Stock not covered under insurance, if considered for drawing power does not reflect the true drawing power since bank runs a huge risk, in the case of any mishappening.
Drawing power is generally a post-sanction credit monitoring tool. After sanction of limits, it helps the bank in keeping a tab on the performance of the firm or company to whom the limits are sanctioned. If the debtors become sticky at any point in time, or if the paid stock shows decreasing trend constantly month on month, it is an alarm bell for the bank.
While opening a CC account, DP has arrived basis the stock, book debts and creditors statement based on the closing position of the earlier month. The customer Firm or the company availing working capital limits from the bank can utilize these limits for a month i. In most of the cases, debtors up to 90 days are considered for calculating DP. But, if the business has a longer credit cycle, more than 90 days debtors might be considered for DP calculation.
This is to be done if it is clearly mentioned as part of sanction terms. Depending upon aggression of bank in lending, the margin is kept. Banks who are more aggressive keep less margin and vice versa. Working Capital limit is worked out prior to sanction. Working capital limits are primarily secured against the stock and book debts of the firm or company. That means a customer can utilize maximum amount as the limit sanctioned, even if the drawing power arrived is more for a particular month closing.
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For the amount of creditors outstanding, the stock is unpaid to that extent. So, deduction of creditors is done. Bank shall not be funding for something that is not being spent, so creditors are to be deducted. Please elaborate the same ,. I hope it helps! IT Portal 2. Check out the latest videos explaining the various features of the new portal. Kaushal Soni. Is cash credit a demand loan? What is calculated by multiplying the power on the objective by the power on the eyepiece?
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The bank usually charges slightly higher interest rates for the given TOD facility which certain terms and conditions attached. While drawing power is the highest amount allowed to be drawn from the limits sanctioned. He is passionate about keeping and making things simple and easy.
Running this blog since and trying to explain "Financial Management Concepts in Layman's Terms".
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