Cash Credit Limit in 2026: How Banks Set It, Drawing Power and What It Really Costs

If you run a trading firm or a factory, a cash credit limit is almost certainly the bank facility that keeps your business moving between buying stock and collecting from customers. This guide explains how banks decide the size of your limit, how the monthly drawing power is worked out from your stock statement, what interest and fees you really pay, and the RBI rules that can turn a late stock statement into a bad loan — with worked rupee examples you can redo on your own numbers.

Quick answer

A cash credit limit is a working-capital account secured by your stock and receivables. You can draw up to the lower of the sanctioned limit and your monthly drawing power, repay any time, and pay interest only on the daily balance used. For MSEs with limits up to ₹5 crore, banks are guided to sanction at least 20% of projected turnover.

• Drawing power = (paid stock − margin) + (eligible debtors − margin), from your latest stock statement

• Interest is repo-linked for MSMEs; repo is 5.50% after the October 2026 policy

• No collateral for MSE loans up to ₹20 lakh sanctioned or renewed from 1 April 2026

• Balance above drawing power for 90 days, or stock statements older than three months, can make the account an NPA

What a cash credit limit is

A cash credit (CC) account looks like a current account that is allowed to go below zero, up to a ceiling. The ceiling is the sanctioned limit — say ₹40 lakh — fixed for a year at a time. You pay suppliers and wages from it, deposit customer collections into it, and the balance moves up and down every day. Interest is calculated on the actual debit balance each day and debited to the account monthly.

What makes it "cash credit" rather than a plain overdraft is the security. The bank takes a hypothecation charge over your current assets — raw material, work-in-progress, finished goods and book debts (money customers owe you). Hypothecation means the goods stay with you and you can sell them in the normal course of business, but the bank has a registered charge on them. In return the bank wants to see, every month, how much of that security exists. That is the stock statement, and from it the bank works out your drawing power.

Two numbers therefore govern a CC account. The sanctioned limit is the maximum the bank has agreed to lend. Drawing power is how much of that you can use this month, based on the security you actually hold. You can draw the lower of the two. A business with a ₹40 lakh limit but only ₹30 lakh of drawing power after margins can use ₹30 lakh, not ₹40 lakh.

Cash credit vs overdraft vs term loan

These three get confused because all of them are "bank loans for business." The difference is what they fund and how you draw and repay them.

Which facility fits which need

	Cash credit	Overdraft	Term loan
Purpose	Stock and receivables — the operating cycle	Short-term gaps in any business	Machinery, premises, other fixed assets
Security	Hypothecation of stock and book debts (plus collateral above the free limit)	FD, property, securities, or GST/cash-flow based without collateral	The asset financed, often with collateral
How much you can draw	Lower of limit and monthly drawing power	Up to the sanctioned limit	Fixed amount disbursed once or in tranches
Repayment	Any time; limit revolves	Any time; limit revolves	Fixed EMIs over years
Interest	On daily balance used	On daily balance used	On the full outstanding principal
Paperwork	Monthly stock statement, annual renewal, stock audits	Annual renewal; no stock statements for most types	Annual financials; no stock statements

Purpose

Cash credit

Stock and receivables — the operating cycle

Overdraft

Short-term gaps in any business

Term loan

Machinery, premises, other fixed assets

Security

Cash credit

Hypothecation of stock and book debts (plus collateral above the free limit)

Overdraft

FD, property, securities, or GST/cash-flow based without collateral

Term loan

The asset financed, often with collateral

How much you can draw

Cash credit

Lower of limit and monthly drawing power

Overdraft

Up to the sanctioned limit

Term loan

Fixed amount disbursed once or in tranches

Repayment

Cash credit

Any time; limit revolves

Overdraft

Any time; limit revolves

Term loan

Fixed EMIs over years

Interest

Cash credit

On daily balance used

Overdraft

On daily balance used

Term loan

On the full outstanding principal

Paperwork

Cash credit

Monthly stock statement, annual renewal, stock audits

Overdraft

Annual renewal; no stock statements for most types

Term loan

Annual financials; no stock statements

The rule of thumb that keeps your accounts clean: buy fixed assets with a term loan, run the operating cycle on CC. Paying for a new machine from the CC account eats drawing power that should be funding stock, and banks see it at renewal as diversion of working capital. Our guides to the business overdraft and the term loan cover those products in detail.

How banks decide the size of your limit

RBI no longer prescribes a single method for assessing working capital — each bank's board-approved loan policy sets the method. But for small borrowers, nearly every bank follows the turnover method from the Nayak Committee report.

