Drawing Power v/s Sanctioned Limit

Sanctioned limit is the total exposure that a bank can take on a particular client for facilities like cash credit, overdraft, export packing credit, non-funded exposures etc. On the other hand, drawing power refers to the amount calculated based on primary security less margin as on a particular date. It is an amount that the client can use for a particular period from the sanctioned limit.

Drawing power is applicable only to fund based working capital financing facilities. Drawing power calculation also helps the lending institutions to keep a time-to-time watch on the performance of the company by tracking its inventory turnover and its book debts periodically. It is used as a part of credit monitoring practices of the lending institution.

Differences between Drawing Power and Sanctioned Limit

Let us now look at the differences between drawing power and sanctioned limit that distinguish them from each other:

Sr. No

Drawing Power

  Sanctioned Limit

1.

Drawing power is the amount that a customer can withdraw from the total limit that is sanctioned to him by the lending bank

Sanctioned limit is the total limit allotted to a customer by the financial institution for working capital requirements. This is the maximum amount that the borrowing company can utilize. The limit is usually given at the time of commencement of credit facilities after doing the credit appraisal of the borrower/company.

2.

The Drawing power amount is calculated as the per margin rate of the lending bank; i.e. The amount is usually calculated after deducting margin from primary security for working capital (usually cash credit limit) i.e. “Stock Less Creditors + Book Debts”

Sanctioned limit is calculated based on the proportion of collateral submitted and  financial details provided by the borrower (individual or company) to the lending bank

3.

The amount eligible for drawing power can change every month and is a fluctuating amount which depends on the closing value of the stock in the inventory statement provided by the company at the end of that period (Generally every month or every quarter).

The sanction limit may undergo periodic review and it changes as per the decision by credit committee but the change is at a lesser frequency as compared to drawing power.

While drawing power and sanctioned limits are of longer tenure arrangements to meet the working capital requirements of the client as they require temporary financing for meeting short-term requirements. Hence, a tailor-made arrangement is made available to the clients as one-off overdraft facility, normally for a period of not more than 30 days. This is called Temporary Overdraft facility (TOD).

A Temporary Overdraft facility is made available to the customer to meet his immediate credit requirements. TOD is short term and is generally not backed by any security. The bank usually charges slightly higher interest rates for the given TOD facility which certain terms and conditions attached. TOD amount is over and above the sanctioned regular limit, however, it is still supposed to be within the drawing power at the time of “TOD sanction” based on the updated stock, creditors and book debts position.

Conclusion:

Working capital limit sanctioned by the company is normally given basis strict credit appraisal of the client taking into consideration the company’s own funds, debtors, stock and other securities provided. While drawing power is the highest amount allowed to be drawn from the limits sanctioned.

References:

Last updated on : December 23rd, 2016
What’s your view on this? Share it in comments below.

One Response

  1. Navin

Leave a Reply

Methods for Estimating Working Capital Requirement
  • Disadvantages of Trade Credit
    Disadvantages of Trade Credit
  • Free Cash Flow
    Free Cash Flow
  • Net Working Capital
    Net Working Capital
  • Current Assets and Their Key Features
    Current Assets and Their Key Features
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook


    Related pages


    what are quick assets in accountingcapitalized leasedisadvantages of financial accountingconvertible debenture definitiondividend per share calculatorstock turnover days formulamotives of mergersamortization of capitalized interestadvantages of invoice discountingcurrent ratio formula calculatorpayback formulawhat is total assets turnoverlc at sight payment termsirr calprofitability ratios listmanagerial accounting as compared to financial accountingsalary is direct or indirect expenseretained earnings investopediaaccounts receivable with recoursedifference between stakeholder and shareholderdebt to asset ratio analysismaterial costing in cost accountingliquidated valuedebenture definewhat does hire purchase mean on a carwhat is meant by debit and credit in accountingdistinguish between costs and expensesgordon model calculatordividend payment formulahow to calculate operating leveragethe journal entry for recording an operating lease payment woulddzb banknet profit turnover ratio formulausance lcirr appraisalfundamental accounting equation examplesifrs asset definitionbcr calculator ratediscounted payback period exampleror formulawhat are the limitations of ratio analysiscompute cost of equitydefinition of direct and indirect expensesdefine sweat equitycosting meaning definitionoperating profit margin ratio interpretationadvantages and disadvantages of weighted average methodoverdraft advantageswhat does irr meancalculating operating income formulawhat is eoq in inventory managementstock turnover rate formulaconvertable debenturesaccounts recievable turnover ratioprofitability ratio exampleshow to calculate roadebit vs credit definitionbeneficiary meaning in bankingadvantages and disadvantages of financial leverageasset turnover meaningformula asset turnovermodigliani and millerreceivables turnover calculatorbearer debentureswacc formula calculatorcapital lease calculationroe formula dupontnon cumulative dividendscma debtsimple pay back periodarbitrage theorydebit vs credit accountinginternal rate of return formula for dummiesanother word for rationingnet operating income approachfinancial statement adalahformula for epswhat is meant by irrideal stock turnover ratiodebit and credit accounting explaineddebit and credit entries in accounts