How to Calculate Drawing Power for a Cash Credit / Working Capital Facility with Examples
PrintListen to this Article
The Cash Credit limit (known as working capital limit) is sanctioned by banks and financial institutions to business organizations to run their day to day functions and achieve growth of business.
This facility offers the borrowers flexibility and comfort to withdraw funds from the bank as per their financial requirement from time to time.
The working capital facility is sanctioned for a period of one year and same may be renewed by the bank (or financial institution) every year with the same limit or enhanced limit or reduced limit to the borrower firm / company which is assessed on the basis of firm’s financial result of the preceding (reporting) year as well as on projected balance sheet for the ensuing (subsequent) year.
Drawing Power generally addressed as “DP” is an important concept for Cash Credit (CC) facility availed from banks and financial institutions.
It is the limit up to which a borrower can withdraw funds within the Cash Credit limit.
Updating drawing power for working capital by the bank is an important credit monitoring exercise.
The borrower is allowed utilize the funds from the cash credit account within the sanctioned cash credit limit or drawing power arrived by the bank for the particular month whichever is less.
The Drawing Power is arrived on the basis the stock, book debts and creditors statement submitted by the borrower based on the closing position of the earlier month.
Drawing Power can be calculated based on the specific margins and other terms and conditions contained in the Sanction letter.
Here, margin is the owner’s contribution to the business.
(In most of the cases, a margin on the stock is 25% and for book debts 40% of net debtors which may vary from bank to bank and industry to industry.)
Banks have a practice of updating drawing power based on monthly / quarterly closing stock-book debt and trade creditors’ statements submitted by the firm/company.
Drawing Power = Net Value of Stock + Net Value of Debtors.
Where,
Net Value of Stock = (Stock – Creditors)*(100% – % margin on stock)
and
Net Value of Debtors = (Debtors*(100% – % margin on debtors))
CLICK ON THE LINK FOR COMPLETE VIDEO,
https://youtu.be/YU0dfFopndk
Category : Bank Branch Audit | Comments : 0 | Hits : 14907
Bank Branch Statutory Audit Update. Total Number of Bank Branch Statutory Auditors (Category wise) Appointed and Total Number of Bank Branches Audited . CLICK ON THE LINK TO WATCH COMPLETE VIDEO,,,, https://www.youtube.com/watch?v=yEy0nBKEseM
List of CA Firms Appointed by RBI as Central Statutory Auditors (CSAs) of 12 Public Sector Banks (PSBs) Banks for FY 2023-24. Sl. No. Name of the Bank Names of audit firms approved for appointment as SCAs for FY 2023-24 with Firm Registration Number (FRN) and Unique Code Number (UCN) Tenure in FY 2023-24 (in years) 1 Bank of Baroda M/s Khandelwal Jain & Co., (FRN 105049W; UCN 60996) 2nd M/s S Venkatram & Co LLP, (FRN 004656S; UCN 190913) 2nd ...
Core Banking System - CBS A composite system / software which handles Transactions, Customer Relations, Regulatory compliances, MIS / Reports request is the need of an Hour. Core Banking Systems provide the solution for the same. There are various Core Banking Software's available in the market. Role and Responsibilities of the Bank Considering the importance of IT systems in the preparation and presentation of financial statement, it is imperative that the bank should share detailed in...
Registration of Transactions with CERSAI:- In terms of circular DBOD.Leg.No.BC.86/09.08.011/2010-11 dated April 21, 2011 on ‘Setting up of Central Electronic Registry under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002’, as amended from time to time, banks are required to register, on an ongoing basis, the transactions relating to securitization and reconstruction of financial assets on the CERSAI portal. Banks al...
Role and Responsibility of the Auditor - SA 240 | Fraud Detection Techniques in Banks | Tips for the Auditors to identify frauds in Bank Branch Audit. Types of Fraud in Banking System:- There are numerous ways in which banking frauds are committed. The frauds committed in banking system can be classified under different types, based on the historical data available. Some examples of banking frauds are as under: Account Opening Fraud: This involves an account being opened with either fake or o...
Comments