Drawing power and stock statements, without the confusion

A business can have a cash credit limit sanctioned at a healthy figure and still find itself unable to draw anywhere near that amount. This confuses a lot of borrowers, who assume the sanctioned limit is simply the amount available. It is not. What is actually available to draw at any point is the drawing power, a figure recalculated regularly from the value of the stock and receivables the account is secured against, and it can be well below the sanctioned limit if those underlying values have not been reported, or have fallen.

Sanctioned limit versus drawing power

The sanctioned limit is the ceiling the bank has approved based on the business's assessed working capital need. Drawing power is the amount actually available to draw against that limit at a given point in time, calculated from the value of stock and receivables (less an agreed margin) that the business has pledged as security under a hypothecation arrangement. The two coincide only when the business is holding enough eligible stock and receivables, correctly reported, to fully support the sanctioned figure. In practice, drawing power moves up and down with the business's actual inventory and debtor position, while the sanctioned limit stays fixed until the next renewal.

Why the monthly stock statement matters so much

Drawing power is recalculated each time a fresh stock and book-debt statement is submitted, usually monthly. If the statement is not submitted, is submitted late, or understates stock and receivables, drawing power can fall sharply — even though the business's actual position may be perfectly healthy — simply because the bank has no current, reliable figure to calculate against. This is one of the most common, and most avoidable, reasons a business finds its usable limit suddenly reduced.

What counts as eligible stock and debtors

Not everything sitting in the warehouse or on the books counts toward drawing power. Obsolete or slow-moving stock, goods held on consignment for someone else, stock pledged elsewhere, and debtors past the agreed age limit or owed by related parties are typically excluded, per the terms of the sanction. A business that includes ineligible items in its stock statement, deliberately or by oversight, is overstating its own drawing power — which the bank's periodic inspection or audit is likely to catch, and which then has to be corrected, sometimes with the account temporarily restricted while it is sorted out.

Common items wrongly included in stock statements

• Obsolete, damaged or very slow-moving inventory valued at full cost.
• Stock physically held for a customer or on consignment, not owned by the business.
• Debtors well past the agreed age limit, or from related parties.
• Stock already pledged as security to another lender.
• Advances to suppliers mistakenly shown as stock.

A worked example of the calculation

Keeping drawing power healthy in practice

1. Submit stock and book-debt statements on time, every month, without exception.
2. Reconcile the statement against actual physical stock and the debtor ledger before submitting.
3. Flag and remove ineligible items (obsolete stock, over-age debtors, consigned goods) proactively rather than letting an inspection find them.
4. Watch debtor ageing closely — a few large customers crossing the eligibility cut-off can move the number significantly.
5. Raise a discrepancy with the bank as soon as it is noticed, rather than after several months of reduced drawing power.

What happens if the account is overdrawn against drawing power

If the outstanding balance in the account exceeds the drawing power for an extended period, the account can start moving toward the early categories of account stress that Indian banks track — commonly referred to as SMA (special mention account) classifications, beginning at SMA-0 for very early, short-duration irregularity. This is a signal for the bank to engage with the borrower, not an automatic penalty, but it is far better addressed by keeping drawing power and utilisation aligned proactively than by responding after the classification has already triggered.

Stock audits and periodic inspections

Beyond the monthly statement, banks typically carry out periodic stock audits or inspections, either through their own officers or an appointed external agency, particularly for larger cash credit limits. These visits physically verify that the stock declared in the monthly statement genuinely exists, is stored where it is supposed to be, and is valued reasonably. A business that has been reporting accurately each month has little to worry about at this stage; a business that has been rounding up figures, or including ineligible stock to keep drawing power comfortable, is likely to have the gap surface at exactly this point, which is a far worse outcome than a temporarily reduced limit.

Preparing for a stock audit is mostly a matter of good housekeeping: keeping stock physically organised and easy to count, maintaining a clear and current stock register that ties back to the accounting records, and being able to explain any large or unusual movement in inventory since the last visit. Businesses that treat the stock audit as a routine, well-prepared event rather than an occasional scramble tend to come through it with no adverse observations at all.

Businesses running multiple locations — a factory, a separate warehouse, and perhaps a retail counter — should also be clear, internally, about which location's stock is included in the statement submitted to any particular bank, especially where more than one lender or facility is involved. Double-counting the same stock across two separate statements, even unintentionally, is exactly the kind of inconsistency an inspection or audit is designed to catch.