first inflates the result.

Common Mistakes With Cash Credit Limit

Almost every error here comes from confusing the ceiling with what is actually available.

• Budgeting against the sanctioned figure when the usable amount is whichever is lower of that and the computed drawing power. Work from the computation, not the sanction.
• Drawing to the limit and then discovering that a verification has reduced the eligible stock, leaving the account over-drawn against its security without anybody having acted deliberately.
• Operating the account as a term loan, with a balance that sits near the limit and few credits, which signals to a reviewer that the money is paying for something the limit was never sanctioned against.
• Forgetting that interest accrues on the outstanding balance daily, so idle drawn funds cost money that a properly operated account would not incur.
• Submitting the stock statement late and assuming the previous drawing power stands, when a stale figure can freeze the account.

Related Stock Audit Terms

Drawing power moves with whatever a count establishes, so physical verification is the entry to read next. Every other term in this cluster is listed in the stock audit terms, grouped by the part of the work it belongs to.