HOW TO
CALCULATE
DRAWING
POWER
By LAKHBIR SINGH
Ex-General Manager, Canara
Bank
DRAWING POWER
Drawing Power (DP) refers to the
1. Maximum amount of credit limit borrower is
allowed to access from a lender, typically a
bank, against their working capital limit.
2. It is a critical component in short-term
financing, especially for businesses relying on
working capital loans or bank overdrafts.
DRAWING POWER
IMPORTANCE OF DRAWING POWER
Determines Maximum Borrowing Limit: It helps determine
the maximum credit a business can draw against its working
capital limit.
Risk Mitigation for Lenders: Ensures that a borrower doesn’t
exceed the permissible credit limit, reducing lender risk.
Reflects Financial Health: Indicates a business’s liquidity and
ability to manage short-term obligations.
Supports Operational Needs: Ensures businesses have
adequate funds for day-to-day operations without
overborrowing.
Regulatory Compliance: Helps banks comply with regulatory
guidelines and internal credit policies.
DRAWING POWER CALCULATION
1. CURRENT ASSETS
2. CURRENT LIABITIES
3. MARGIN
DP=(Current Assets−Current Liabilitie
s)−Margin Requirement
DRAWING POWER CALCULATION
Current Liabilities Amount Current Assets Amount
(CL) (₹) (CA) (₹)
₹ ₹
Sundry Creditors Cash in hand
1,00,000 1,00,000
₹
Bills Payable ₹ 50,000 Cash at bank
2,50,000
₹
Outstanding Expenses ₹ 75,000 Inventory
5,00,000
₹ ₹
Other CL Receivables
1,00,000 4,00,000
Additional
Current Information:
portion of Short-term ₹
• Margin Requirement: ₹ 75,000
25% of the investments
total current assets (as3,00,000
per
long-term debt
standard practice).
• The existing working capital limit is ₹6,00,000.
DRAWING POWER CALCULATION
Description Amount (₹)
Total Current Assets (CA) 15,50,000
Total Current Liabilities (CL) 4,00,000
Margin Requirement (25% of CA) 3,87,500
Drawing Power (DP) 7,62,500
Description Amount (₹)
Existing Working Capital Limit 6,00,000
Calculated Drawing Power (DP) 7,62,500
Excess Amount 1,62,500
The Drawing Power (DP) of ₹7,62,500 exceeds the existing working
capital limit of ₹6,00,000. Hower, the business can access Limit/ funds
to the extent or ₹6,00,000 only.
DRAWING POWER CALCULATION
Current Liabilities Amount Current Assets Amount
(CL) (₹) (CA) (₹)
₹ ₹
Sundry Creditors Cash in hand
1,00,000 1,00,000
₹ ₹
Bills Payable Cash at bank
2,00,000 2,50,000
₹ ₹
Outstanding Expenses Inventory
1,50,000 5,00,000
₹
Other CL ₹ 50,000 Receivables
4,00,000
Additional
Current Information:
portion of ₹ Short-term ₹
• Margin Requirement:
long-term debt 25% of the investments
1,00,000 total current assets (as3,00,000
per
standard practice).
• The existing working capital limit is ₹6,00,000.
DRAWING POWER CALCULATION
Description Amount (₹)
Total Current Assets (CA) 15,50,000
Total Current Liabilities (CL) 6,00,000
Margin Requirement (25% of CA) 3,87,500
Drawing Power (DP) 5,62,500
Description Amount (₹)
Existing Working Capital Limit 6,00,000
Calculated Drawing Power (DP) 5,62,500
Less Amount 37500
The Drawing Power (DP) of ₹5,62,500 which is less than the existing
working capital limit of ₹6,00,000. Thus, the business can access Limit/
funds to the extent or ₹5,62,500 only.
Than
ks
Contact Details
7888596925
[email protected]
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