Cash Credit Account in India: What Our Rice Mill's Limit Taught Me

I run the working capital of our family's rice mill near Kashipur, and the business runs on a bank Cash Credit account, renewed roughly once a year against its financials and account conduct. Every month the accountant's figures become a stock statement, the stock statement becomes drawing power, and drawing power decides what we can actually use. It is highest after paddy procurement and falls as the rice is milled and sold. Almost everything in this guide is something that account makes concrete.

This is the overview for the Cash Credit series on this site. It covers what a CC account is, the four numbers people confuse, how security, margin, interest and renewal work, and when CC is the wrong tool. Where a topic needs its own treatment (stock statements and drawing power, documents, renewal and NPA risk, insurance, government-guaranteed schemes), this guide links to the dedicated one. The first-person version, season by season, is in how I run our mill's cash credit account.

What a Cash Credit account actually is

A Cash Credit account, usually just called a CC account or CC limit, is a working-capital credit line a bank sanctions against a business's current assets, mainly stock and receivables, rather than a single fixed loan amount you draw once and repay in EMIs. You get a sanctioned ceiling, and within that ceiling you can draw, repay and draw again as your business's cash cycle needs it. Interest is charged only on what you have actually drawn on any given day, not on the full sanctioned amount sitting unused.

That one feature, paying only for what you use, is why CC exists as a separate product from a term loan. A rice mill, a hardware wholesaler, a garment manufacturer and a fertiliser distributor all have the same basic problem: they pay for raw material or stock well before they collect cash from selling the finished product. Wages, supplier payments and transport do not wait for the customer's cheque to clear. A CC account is built to bridge that timing gap.

Who actually uses a Cash Credit account

CC suits businesses where money is tied up in inventory or debtors for a meaningful stretch of the operating cycle:

• Manufacturing units that buy raw material in bulk, hold work-in-progress, and sell finished goods on credit terms.
• Wholesalers and distributors who stock inventory ahead of demand and extend credit to retailers downstream.
• Rice mills, cold-storage operators and other seasonal processors who buy a large share of their annual raw material in a short harvest window and sell it down gradually over months.
• Contractors and service businesses with material-heavy jobs, where bills are raised and collected well after materials are bought and labour is paid.

What these businesses share is a working-capital cycle: cash goes out to buy stock or pay for inputs, turns into finished goods or completed work, gets sold or billed, and eventually comes back as cash from the customer. CC is priced and structured around financing that gap, not around a single purchase.

Sanctioned limit, drawing power, utilised amount, and available limit

These four numbers look similar but mean different things, and mixing them up is the most common source of confusion around a CC account.

• Sanctioned limit is the ceiling the bank has approved for the account, stated in your sanction letter. It is reviewed, usually annually, and can go up or down at the next review.
• Drawing power (DP) is how much you are actually permitted to draw right now, calculated from your latest stock and receivables statement after the bank's margin. DP can be lower than the sanctioned limit, often is, and is never supposed to be higher than it.
• Utilised amount is what you have actually drawn and owe interest on today.
• Available limit, for practical purposes, is the lower of (sanctioned limit − utilised) and (DP − utilised), because you cannot draw beyond either ceiling, whichever is more restrictive that month.

A simple way to hold this in your head: the sanctioned limit is what the bank has agreed to in principle; the drawing power is what your own stock and books currently support; and you can never draw more than the smaller of the two. How DP is actually calculated, and the mistakes that quietly shrink it, are covered in Stock Statement for Cash Credit: How Drawing Power Is Calculated.

How the sanctioned limit is arrived at: a quick word on turnover-based assessment

Before any of the above applies, the bank has to decide how large a CC limit to sanction in the first place. Most banks start from either a projected-turnover method (commonly associated with a rough multiple of projected annual turnover for smaller borrowers) or an operating-cycle method that works out your actual cash-conversion cycle: how many days stock sits before sale, how many days customers take to pay, and how many days you take to pay suppliers. The limit is then sized to that gap. Neither method is universal across all banks and loan sizes, and the exact approach and assumptions your bank uses are something only your own sanction file will show. This gets a full treatment in How Banks Calculate a Cash Credit Limit, including why two businesses with similar turnover can receive very different limits and both be sized reasonably, because their operating cycles differ rather than the "quality" of the business.

Security: hypothecation, primary security, and collateral

A CC account is typically secured in two layers, though the exact structure is set out in your own sanction letter and varies by bank, borrower size and risk profile:

• Primary security is usually the hypothecation of stock (raw material, work-in-progress, finished goods) and book debts (receivables) that the limit itself finances. Hypothecation means the bank has a charge over these assets without taking physical possession of them. You continue to hold, use and sell the stock, but you have agreed the bank has first claim over it if the account goes bad.
• Collateral security is additional security the bank may ask for beyond the stock and receivables: immovable property, a fixed deposit or another acceptable asset, depending on the size of the limit, the bank's internal policy and the borrower's track record.

Do not assume every CC account is collateral-free, and do not assume every CC account requires property as collateral either. Both exist, and which applies to you depends on your bank's policy, the limit size and your credit profile, not on a universal rule.

Margin

Banks do not fund 100% of your stock or receivables value. A margin, commonly somewhere in a broad 15-25% range for stock and often higher for receivables (the exact percentage is set by your own bank and sanction terms), is deducted before arriving at the eligible value for drawing power. The margin exists so that the borrower always carries some of their own money in the working-capital cycle, and so the bank has a buffer if stock values or receivable quality slip.

How interest works on a Cash Credit account

Interest on a CC account is charged on the daily outstanding balance, not on the sanctioned limit. If your limit is sanctioned at a certain amount but you draw only a fraction of it on a given day, interest for that day is calculated only on the amount actually drawn. This is the core economic difference between CC and a term loan, where interest runs on the full outstanding loan balance on a fixed repayment schedule whether or not you are actively using the funds.

