“Drawing Power”, or popularly referred to as “DP” in common parlance by businessmen and bankers is a very important concept one need to keep in mind, if they have borrowed funds from their banks (lenders) - for the working capital needs of the business - which include financing businesses Current Assets like inventory, debtors (receivables), etc. The same is not applicable, in case the borrower has raised term loans to finance its capital expenditures (like plant & machinery, building, etc). 

While assessing the net current assets to be financed, banks do keep in mind that that you are not over funded; so, in case you have received some financing from your suppliers (creditors), they shall keep note of it and only the balance net amount shall be considered for funding. Example:

In the above example, banks will explore how to fund Rs.350 (Net Current Assets) and not the entire amount of Rs.500. 

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The same is ideally tabulated in the following manner:

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Promoter Margin in Drawing Power Calculation

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The next point which arises naturally is will the bank fund the entire net current assets requirement (Rs.350). The answer to this question is clear “No”. Banks always want to ensure that your skin is also in the game when they finance you for working capital needs. Accordingly, we have the concept of Promoter Margin, while assessing working capital funding.

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The lenders will specify a margin of certain %age on Inventory and Debtors which has to be brought in by the promoters and only the balance amount will be funded by the Banks. Normally, the margin on inventory is 25%. The Debtors margin is again ideally 25%, but it varies from 10% to even 40-50% - depending upon the type of debtors (customers) you have. If you have big reputed customers with strong credit rating (like AAA) - then, the margin may be significantly lower and vice versa. 

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Thus, it is quite evident that Banks will fund Rs.267.50 and the promoters will have to manage Rs.82.50 from their own sources. 

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Another concept which comes into play is called the “Cover Period” - which applies to debtors only. This signifies that Banks will consider funding only your fresh / latest debtor, which are certain months old and not the old debtors. So, if the cover period is 90 days (say), then all debtors beyond 90 days will have to be excluded from the bank's calculation of DP. Such debtors shall have to be funded by Promoters themselves. The standard norm is to apply 90 days as cover period but this may also change on a case to case basis, depending upon the nature of business & client profile of the borrower. Say, of the total debtors of Rs.100, debtors within 90 days limit stands at Rs. 70, then the revised DP calculation shall be as under:

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Hence, we see that the net amount to be financed by Banks has reduced to Rs.243.50 - while considering the cover days concept. The final amount thus derived (Rs.243.50) is also called the Maximum Permissible Bank Finance (MPBF). 

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It is to be noted that some banks may have different formulas for calculating the Drawing Power (DP) limit but largely the above calculation holds true. 

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Further, a businessman cannot avail more funds beyond its Drawing Power (DP) limit, irrespective of the fact that it has a higher sanctioned limit. Let me give an example to elaborate this. 

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Example - Say, you have a bucket with a full capacity of 20 Litres. You have filled it with water worth 15 litres. Now, in the above situation, if I may ask, how much water can you use? The answer would be 15 litres and not 20 litres - simply because that is what is available to you irrespective of the fact that the bucket size is 20 litres.

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In this analogy, bucket size is the total sanctioned limit (20) and water content is the Drawing Power (DP) limit (15).

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Frequency of Submission of Drawing Power (DP)

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Practically, a borrower is required to submit a Drawing Power (DP) Statement / Stock Statement (as called sometimes) - at the end of every month stating the detailed calculation of Drawing Power (DP) along with associated supportings. In case, the actual utilisation of bank fund is higher than the DP limit (as per latest calculation), then the promoter has to make good the difference and ensure that actual utilisation never crosses the DP limit. On the contrary, if the actual utilisation of the Bank fund is lower than the Drawing Power (DP), then it is ok and nothing needs to be done. 

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The above Drawing Power (DP) Statement / Stock statement needs to be submitted ideally within 15 days of the next month. However, the same varies between 7 days to 20 days as well, on a case to case basis. In case, you submit the DP statement post the specified period - then Banks have a right to levy penal charge and they do so at times.

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So, one has to be very careful of the following while submitting Drawing Power (DP) statement to Banks:

a.  The same is submitted on or before the due date

b. The calculation of Drawing Power (DP) eligibility is correct so as not to create any problem 

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Some borrowers who have lower working capital limits, opt for Overdraft (OD) limits instead of the standard Cash Credit (CC) limit - by virtue of which they are exempted from the requirement of submitting Drawing Power (DP) statements every month. This acts as a big breather for small businesses and free them from such compliances. 

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Key Takeawys for Drawing Power (DP)

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Thus, to summarise, the following are the key takeaways for Drawing Power:

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a. Drawing Power is a statement which business borrowers submit to Bank every month showing detailed calculation of its inventory, debtor and creditor position

b. This statement needs to be submitted for Cash Credit limit and not for OD or Term Loan or any other credit limit availed by the borrower. 

c. Banks will fund maximum upto the amount as shown in DP statement and as verified by them.

d. Any excess utilisation (if any), will have to be refunded.

e. The DP limit acts as the Maximum Permissible Bank Finance (MPBF) limit.

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For any assistance with your Drawing Power Calculation and submission please contact us  with  more please feel free to contact us at BankKepping.