Drawing power (dp) vs sanctioned limit

CA Student



What is meant by the term DP and Sanctioned Limit in case of Advance account like CC/OD A/c. How it is to be calculated. wht are main differences between them..?

As per RBI Guidelines, Borrower need to retain a margin of 25% i.e. 75% of Cash purchases and Book Debts are eligible.

In my opinion this 75% amount is Drawing Power but phir Sanctioned Limit Kya hota hai. Is it linked with this 75% amount calculation..

pls explain with the help of a example...

 
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Practicing CA



Hi Abhinandan, without going into details of RBI regulations, I understand that drawing power refers to amount that a borrower can withdraw each month/ period based on the latest reported inventories/ book debts, whereas sanctioned limit is the amount of loan/ total credit limit sanctioned by the bank at the time of commencement of the credit facilities. Normally drawing power has to be within the limit of amount sanctioned initially. but based on fund requirements of the borrowers and their credit standing, bank may allow them to withdraw in excess of the sanctioned amount if the drawing power allows them to do so. Normally this excess withdrawal is known as temporary overdraft (TOD) which carries slightly higher rate of interest.


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