Credit for MSME Manufacturing industry

Many of the MSME Manufacturing industry businessmen turn towards Banks to meet their funding needs for working capital requirements. However, they get confused as to what type of working capital instrument would suit them given their personal and professional objectives. The objective of this article is to decipher this confusion and give clarity on the subject matter.

‍Types of Fund-Based Working Capital available to the MSME Manufacturing Industry Players

Following are the three most common types of working capital funding instruments that a MSME Manufacturing business borrower can resort to from Banks

Cash Credit (CC) for MSME Manufacturing Industry:

In this case, the bank sanctions a particular amount of credit limit and the MSME Manufacturing business is free to use any amount within that limit. Interest is levied only on the amount utilized (on daily balance basis) and not on the full sanction limit. However, the maximum amount a MSME Manufacturing business can use in a particular month is the lower of the two parameters:
Actual sanction limit or Amount derived as per your eligibility in the Drawing Power (DP) statement.

Bank Overdraft (OD) for MSME Manufacturing Industry:

Bank Overdraft is generally given to very small borrowers and works similar to Cash Credit on the same principle. However, one major difference is that the requirement of DP statement is not applicable here and the MSME Manufacturing business need not submit any stock statement related information to the Bank on a monthly basis. Here also, you pay interest on the amount utilized on a daily basis.

Dropline Overdraft (DOD) for MSME Manufacturing Industry:

Dropline Overdraft (DOD) is an innovative concept and is introduced by certain banks to cater to the working capital needs of certain sections of the borrower. At times, the MSME Manufacturing industry borrower wishes to get debt free but knows that this cannot happen overnight – it has to be a gradual and disciplined process. Dropline Overdraft (DOD) comes to the rescue for these types of MSME Manufacturing borrowers. In the case of Dropline Overdraft (DOD), one is free to utilize the working capital funds just like CC / OD and you pay interest only on the amount utilized. However, every month, a fixed amount of the credit limit is gradually reduced so as to ensure that the MSME Manufacturing business entity has the discipline to manage its business with a little lower banking limit. Over a period of the next 3-5 years, it is expected that the limit will gradually become zero; and the MSME Manufacturing business entity has good discipline to run its business without bank funding and become debt free.
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‍Difference Between the Different Types of Funds Based Working Capital

A tabular comparison of all three working capital instruments is given hereunder for the benefit of the MSME Manufacturing industry borrower:

Parameters

Cash Credit

Overdraft

Dropline OD
Credit Limit Fixed Fixed Reduce gradually
Purpose For working capital Could be for general business purposes Normally for working capital
Credit Limit Fixed Fixed Reduce gradually
Interest Charged at month end on running daily balances
Interest Rates Slightly lower than other instruments Marginally higher than Cash Credit (at times)
Processing Fee Applicable & paid on the entire sanctioned limit Paid on the entire limit even though you don’t have that limit for the full year
WCDL sub-limit Can be given on a case to case basis Not offered
Drawing Power (DP) Statement To be submitted every month Not needed Normally not required
Stock Audit Required to be done (at borrower’s expense) Not Required
Collateral Needed Marginally lower than Overdraft / Dropline OD Marginally higher than Cash Credit
Repayment of Loan Ideally, on the bank’s demand; however, the same gets annually renewed and no repayment happens On Demand Monthly, quarterly, half yearly or yearly
Tenure 12 months 12 months For a longer period
Monitoring by Bank Regularly Irregular Partially Done
Bank’s Comfort Very likely – most common product, subject to credit satisfaction For small loans and depending upon the nature / profile of the borrowers Mixed (only certain banks)

‍Which banking instrument (CC / OD / DOD) is good for MSME Manufacturing industry borrowers?

Deciding between the Cash Credit, Bank Overdraft and Dropline OD can be a mounting task. The answer to the above depends upon a host of factors.

  1. Overdraft facility is generally offered by banks only on loans up to Rs. 3-5 crore. For amounts beyond Rs. 5 crore, banks prefer to seriously monitor the MSME Manufacturing industry borrower’s financial performance rigorously and review stock statements every month. Hence, they shall offer Cash Credit and not Overdraft facility.
  2. What is your mindset and capability as a borrower? Do you want to become debt free? So, a forced discipline mechanism of Dropline OD would be apt for you. However, in case you think your business will be severely impacted because of the consistent limit reduction every month and you shall not be at ease; then Dropline Overdraft (DOD) is not meant for your MSME Manufacturing business.
  3. Does your MSME Manufacturing business have enough resources / bandwidth / systems within your company who shall work tirelessly to provide the DP Statement to the Bank every month? If not, then you may explore availing an Overdraft instead of a CC or simply choose to contact us at BankKeeping.

So, to conclude, all these instruments, Cash Credit, Overdraft and Dropline OD, have their own pros and cons and these have been designed by Banks keeping in mind the different categories of borrowers. So, go ahead and choose the one which is best suited for you. To ensure accuracy in monthly interest debits and to avoid overpaying interest, you may choose to use the services of experts like BankKeeping. We are equipped to handle all banking needs of a MSME Manufacturing industry operator with our team of experts and specially designed products.