How cash credit interest and drawing power are calculated: worked MSME example
Calculate interest on a cash credit or overdraft limit using daily balances, and work out drawing power from stock, debtors and creditors with margins, step by step in rupees.
Interest on a cash credit or overdraft limit is charged only on the amount you actually use, calculated on the daily outstanding balance (the "daily product" method) and debited to the account monthly. How much you can draw is capped by your drawing power (DP): the value of your paid stock and eligible receivables after the bank's margins, recalculated from your monthly stock statement, and never more than the sanctioned limit. If your balance stays above DP or the limit, or interest is not serviced, the account can become "out of order" and slide towards NPA status.
This guide belongs to the business loan calculation guide and checklist. All figures are illustrative; margins and day-count conventions vary by bank and are set out in your sanction letter.
Part 1: interest on a cash credit account
Formula. Interest for the month = Σ (daily closing balance) × annual rate ÷ 365.
Illustrative ₹30 lakh limit at 10.5%, during a 30-day month:
| Days | Balance used | Days × balance |
|---|---|---|
| 1–10 (10 days) | ₹25,00,000 | ₹2,50,00,000 |
| 11–22 (12 days) | ₹15,00,000 | ₹1,80,00,000 |
| 23–30 (8 days) | ₹20,00,000 | ₹1,60,00,000 |
| Total daily product | ₹5,90,00,000 |
Interest = ₹5,90,00,000 × 10.5% ÷ 365 = ₹16,973
Your average balance for the month was ₹5,90,00,000 ÷ 30 ≈ ₹19.67 lakh. Had you taken the full ₹30 lakh as a term loan, a month's interest would have been about ₹30,00,000 × 10.5% × 30 ÷ 365 = ₹25,890. The ₹8,917 difference is the value of paying interest only on use.
Practical points.
- Interest is usually debited at month-end and must be paid (credits into the account must cover it). Interest that is debited and not covered by credits for 90 days is one of the triggers for NPA classification of a CC/OD account.
- Depositing sales receipts into the CC account daily, instead of a separate current account, cuts the daily product and your interest.
- Some banks levy a commitment charge on the unutilised portion, or a minimum utilisation requirement. Check the sanction terms.
Part 2: drawing power
Formula (typical).
DP = (Paid stock × (1 − stock margin)) + (Eligible receivables × (1 − debtor margin))
where "paid stock" = stock value − sundry creditors for goods (unpaid purchases), and "eligible receivables" usually means debtors not older than 90 days (some banks use 60, 120 or 180 days).
Illustrative month-end statement:
- Raw materials, WIP and finished goods: ₹40,00,000
- Sundry creditors for goods: ₹15,00,000
- Debtors up to 90 days: ₹25,00,000; debtors over 90 days: ₹4,00,000
- Margins in sanction letter: 25% on stock, 40% on debtors
Calculation:
- Paid stock = ₹40,00,000 − ₹15,00,000 = ₹25,00,000
- DP from stock = ₹25,00,000 × 75% = ₹18,75,000
- Eligible debtors = ₹25,00,000 (the ₹4 lakh older than 90 days is excluded)
- DP from debtors = ₹25,00,000 × 60% = ₹15,00,000
- Total DP = ₹33,75,000
- Available to draw = lower of DP (₹33.75 lakh) and limit (₹30 lakh) = ₹30,00,000
If next month stock falls to ₹30 lakh while creditors stay at ₹15 lakh, DP from stock becomes ₹11,25,000 and total DP ₹26,25,000. If your balance is ₹29 lakh, you are over-drawn by ₹2.75 lakh against DP, even though you are within the limit. That must be regularised quickly.
Why drawing power problems lead to stress
| Situation | Effect | What to do |
|---|---|---|
| Stock statement submitted late | Bank may freeze DP at a lower figure or levy a penal charge | Submit by the date in the sanction letter, usually monthly |
| Old debtors rising | Excluded from DP; available limit shrinks | Chase collections; consider TReDS for large buyers |
| Machinery bought from the CC | Balance no longer backed by current assets | Ask for a term loan to refinance the capital spend |
| Seasonal dip in stock | DP falls while balance stays high | Agree a seasonal limit or peak/non-peak limits at renewal |
| Over-drawn beyond DP for long | Account can be classified out of order, SMA and then NPA | Talk to the bank before 30 days; see SMA and NPA |
Checklist for running a CC account well
- Route all customer receipts into the CC account.
- Keep a monthly stock and debtors register that reconciles with your books and GST returns.
- Track DP yourself each month using the bank's margins.
- Watch the debtors ageing column; anything crossing the cut-off reduces DP.
- Service interest every month from genuine credits.
- Start renewal at least a month before the due date with updated financials.
Frequently asked questions
Is interest on cash credit compounded?
Interest is debited monthly and, if not paid, becomes part of the balance on which next month's interest is calculated. That is why unpaid interest grows quickly; service it monthly.
Can I use 360 days instead of 365?
Indian banks generally calculate on actual days with a 365-day year, but conventions differ by product. Your sanction letter or the bank's interest policy states the method.
Why does the bank exclude debtors over 90 days?
Older receivables are less likely to be collected. Some banks allow longer periods for certain sectors or government buyers; ask at renewal if your industry has longer cycles.
Does a CC limit need an EMI calculator?
No. Use the method on this page. The EMI calculator is for term loans. For choosing between products, see cash credit vs overdraft vs term loan.
Sources
- Reserve Bank of India — income recognition and asset classification (IRAC) norms and MSME lending directions
- SIDBI — working capital resources for MSMEs
