There are some similarities between CC limit and OD limit such as short term method of financing and interest shall be charged on the basis of average utilization of the limit amount. But there are many differences between CC limit and OD Limit.
Major Differences between
Cash Credit Limit and Overdraft Limit are as follows:-
S.No
|
Basis
|
Cash Credit Limit (CC Limit)
|
Overdraft Limit (OD Limit)
|
1.
|
Borrower
|
In case of CC Limit the borrower should be a
business entity.
|
In case of OD Limit the borrower can be any
person (either individual or business entity or non business entity)
. |
2.
|
Eligibility
|
The amount of the loan shall be calculated on
the basis of past turnover and future Projected Turnover of the business entity and Primary security
such as Stock and Book debts
. |
The amount of the loan shall be calculated on
the basis of Last two or three year Income tax return of the borrower.
|
3.
|
Financial Statements/Projections
requirements. |
Past two or three years ITR along with financial
statements and two or three future year’s projection are required.
|
Past two or three years ITR along with financial
statements are required.
|
4.
|
Types of Security
|
Two types of securities are required for CC financing:
(i) Primary Security- Stock & Book debts
(ii)
Collateral Security-Residential/ Commercial Property.
|
Only Collateral Security i.e. Residential/
Commercial Property is required under OD financing.
|
5.
|
Margin on Collateral Security
|
For this collateral security shall be required for an amount either equal to the limit amount or less than the Limit given by the lender.
|
For this collateral security shall be required
for the amount more than the OD Limit given by the lender generally 1.5 times of the limit amount.
|
6.
|
Business Transactions
|
In this case limit account is like a current
account. Business entity must route its business transactions through CC account only.
|
In this case Borrower is not required to route
its business transactions through OD limit account.
|
7.
|
Ratios
|
Under this Scheme lender also required to check the current ratio,
debt equity ratio, maximum permissible bank finance(MPBF) etc of financial statement.
|
Under this Scheme, ratio analysis is not required.
|
8.
|
Drawing Power Limit
|
Under this Scheme, Lender calculates drawing power limit
on the basis of stock and book debts as submitted by the business entity.
|
Under this Scheme, no such calculation is required as borrower can use the funds up to sanctioned limit amount.
|
9.
|
Rate Of Interest (ROI)
|
In this case, ROI depends upon rating of the business entity. If rating is low, ROI will be higher. If rating is high, ROI will be lower.
|
In this case, ROI will depend upon
bank's floating rate of interest i.e. Base Rate +Some Margin instead of
rating of the borrower.
|
10.
|
Submission of stock statement
|
Business entity will be required to submit
stock statements to the lender at regular intervals i.e. monthly/quarterly.
|
Borrower will not be required to submit stock
statements with lender on regular basis.
|
11.
|
Renewal of the Limit
|
In this case, lender will renew the limit after
every one year or after such time period as specified in sanction norms.
At the time of Renewal of the limit, previous
year ITR and Financial Statement along with 2 or 3 years projection of the business
entity shall be required to be submitted to the lender.
|
In this case lender has to renew the limit after
every one year or
At the time of Renewal of the limit previous
year ITR and Financial Statement of the borrower shall be required.
|
For any queries you may drop a mail on aashish@akvassociate.com
CA Aashish Gupta
By-www.akvassociate.com
https://www.facebook.com/akvassociates
By-www.akvassociate.com
https://www.facebook.com/akvassociates
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