## Drawing Power (DP) in Cash Credit Facilities

### What is Drawing Power?

Drawing Power (DP) is the limit up to which a firm or company can withdraw from the sanctioned working capital (Cash Credit) limit. It is recalculated periodically based on the value of primary security held.

### Drawing Power vs. Sanctioned Limit

Feature	Sanctioned Limit	Drawing Power
Definition	Total exposure bank can extend to a client	Amount derived from primary security less margin
Nature	Fixed ceiling granted once	Variable — changes with value of current assets
Scope	Covers CC, OD, etc.	Specific to collateral at a given date

> Rule: All accounts must remain within both the drawing power and the sanctioned limit at all times. Accounts breaching either must be reported to Management / Head Office.

### Bank's Duties

Drawings in working capital accounts must be covered by adequacy of current assets.
DP must be based on current stock statements.
Stock statements relied upon for computing DP must not be older than 3 months; outstanding balances based on older statements are deemed irregular.

### Auditor's Concerns

Scrutinize stock statements, quarterly returns, and other statements submitted by the borrower.
Examine the borrower's audited Annual Report.
Verify that the Drawing Power Register is updated every month and entries are officer-checked.

### Stock Audit Requirements

Mandatory for accounts with funded exposure > ₹5 crores.
Auditor may recommend stock audit in other cases if the situation warrants.
In consortium lending, the branch should obtain the stock audit report from the lead bank.

### How to Compute Drawing Power

Step 1 — Stocks component

1. Start with stocks at realizable value.

2. Deduct unpaid stocks (sundry creditors + acceptances/LCs) → gives paid-for stocks.

3. Apply the prescribed margin percentage → gives DP from stocks.

Step 2 — Debtors component

1. Start with total debtors.

2. Deduct ineligible debtors → gives eligible debtors.

3. Apply the prescribed margin percentage → gives DP from debtors.

Total DP = DP from Stocks + DP from Debtors

Worked example

### Example 1

### DP Computation — Numerical Illustration

Particulars	Sub-total	DP
Stocks
Stocks at realizable value	1,000
Less: Sundry creditors	(300)
Less: Acceptances / LCs	(300)
Paid-for stocks	400
Less: Margin @ 25%	(100)	300
Debtors
Total Debtors	1,000
Less: Ineligible debtors	(200)
Eligible Debtors	800
Less: Margin @ 40%	(320)	480
Total Drawing Power		780

Interpretation: Even if the sanctioned CC limit is, say, ₹900, the firm can only draw up to ₹780 on this date because the security supports only that amount after margins.

⚠️ Common exam mistakes

Confusing Drawing Power with Sanctioned Limit — DP is security-based and changes monthly; sanctioned limit is a fixed ceiling.
Failing to deduct unpaid stocks (creditors/LCs) before applying the margin — only paid-for stocks form the eligible base.
Accepting stock statements older than 3 months as valid — such DP calculations render the outstanding balance 'irregular'.
Not checking whether the Drawing Power Register is updated and counter-signed by an officer each month.
Ignoring ineligible debtors (e.g., debtors outstanding > 90 days) when computing the debtors component of DP.

Reference:

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Computation of Drawing Power (DP) in Cash Credit

Worked example

⚠️ Common exam mistakes