Cash Credit vs Overdraft: The difference banks actually care about

Cash credit and overdraft work the same way in the account: you get a limit, you draw and repay as often as you like, and you pay interest only on the amount you actually use. The difference banks care about is what backs the limit. A cash credit (CC) is secured by your current assets, mainly stock and receivables, so the amount you can draw moves every month with your drawing power. An overdraft (OD) is backed by something else, such as a fixed deposit, a property or the strength of your financials, so the limit usually stays fixed (or reduces on a set schedule).

That one difference changes how the limit is assessed, what documents you submit every month, and how quickly an account can slip into trouble.

The short answer in a table

How a cash credit limit works

A cash credit is the standard working capital facility for a business that buys, holds and sells goods. The bank finances part of the money locked in your operating cycle : raw material, work in progress, finished goods and money owed by customers.

Because the security is the current assets themselves, the bank needs to know their value every month. So the borrower submits a stock statement showing stock, debtors and creditors. The bank deducts unpaid creditors, applies margins, leaves out debtors older than the age limit in the sanction letter, and arrives at the drawing power (DP). You can draw the lower of DP and the sanctioned limit. 

How big should the limit be in the first place? For a cash credit, the bank estimates the working capital gap from your turnover, holding periods of stock and debtors, and your own contribution, using CMA data and methods. The limit is then reviewed every year against actual sales.

Typical controls that come with a CC:

• Monthly stock and book-debt statements by the date in the sanction letter.
• Periodic stock audit and inspection visits by the bank.
• Insurance of stock with the bank's clause.
• Routing of sales proceeds through the CC account, so the bank sees the business turning over.

How an overdraft works

An overdraft lets the account go into debit up to a limit. What sits behind that limit decides the type of OD:

1. OD against a fixed deposit. The bank lends a share of the deposit value. The deposit is marked as lien, and the limit runs till the FD matures. Assessment is light because the security is cash with the bank itself.
2. OD against property. A loan against property structured as an overdraft. The limit is set from the property value and the borrower's income. It is often a dropline OD , where the limit reduces every month so that it reaches zero by the end of the tenure.
3. Working capital OD for service businesses. Consultants, IT firms, contractors and other businesses with little or no stock cannot give a meaningful stock statement. Banks assess these on financials, bank statement turnover and receivables, and sanction an OD instead of a CC.
4. Clean or temporary OD. A short, often unsecured accommodation for a strong existing customer, given for a specific need and a short period.

The key point: in most ODs, the amount you can draw does not move with your stock. That makes it simpler to run, but the bank compensates by asking for harder security (a deposit or property) or by setting a smaller limit.

A worked example: same ₹50 lakh limit, two different months

A typical case: a distributor has a ₹50 lakh cash credit . The sanction letter sets a 25% margin on paid stock and a 25% margin on debtors up to 90 days old.

Month 1

• Paid stock = 55 − 15 = 40; DP on stock = 40 × 75% = 30
• DP on debtors = 30 × 75% = 22.5
• Total DP = 52.5 lakh , so the full ₹50 lakh limit is available.

Month 2 (after a slow season)

• Paid stock = 25; DP on stock = 25 × 75% = 18.75
• DP on debtors = 25 × 75% = 18.75
• Total DP = 37.5 lakh

The sanctioned limit is still ₹50 lakh, but only ₹37.5 lakh can be drawn. If the account is already at ₹45 lakh, it is ₹7.5 lakh over drawing power , and the borrower has to bring it down.

Had the same business taken a ₹50 lakh OD against property , the full ₹50 lakh would have stayed available in Month 2 (or the reduced limit, if it was a dropline OD; a ₹60 lakh dropline limit reducing by ₹1 lakh a month would stand at ₹48 lakh after 12 months).

The interest side is the same for both. If average use during a 30-day month is ₹35 lakh at an illustrative 10% a year, interest is about 35,00,000 × 10% × 30 ÷ 365 = ₹28,767 . A ₹50 lakh term loan at the same rate would cost about ₹41,096 for that month, because interest runs on the full amount whether you need it or not. That flexibility is why both CC and OD suit businesses whose cash needs rise and fall.

Why the difference matters when things go wrong

RBI's rules on income recognition and asset classification treat CC and OD accounts alike: both are revolving accounts, and both are judged by whether they are "out of order" . Under the current RBI directions, a CC/OD account is out of order if:

• the balance stays continuously above the sanctioned limit or drawing power for 90 days , or
• the balance is within the limit, but there are no credits for 90 days , or the credits are not enough to cover the interest debited over the previous 90 days.

A CC or OD account that is out of order in this way is classified as a non-performing asset (NPA).

Here is where cash credit carries an extra risk. RBI also says that stock statements used to calculate drawing power should not be more than three months old ; balances drawn on drawing power from older statements are treated as irregular. So a CC account can become irregular even when the business is doing fine, simply because:

• stock statements were not submitted on time,
• drawing power fell after a slow season while the balance did not, or
• debtors crossed the age limit and dropped out of the DP calculation.

An OD against property or FD does not have the drawing power trap. Its risks are different: a dropline limit that keeps reducing while the balance does not, or a lack of credits in the account.

Which one should a business choose?

In practice, the choice is usually made by the nature of the business and the security on offer, not by preference:

• You hold significant stock and debtors (trading, manufacturing): the bank will normally offer a cash credit, because your current assets are the natural security and the assessment is built around them.
• You run a service business with little stock: a working capital OD , assessed on your financials, receivables and bank statement, is the usual route.
• You have a property and want a flexible facility: an OD against property , often dropline, gives a larger limit without monthly stock statements.
• You have a fixed deposit and need short-term funds: an OD against FD is quick and avoids breaking the deposit.

Many businesses end up with both: a CC for day-to-day trading needs and an OD against property as a cushion.

Common mistakes borrowers make

• Treating the sanctioned CC limit as fully available. Only drawing power is.
• Submitting stock statements late. It is one of the quickest ways to make a healthy account irregular.
• Inflating stock in the statement. Stock audits and inspections exist to catch this, and a mismatch damages the relationship with the bank far more than a lower limit would.
• Ignoring the dropline schedule on an OD. If the balance does not come down with the limit, the account runs over limit.
• Letting the account go quiet. Both CC and OD accounts need regular credits; 90 days without credits can make an account out of order even within the limit.

Frequently asked questions

Is cash credit the same as an overdraft?

No. Both are revolving limits with interest on the amount used, but a cash credit is secured by stock and receivables and is governed by drawing power, while an overdraft is backed by a deposit, property or the borrower's financials and usually has a fixed or scheduled limit.

Which has a lower interest rate, CC or OD?

It depends on the security and the borrower's rating, not the product name. An OD against a fixed deposit is usually priced at a small spread over the deposit rate because the risk is low; other CC and OD rates are set by each bank's pricing policy.

Can a service business get a cash credit?

Usually not in the classic sense, because it has little stock to hypothecate. Banks give such businesses a working capital OD, sometimes with a drawing power linked to receivables.

When does a CC or OD account become an NPA?

When it becomes out of order: the balance stays continuously above the limit or drawing power for 90 days, or there are no credits (or credits too small to cover the interest) for 90 days.

Sources

• RBI: Commercial Banks – Income Recognition, Asset Classification and Provisioning Directions, 2025 (updated as on 1 October 2026)
• RBI: Master Direction – Lending to MSME Sector