The turnover method (limits up to ₹5 crore)

The Nayak Committee recommended that 25% of a small unit's output value be allowed as working capital, "of which at least four-fifths should be provided by the banking sector." RBI's MSME lending FAQ restates this today: working capital limits for MSE units should be computed at a minimum of 20% of estimated turnover, for credit limits up to ₹5 crore.

In practice: the bank assumes your working capital need is 25% of projected annual turnover. It funds at least 20 percentage points of that and expects you to bring the remaining 5% as your own margin money. The projection must be credible — banks check it against your GST returns, past growth and order book, and will cut an inflated projection.

Larger limits

Above that size, banks build projected balance sheets and look at the gap between current assets and current liabilities (other than bank borrowing), expecting you to fund a share of it from long-term money. Some use a cash budget instead, especially for seasonal businesses. Our working capital guide compares the turnover method with these balance-sheet methods on the same numbers.

Worked example: sizing a limit

Rekha runs an electrical goods wholesale business in Indore. Her turnover last year was ₹1.7 crore, and on her order book and GST trend the bank accepts a projection of ₹2 crore.

• Working capital need at 25% of ₹2 crore = ₹50 lakh
• Minimum bank finance at 20% = ₹40 lakh
• Rekha's own margin at 5% = ₹10 lakh

So the bank is guided to sanction at least ₹40 lakh. Because her limit is above the ₹20 lakh collateral-free ceiling for micro and small enterprises, the bank may ask for collateral, or cover the loan under CGTMSE instead.

Work out your own working capital gap

Current AssetsCurrent LiabilitiesInventory (included above)

Current Ratio1.6

Quick Ratio1.07

HealthHealthy

Net Working Capital₹4,50,000.00

Open the full Working Capital Calculator (PDF, save, compare)

Drawing power: the number that matters every month

The sanctioned limit is set once a year. Drawing power changes every month, and it is what you actually live with.

How drawing power is calculated

Your sanction letter lists the margins — the percentage of each asset the bank will not lend against — and the age cut-off for receivables. The bank then applies them to your latest stock and book-debt statement:

1. Stock: take raw material, work-in-progress and finished goods at the lower of cost or market value. Deduct sundry creditors for goods — stock you haven't paid for is your supplier's money, not yours. Apply the stock margin to what remains.
2. Book debts: take receivables, exclude those older than the cut-off in your sanction (90 days is common for traders; some banks allow longer for manufacturers), and exclude receivables from related parties or already financed elsewhere — for example through TReDS. Apply the book-debt margin.
3. Add the two. Drawing power is the total, capped at the sanctioned limit.

Margins are a matter of bank policy and your risk rating, not RBI rules, so check your own sanction letter. Many sanction letters for small borrowers carry a stock margin of about 25% and a book-debt margin between 25% and 40%.

Worked example: Rekha's monthly drawing power

Rekha's sanction letter sets a 25% margin on stock, a 40% margin on book debts, and excludes debtors older than 90 days. Her September stock statement shows:

Her sanctioned limit is ₹40 lakh, but she can draw only ₹36.9 lakh this month. If her account balance is ₹39 lakh, she is ₹2.1 lakh over drawing power — the account is irregular until she deposits collections or her next statement shows more security. Chasing the ₹6 lakh of old debtors is the fastest way to lift her DP: once collected, it either reduces her balance directly or, as fresh sales, returns as eligible debtors.

Stock statements, stock audits and the NPA rules

The monthly stock statement is the paperwork most CC borrowers resent and most often get wrong. It matters because RBI's asset classification rules are built around it.

The statement. Most banks want it by a fixed date — often the 10th or 15th — for the previous month-end, in the bank's format, signed by the proprietor, partner or director. It lists stock by category, creditors for goods, and debtors by age. Banks increasingly cross-check the sales figure against your GST returns, so a statement that shows ₹20 lakh of monthly sales against ₹12 lakh in GSTR-3B will be questioned.

The stock audit. For larger limits, banks send an empanelled auditor — usually once a year, sometimes more often — to count stock, check valuation and verify debtors against your ledger. Differences between the audit and your statements are the commonest reason for a cut in limit at renewal.

The NPA triggers. Under RBI's income recognition and asset classification norms, as explained in banks' mandatory customer education literature:

• A CC account is out of order if the balance stays above the sanctioned limit or drawing power continuously for 90 days, or if it is within limits but has no credits for 90 days, or credits that don't cover the interest debited over the previous 90 days. An out-of-order CC account is an NPA.
• Drawing power calculated from a stock statement older than three months is treated as irregular. If the irregularity lasts 90 continuous days, the account becomes an NPA.
• Limits should be reviewed within three months of the due date. An account whose limit is not reviewed or renewed within 180 days of the due date is treated as NPA.

