Drawing Power (DP)

Drawing Power (DP): Drawing Power (DP) is the amount a borrower can actually draw within a cash credit or overdraft limit at a given time. It is calculated from the stock and receivables in the latest stock statement, after deducting margins and unpaid creditors. The borrower can use the lower of the sanctioned limit and the DP, and stale stock statements make drawings irregular.

Why Drawing Power (DP) matters in credit and collections

• A typical computation is eligible stock less unpaid creditors, less the stock margin, plus eligible receivables within an ageing cut-off set in the sanction, less the receivables margin; obsolete stock and aged debtors are excluded.
• DP is refreshed from monthly or quarterly stock statements and, for larger limits, tested through periodic stock audits.
• Under RBI's prudential norms, drawings against a DP computed from stock statements more than three months old are treated as irregular, and an account that stays out of order can become an NPA.
• A DP far below the sanctioned limit for long periods suggests over-sanction or a shrinking business; drawings pinned at the DP ceiling suggest liquidity stress.

How drawing power is computed and monitored

The sanctioned limit is a ceiling; drawing power is what the security actually supports today. The borrower submits a stock statement — monthly for most working-capital accounts, less often for smaller ones — listing raw material, work-in-progress, finished goods and receivables. The bank takes paid stock, which is stock less the creditors not yet paid for it, applies the stock margin stated in the sanction, then adds receivables within the permitted ageing after applying the receivables margin. The sum is the DP.

Exclusions do much of the work. Obsolete, slow-moving or damaged stock, goods held on behalf of others, receivables beyond the ageing limit and dues from related parties are typically left out. Where a business has a separate bill-discounting or receivables facility, the same debtors cannot support DP twice. For larger limits, lenders appoint stock auditors to verify stock physically, test valuation and reconcile the statement with the books and GST returns.

DP also matters for asset classification. RBI's prudential norms treat a cash credit or overdraft account as out of order when the outstanding stays continuously above the sanctioned limit or drawing power, or when credits are insufficient to cover interest, and drawings against a DP based on a stock statement more than three months old are deemed irregular. An account that stays out of order for the period specified in the norms is classified as an NPA, which makes DP monitoring an early-warning tool as well as a security control.

How lenders keep drawing power honest

• Compute DP automatically from the stock statement and block drawings above it in the core banking system, rather than relying on manual checks.
• Chase overdue stock statements before they cross three months; an expired DP is a classification problem, not just a paperwork gap.
• Reconcile declared stock and debtors with GST returns, bank credits and the latest financials; sharp divergence is a red flag.
• Commission stock audits for larger limits and act on their exceptions.
• Watch utilisation: drawings pinned at the DP ceiling, or DP falling month on month, warrant an early review.

Drawing Power (DP) — frequently asked questions