Saturday, March 27, 2010

Advances : Banking Basics : Calculation of Drawing Power

What is drawing power ?
Drawing Power is the amount of Working Capital funds the borrower is allowed to draw from the Working Capital limit alloted to him. Because the working capital limit is usually alloted to a borrower against security of Stock and Book Debts, the amount of funds a borrower is allowed to draw is calculated by considering the total value of Stock plus total value of Book Debts for the month after deducting the margin. Margin is the component of funds raised from long term sources such as Share Capital and Term Finance (Long Term Loans). It is for this purpose that the borrower must regularly submit Stock and Book Debts Statement and Statement of Trade Creditors.
Working Capital funds are a kind of Short Term Finance mostly used to purchase Raw Material. Trade Creditors (Sundry Creditors ) are those from whom the company purchases raw material on credit basis. Thus, in a way Trade Creditors also finance the borrower's stock and hence the stock purchased under credit being unpaid stock, cannot be provided as security to Bank. Hence total amount of trade credit received by a company in a month must also be deducted from total stock value to find out the actual value of stock available to the Bank as security.
An example will clarify the above theory.
Suppose the Stock Position of a Company 'X' as on 31.03.2010 is as follows(Rs in lacs) :
1. Total Value of Stock(S) : 35.00
2. Total Value of Trade Creditors(C) : 10.00
3. Total Value of Debtors(D) : 25.00
Margin is 25% on Stock and 40% on Book Debts
Calculation of Drawing Power :
DP = (S-C)*0.75+D*0.60 = (35-10)*0.75+25*0.60 = 33.75 lacs

What is Margin ?
Margin is the promoter's contribution or borrower's own funds. Margin can also mean contribution from other long term sources.

12 comments:

  1. what is to be done if stock is zero while creditors are available ,then is it correct to minus creditors from debtors for arriving at drawing power. if not then why?

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  2. as per the theory, we cannot give credit to the borrower,because borrower has 0 funds,10 lakhs belong to sundry creditors.Thay is also a type of credit borrower has taken from sc. so we cannot take that as security.

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  3. There some mistake on it ,we always do not reduce trade creditors but trade creditors are reduced over and above the amount as on date of sanction of limit.

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  4. what if the company has availed of buyers credit. Will that has to be deducted?
    Because the stock then becomes paid stock.

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  5. Buyers credit is added on to Creditors. Working capital gap net of buyers credit is funded. Also, several banks use the formula DP = 75%*(S+D)- C and thereby allocate higher DP.

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  6. What about advances paid to suppliers? Will the same be reduced from the Trade Creditors? Since the same will in future add to stock, if the same is deducted from Creditors then it should also be added to stock which will have NIL effect and hence according to me it should be ignored. Please help me with the same.

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  7. If borrower has stock under FLC , it is also unpaid stock .. same should be deducted or not from amount of stock ??

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  8. Is WCTL loan with 5 years tenure deducted while calculating drawing power?

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  9. This margin percentage remain fixed?

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  10. No. margin percentage differs from bank to bank. It is mentioned in the sanction letter to the borrower

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  11. is creditors against to be deducted from creditors while calculating drawing power?

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  12. if sanction letter of bank is silent about creditors then take for dp calculating purpose?

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