Bank Financing – Cash Credit i.e. CC……….(Series 1)

Meaning of Cash Credit:

Cash credit (abbreviated as CC) is a short term loan based on “Pay on Demand” concept. CC limit fulfill the working capital requirement which is required to run day to day operation in a business concern.  In this system, Bank or Financial Institution (known as lender) maintains a CC Account for their borrower just like current account.

Lender transfers the sanctioned amount into CC Account from which borrower can withdraw funds as per its business requirements. Therefore, under such financing scheme borrower is liable to pay interest only on the amount he has utilized on average basis during the month. Borrower can’t withdraw total sanctioned amount at a time rather he utilizes the sanctioned amount for payment of business dues. Moreover, borrower is also not allowed to utilize funds from CC account exceeding drawing power which is calculated by adding stock, debtors and after deducting creditors.

Security for Cash Credit: - Borrower is required to provide two types of securities for availing CC limit:- 

Primary Security:- The lender lend money against the security of stock and book debt of the business concern after deduction some margin. However, for the purpose of security obsolete stock and debtors exceeding 90 days are excluded.

Collateral security: - The lender is also required to give collateral security such as Residential/ Commercial property. However, in case of limits below 1 Cr. i.e. CGTMSE scheme collateral security is not required since limit amount is secured by CGTMSE coverage.

Collateral security coverage shall be less than or equal to CC limit as per norms of the lender which can differ from case to case.

Apart from above mentioned securities, lender also take personal guarantee of the borrower and guarantor.

Drawing Power calculation: - Drawing Power is calculated after deducting margin from “Stock less Creditors + Book Debts” for the last month/quarter. Lender have a practice of updating drawing power based on monthly/quarterly closing stock, book debt and trade creditors’ statement submitted by the business concern. Borrower shall be allowed to withdraw sanctioned limit or Drawing Power whichever is lower only.

Example for Calculating Drawing Power:-                              (Amt In lacs)          

Particulars as on 31.03.2015	Amount
Stock	50.00
Creditors	15.00
Total Debtors	70.00
Out of above debtors >90 Days	10.00

Margin on stock: 25%        Margin on Debtors: 50%             Sanctioned Limit: 60 Lacs

       Drawing Power Calculation:-                                                 (Amt In lacs)          

Particulars as on 31.03.2015	Amount
Stock	50.00
Less: Creditors	15.00
Paid Stock	35.00
Less:- 25% Margin	8.75
Eligible Stock for the purpose of DP calculation	26.25
Debtors	70.00
Less:- Debtors >90 Days	10.00
Debtors allowed	60.00
Less: 50% Margin	30.00
Eligible Debtors for the purpose of DP calculation	30.00
Total DP on Stock + debtors	56.25
Allowed Withdrawal Sanctioned Limit or DP whichever is lower	56.25

In my next blog I shall be writing about Bank Overdraft Limit. For any queries you may drop a mail on aashish@akvassociate.com

CA  Aashish Gupta