That is why, at our mill, we draw what the week's supplier payments and wages need and apply collections against the balance as soon as they arrive. Every rupee that sits idle in a current account while the CC balance stays high is interest paid for nothing.

The rate itself is generally linked to the bank's benchmark lending rate plus a spread that reflects your account's risk profile, subject to whatever your sanction terms say. The exact number is bank- and borrower-specific, so this guide deliberately does not quote a rate. What to understand in general terms: your rate is not usually fixed for the life of the facility the way an EMI loan's rate might be presented. It can move with the benchmark, and your spread over the benchmark can be revisited at renewal based on your account's conduct and rating. How rating and conduct influence pricing, and what does not automatically change your rate, is covered in Business Credit Rating and Cash Credit Interest Rate.

Interest is typically debited to the account at the end of each month, which itself uses up some of your drawing power for that cycle. Remember that detail when the account is running close to its limit.

Annual review and renewal

A CC account is not designed to be repaid on a fixed date the way a term loan is. It is reviewed and renewed, typically once a year, based on your latest financial statements, account conduct over the past year, and updated stock and receivable data. Renewal is not automatic. It is a fresh underwriting exercise, even if a lighter one than the original sanction, and a bank can reduce, enhance, or in a poor-conduct case decline to renew a limit.

Because renewal depends on documents the business has to assemble (audited or provisional financials, GST returns, bank statements, stock and debtor statements), the preparation window matters as much as the renewal date. Ours starts 60 to 90 days ahead. The full process is in Cash Credit Renewal, Limit Enhancement and NPA Risk, including what "irregular" and "out of order" mean and how they differ from an account actually turning into an NPA.

Stock statements and debtor statements

Because drawing power is recalculated from your current stock and receivables, you are expected to submit a stock statement, and often a debtor or book-debt statement, on a regular cycle, commonly monthly. The bank uses it to work out what you can actually draw that month, separate from the sanctioned ceiling. An outdated, inaccurate or late statement is one of the most common, and most avoidable, sources of friction on a CC account. At our mill the statement comes from books an accountant updates every week, so it is built from current records rather than reconstructed under deadline pressure. See Stock Statement for Cash Credit for how to get it right, including the mistakes that quietly cost businesses drawing power they were otherwise entitled to.

Bank inspection and stock audit

Banks reserve the right to inspect hypothecated stock physically, and larger limits are often subject to a periodic stock audit by an external or bank-appointed auditor, who reconciles the stock statement against physical stock, purchase and sales records, and sometimes GST filings. This is a routine part of how a secured working-capital facility is monitored, not a sign of suspicion on a well-run account. It does mean your stock statement needs to be something you could defend against a physical count on any given day, not an approximate figure.

Account conduct

"Account conduct" is the bank's shorthand for how disciplined the account has been over a review period: whether it stayed within the sanctioned limit and drawing power, whether interest was serviced on time, whether stock statements came in on schedule, and whether the account showed any irregularity. Conduct feeds directly into renewal terms, enhancement decisions and, as the ratings guide explains, potentially into pricing. It is one of the few things about a CC account that is almost entirely within the borrower's own control.

Charges beyond interest

Depending on the bank and the sanction terms, a CC account can carry charges beyond the interest rate itself: penal interest for drawing beyond the sanctioned limit or drawing power, a charge for late or non-submission of stock statements, processing or renewal fees, and inspection or stock-audit charges. None of these are universal. Some banks bundle several into a single "irregularity charge", others itemise them separately, and the rates differ. Your sanction letter is the source of truth here, not a general industry figure.

When Cash Credit becomes the wrong tool

CC is designed to finance a temporary, self-liquidating working-capital gap: money that goes out to buy stock and comes back, with a margin, when that stock is sold. It is not designed to:

• Fund a permanent capital need, such as machinery, land or a new building. That is what a term loan is for, matched to the asset's useful life and repaid on a fixed schedule. The CC account at our mill has never paid for a machine; Cash Credit vs Overdraft vs Term Loan explains why that separation matters.
• Cover a structurally loss-making business. If a business loses money every month however well it manages stock and collections, a CC limit does not fix that. At best it delays the point at which the problem becomes visible; at worst it lets losses build up against a facility secured on shrinking real assets.
• Substitute for owner's capital. A business permanently and fully drawn on its CC limit, month after month, with no headroom, is usually telling you something about its underlying margin or growth pace that the credit line itself cannot solve.

Telling "we have a 45-day gap between paying suppliers and collecting from customers" apart from "we are losing money and need cash to keep going" is one of the more important judgment calls a business owner makes. A bank's underwriting is meant to catch the second case, but the owner is in the best position to see it first.

A simple illustrative example

The numbers below are a round, illustrative example only, not a real sanction case, and not a formula that applies uniformly to every business.

Suppose a trading business is sanctioned a CC limit of ₹50 lakh. At the start of a month, after submitting its stock statement, its drawing power works out to ₹42 lakh (stock and receivables value after margin). During the month it draws ₹30 lakh to pay suppliers, then collects from customers and repays ₹18 lakh, leaving ₹12 lakh outstanding at month-end. Interest for the month runs only on the money in use: not on the full ₹50 lakh sanctioned, and not even on the full ₹42 lakh drawing power, but on whatever was actually drawn each day. If stock levels dip the following month and the next stock statement shows a lower eligible value, drawing power for that month could fall to, say, ₹36 lakh, even though the sanctioned limit is unchanged at ₹50 lakh.

To see how many days your own cash is tied up in stock and receivables before you think about a limit at all, the working capital calculator is a quick first pass.