Drawing power: one month over the line is not an out-of-order account
Drawing power on a cash-credit account is paid stock less the stock margin plus eligible debtors less the debtor margin, capped at the sanctioned limit, and the margins come from the sanction letter,
Summary
Drawing power on a cash-credit account is paid stock less the stock margin plus eligible debtors less the debtor margin, capped at the sanctioned limit, and the margins come from the sanction letter, not from a rule. An account becomes "out of order" only when the drawing stays above that figure for 90 continuous days, or when drawing power rests on a stock statement more than three months old, so the month that shows the excess is the month to fix it, not proof that the account has already failed.
The situation
Every borrower with a cash-credit or overdraft limit against stock and book debts sends the bank a stock statement every month, usually by the 7th or the 10th, and the bank recomputes drawing power from it. For a CA office with fifteen such clients that is 180 statements a year. A stock-statement Excel template has reportedly been downloaded more than 45,000 times, which tells you how many offices do this by hand.
Two things go wrong with it. The arithmetic is done on the wrong base, usually gross stock or all debtors. And when a month comes out with the outstanding above drawing power, the client is told the account is "irregular" or "out of order", which is a regulatory status with a specific test, and one month does not meet it.
The rule
The computation, as every bank's format applies it:
| Line | How it is worked |
|---|---|
| Total stock | Raw material + work in progress + finished goods + stores, at cost or market, whichever is lower |
| less: Sundry creditors for goods | Stock not yet paid for is not financed |
| Paid stock | |
| less: Stock margin | Typically 25%; the sanction letter decides |
| A. Net value of stock | Paid stock × (1 − stock margin) |
| Debtors within the age cut-off | Typically under 90 days; the sanction letter decides |
| less: Debtor margin | Typically 40%; the sanction letter decides |
| B. Net value of debtors | Eligible debtors × (1 − debtor margin) |
| Drawing power | A + B, capped at the sanctioned limit |
A worked month: raw material ₹25 lakh and finished goods ₹35 lakh, creditors ₹12 lakh. Paid stock is ₹48 lakh; at 25% margin, ₹36 lakh. Debtors under 90 days are ₹30 lakh; at 40% margin, ₹18 lakh. Drawing power is ₹54 lakh against a limit of ₹60 lakh. If the account stands at ₹57 lakh, it is inside the sanctioned limit and ₹3 lakh above drawing power, and it is the second figure that matters.
When an account is out of order. Under the RBI's prudential norms on income recognition, asset classification and provisioning (IRACP), a cash-credit or overdraft account is out of order where the outstanding stays continuously above the sanctioned limit or drawing power for 90 days, or where, though within them, there are no credits for 90 continuous days, or the credits do not cover the interest debited over that period. Separately, drawings allowed on drawing power computed from a stock statement more than three months old are treated as irregular, and an irregularity that continues for 90 days leads to the account being classified a non-performing asset.
What is changing. The RBI (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026, dated 27 April 2026, replace the IRACP norms for commercial banks from 1 April 2027 with the expected-credit-loss framework and their own out-of-order criteria. Until then the IRACP test above is the one your client's bank applies.
Where people go wrong
Gross stock. Drawing power starts from stock the borrower has paid for. A statement that shows ₹60 lakh of stock and leaves the ₹12 lakh of creditors out overstates paid stock by a fifth, and the bank's stock auditor will find it.
All the debtors. Only debtors inside the age cut-off in the sanction letter count. Debtors of 120 days are an asset in the balance sheet and nothing at all in the drawing-power computation.
Default margins. 25% and 40% are the figures every calculator uses because they are common, not because they are law. A sanction at 30% on stock and 50% on debtors produces a different number from the same stock.
The limit that moved. When a limit is enhanced mid-year, a statement for an earlier month must still be computed on the limit and margins in force that month. A sheet that prints the new limit in the header and caps the computation at the old one contradicts itself on paper the borrower signs.
"Is insured." Most formats end with a declaration that the stock is fully insured. If the policy lapsed last month, or the sum insured is below the stock declared, the borrower has signed a false statement. Put the policy number, sum insured and expiry on the statement and check them against its date.
Calling one month "out of order". A single statement with the outstanding above drawing power is a fact to act on: bring the balance down, or put in more stock or debtors before the next statement. It is not the RBI test, which runs on 90 continuous days. The Master Circular itself tells banks not to classify an account as an NPA merely because of temporary deficiencies such as inadequate drawing power on the latest stock statement. Writing "irregular" on a client's working paper on the strength of one month is both wrong and alarming.
The statement that was never sent. The quieter failure is the stale one. A client who stops sending statements in a slow quarter crosses the three-month line without any single month looking bad.
What to do
- Take the margins, the debtor age cut-off, the limit and the due date from the current sanction letter, and write them on the file.
- Net creditors for goods off stock, and age the debtors before you count them.
- Compute drawing power every month and compare it with the outstanding on the statement date, not only with the limit.
- Where the outstanding is above drawing power, tell the client the amount and that the 90-day clock is the bank's, and fix it before the next statement.
- Diarise the filing date for every CC client, and treat a statement two months behind as urgent.
The tool
The arithmetic above is free in several browser calculators now, and I would not have built another one. What I kept losing was the month: last month's figures to copy forward, the limit and margins a filed statement was computed on, the insurance expiry, and fifteen clients' histories in fifteen spreadsheets. So the stock-statement tool keeps a list of clients and twelve months each; last month pre-fills the new one, each saved month keeps the limit and margins it was computed on, it warns where the insurance is short of the stock or has lapsed by the statement date, and it flags when the last statement on file is more than two months old. It prints a two-page statement on the borrower's own letterhead, with the declaration and signature block and nothing about the tool on the paper, and it never calls one month's figures irregular. It is a generic format, not any bank's facsimile; it does not compute MPBF or split drawing power across a consortium; and it does not know your client's sanction terms until you enter them. Everything is stored in your own browser, with a JSON backup.
Sources
- RBI — Master Circular, Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, RBI/2022-23/15, 1 April 2022 — https://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MCIRACP0104202272A68328898841D488D7CC79E35C5F73.PDF
- RBI — Prudential norms on IRACP: clarifications, RBI/2021-2022/125 (12 November 2021; the "out of order" definition) — https://rbidocs.rbi.org.in/rdocs/notification/PDFs/125IRAC5D423E89A957430AAEEE46913F90155E.PDF
- TaxGuru — complete analysis of the ECL framework, RBI (Commercial Banks – Asset Classification, Provisioning and Income Recognition) Directions, 2026 — https://taxguru.in/rbi/complete-analysis-ecl-framework-commercial-banks-rbi-directions-2026.html
- Quicko — how drawing power is calculated for a cash-credit account — https://rbidocs.rbi.org.in/rdocs/notification/PDFs/15MCIRACP0104202272A68328898841D488D7CC79E35C5F73.PDF; https://rbidocs.rbi.org.in/rdocs/notification/PDFs/125IRAC5D423E89A957430AAEEE46913F90155E.PDF; https://learn.quicko.com/how-is-drawing-power-calculated-for-a-cash-credit-account
- CA Sansaar — calculating drawing power, with examples — https://www.casansaar.com/articles-Bank-Branch-Audit/How-to-Calculate-Drawing-Power-for-a-Cash-Credit-Working-Capital-Facility-with-Examples/3977.html
- Bankers Club — drawing power in cash credit — https://bankersclub.in/drawing-power-in-cash-credit/