Drawing Power

Drawing power is an important operational concept in banking and finance, particularly in the context of working capital finance in the Indian economy. It refers to the maximum amount a borrower is permitted to withdraw from a sanctioned credit limit at any given point in time. Drawing power is not fixed permanently; instead, it is periodically assessed by banks based on the value of eligible current assets such as inventory and receivables, after applying prescribed margins.
In India, drawing power plays a critical role in regulating short-term credit, ensuring disciplined utilisation of bank funds, and safeguarding the interests of banks while meeting the liquidity needs of businesses. It is especially relevant in cash credit and overdraft facilities, which form a significant component of bank lending to trade, industry, and small enterprises.

Concept and Meaning of Drawing Power

Drawing power represents the borrowing capacity of a customer under a working capital arrangement as determined by the bank. While a bank may sanction a higher credit limit, the borrower can draw funds only up to the drawing power calculated at a particular time. This ensures that borrowing remains linked to the actual level of business activity and asset backing.
The primary purpose of drawing power is to prevent over-financing and diversion of funds. By restricting withdrawals to a level supported by tangible current assets, banks reduce credit risk and promote prudent financial management among borrowers.

Drawing Power and Working Capital Finance

Drawing power is closely associated with working capital finance, which is extended to meet the day-to-day operational requirements of businesses. In the Indian banking system, working capital is commonly financed through cash credit limits, where borrowers are allowed to draw funds as and when needed, subject to drawing power constraints.
The calculation of drawing power is typically based on stock statements and receivables statements submitted by borrowers at regular intervals. This dynamic assessment ensures that bank finance expands or contracts in line with business cycles and operational realities.

Basis for Calculation of Drawing Power

The calculation of drawing power is primarily based on the value of eligible current assets. These usually include raw materials, work-in-progress, finished goods, and trade receivables. Banks apply a margin to these assets to arrive at the drawing power.
Margins represent the borrower’s contribution to working capital and act as a cushion against fluctuations in asset values. For example, if a bank stipulates a margin of 25 per cent on inventory, only 75 per cent of its assessed value will be considered for drawing power. This conservative approach protects banks from potential losses arising from price volatility or deterioration of asset quality.

Role of Stock and Receivables Statements

Regular submission of stock and receivables statements is central to the determination of drawing power. These statements provide details of the quantity, value, and composition of current assets held by the borrower. Banks scrutinise these statements to assess their accuracy, relevance, and compliance with sanctioned terms.
Inaccurate or delayed submission of statements can lead to reduction or suspension of drawing power. This mechanism enforces financial discipline and ensures transparency in the utilisation of bank credit.

Drawing Power and Sanctioned Credit Limit

It is important to distinguish between drawing power and the sanctioned credit limit. The sanctioned limit is the maximum credit facility approved by the bank after credit appraisal, whereas drawing power is the operational limit that determines how much of this facility can actually be utilised at a given time.
In many cases, drawing power may be lower than the sanctioned limit due to insufficient current assets or higher margins. This distinction helps banks control credit exposure without frequently revising sanctioned limits.

Regulatory Perspective in India

The regulation and monitoring of drawing power form part of the broader prudential framework governing bank lending in India. Guidelines issued by the Reserve Bank of India emphasise the need for proper assessment of working capital requirements, periodic review of limits, and close monitoring of asset-backed lending.
Banks are expected to adopt transparent and consistent methods for calculating drawing power and to ensure that credit decisions are aligned with the borrower’s actual business operations and cash flows.

Importance of Drawing Power for Banks

For banks, drawing power serves as a vital risk management tool. It links credit availability to asset coverage, thereby reducing the risk of unsecured or excessive lending. By continuously monitoring drawing power, banks can detect early signs of stress, such as declining inventory levels or delayed receivables.
Drawing power also supports better asset-liability management by aligning short-term lending with real economic activity. This contributes to the stability and soundness of the banking system.

Significance for Borrowers and Businesses

From the borrower’s perspective, drawing power encourages efficient working capital management. Businesses are incentivised to maintain adequate inventory levels, improve receivables collection, and ensure accurate financial reporting in order to maximise access to bank finance.
For small and medium enterprises, which form the backbone of the Indian economy, drawing power-based lending provides flexibility while maintaining financial discipline. It allows firms to access funds as needed without resorting to informal or high-cost sources of finance.