What Is Drawing Power Of Borrower?
Mukunda Tripathee
With the expansion of business transaction, business organization requires long term as well as short term fund. Basically, short term fund is required to conduct day to day business operation such as purchase raw materials, work in progress, payment of expenses, wages and so on. Short term fund is also called working capital loan. Such loan is supplied by bank in terms of overdraft facility (OD), short term loan (STL), demand loan, line of credit etc.
After assessing the credit appraisal of borrower, the bank sanctions certain limit to each borrower. This limit is backed by different kinds of collateral such as primary and secondary collateral. Here, primary collateral means stocks, receivables etc. which are business goods. Likewise, secondary collateral means land and building, jewelries, Fixed Deposits (FD), gold and silvers etc. which are kept for additional security, other than business goods.
The most important things to remember is, if the bank fixes the OD limit to the borrower, s/he can not use full limit of OD. The borrower can use less than OD limit if his/her drawing power is less than the OD limit. Likewise, if drawing power is more than OD limit, s/he can use the maximum amount equivalent to the OD limit.
Hence, it is necessary to understand, what does the drawing power of borrower mean.
What is Drawing Power Of Borrower?
Drawing power of borrower refers the maximum amount that borrower can utilize with in limit of OD. Drawing power is applicable in working capital. Drawing power can be changed month by month which is based on stocks, book debts (account receivables) and creditors.
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Determination Of Drawing Power Of Borrower
For the security of bank’s loan, the bank assigns to borrower to inject certain percentage of equity in the stock and book debts which is called margin. In common practice, banks keeps 25 percent margin in stocks and 40 percent margin in book debts. It means at least for 25 percent on stock and 40 percent on book debts, the borrowers shall have to invest them self from their own money and use bank finance for rest of margin. However, margin amount may vary bank to bank and borrower to borrower.
In Lakh
| Particulars | For case A- | For case B- |
| Stock | 35 | 55 |
| Less-Creditors | 10 | 10 |
| Less- Margin | 25% (portion of borrower’s investment in stock) | 25% (portion of borrower’s investment in stock) |
| Book debts | 25 | 35 |
| Less: Margin | 40% (portion of borrower’s investment in book debts/ account receivables) | 40% (portion of borrower’s investment in book debts/ account receivables) |
| Drawing Power | (Stocks-Creditors)(1-0.25)+Book debts(1-0.4)
(35-10)(1-025)+25(1-0.4) = 33.75 |
(Stocks-Creditors)(1-0.25)+Book debts(1-0.4)
(55-10)(1-0.25)+35(1-0.4) =54.75 |
| Status | Less drawing power than OD limit | More drawing power than OD limit |
Conclusion
Here, as shown in the table above, the bank has sanctioned OD limit of Rs. 50 lakh to its borrower. But in case A, the drawing power of borrower is less than OD limit. So, the borrower can utilize Rs. 33.75 lakh only out of total sanctioned limit. Similarly, in case B, the drawing power of borrower is more than OD limit. So the borrower can utilize maximum of Rs. 50 lakh only, not equivalent to drawing power. It means the eligible limit to utilize by borrower in OD limit and drawing power is whichever is lower.
(Mr. Mukunda Tripathee is currently working in the banking sector.)
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