Before an account becomes an NPA it passes through the special mention categories — SMA-1 when irregular for more than 30 and up to 60 days, SMA-2 for more than 60 and up to 90 days. These are reported to credit bureaus and show up when you apply to another lender. An NPA is upgraded to standard only when all arrears are cleared and pending irregularities — including overdue stock statements and renewal — are fixed.

How a missed stock statement becomes an NPA

Month-end

Stock position date for the statement

Due date

Statement due (often 10th–15th); late fee may apply

After 3 months

Drawing power based on the old statement is treated as irregular

31–60 days irregular

SMA-1 — reported to credit bureaus

61–90 days irregular

SMA-2

90+ days irregular

Account classified as NPA

What a cash credit limit costs

Interest

Since 1 October 2019 RBI has required banks to link new floating-rate loans to micro and small enterprises to an external benchmark, and medium enterprises followed from 1 April 2020. Almost all banks use the RBI repo rate, which the Monetary Policy Committee raised to 5.50% in October 2026. Your rate = repo + the bank's spread for your rating, and it resets at the interval in your sanction — Axis Bank's grid says once in three months.

Axis Bank's published small-business grid shows cash credit at repo plus 4.95%–5.20%. The same bank disclosed that secured working capital disbursed in April–June 2026 carried rates of 7.5%–13.65% (mean 8.79%). Public sector banks price similarly against repo or their own EBLR; ask for the rate in writing in your Key Facts Statement.

Fees

Expect a processing fee at sanction, a renewal fee every year, documentation and stamp duty on the hypothecation agreement, stock audit fees on larger limits, and penal charges if you breach terms. As examples of published schedules, Canara Bank charges 0.25% per lakh or part (minimum ₹500) on working capital limits above ₹50,000 and up to ₹10 lakh, and ₹290 to ₹425 per lakh by risk grade above that; HDFC Bank lists a renewal fee of up to 1% of the facility plus taxes and default interest of 18% a year on overdue CC/OD accounts.

Published cash credit pricing (October 2026)

5.50%

RBI repo rate

the benchmark for most MSME loans

4.95%–5.20%

Axis Bank CC spread over repo

small business rate grid

8.79%

Mean rate, Axis secured WC disbursed Apr–Jun 2026

range 7.5%–13.65%

18% a year

HDFC default interest on overdue CC/OD

Worked example: interest on daily balances

Rekha's September CC balances were ₹30 lakh for 10 days, ₹36 lakh for 15 days after a large purchase, and ₹25 lakh for the last 5 days after two customers paid. Using an illustrative rate of 10.45% (repo 5.50% plus the top of Axis's published CC spread):

• Sum of daily balances = (30 × 10) + (36 × 15) + (25 × 5) = 965 lakh-days
• Interest = ₹9,65,00,000 × 10.45% ÷ 365 = ₹27,628 for the month

Had she borrowed a fixed ₹36 lakh term loan for the month instead, interest at the same rate would have been about ₹30,920. The CC saves money because collections reduce the balance immediately — which is why depositing every rupee of sales into the CC account, rather than a separate current account, is the simplest way to cut your interest bill.

Collateral, guarantees and the 2026 change

Banks may not take collateral security on loans of up to ₹20 lakh to micro and small enterprises. RBI raised this ceiling from ₹10 lakh through its Lending to MSME Sector (Amendment) Directions of 9 February 2026, and it applies to all MSE loans sanctioned or renewed on or after 1 April 2026 — so your next CC renewal is the moment to ask for any property mortgage on a small limit to be released. Banks may extend it to ₹25 lakh for units with a good track record. Voluntarily pledged gold or silver is not treated as a breach of the rule.

Above that level, CGTMSE guarantees let banks lend without collateral up to ₹10 crore under the scheme's terms, for an annual guarantee fee. HDFC Bank, for example, advertises collateral-free working capital up to ₹5 crore under CGTMSE for businesses with turnover up to ₹7.5 crore. See our CGTMSE guide for the fee slabs.

Renewal: what banks look at

Every year the bank asks for audited or CA-certified financials, the latest stock statement, GST returns, bank statements, an updated projection and details of other borrowings. It then looks at four things: whether turnover through the account matches your stated sales, whether the limit was actually used (an account sitting at ₹5 lakh against a ₹40 lakh limit invites a cut), whether stock statements arrived on time and matched the audit, and whether the account went irregular during the year.

Keep ready for your CC renewal

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• Last year's audited or CA-certified balance sheet and P&L
• Provisional financials for the current year to date
• Projected balance sheet and turnover for the coming year
• Twelve months of GSTR-1 and GSTR-3B
• Latest stock and book-debt statement with an ageing of debtors
• Bank statements of all accounts, including with other banks
• Udyam registration certificate
• Stock audit report (if any) and your replies to its observations
• List of term loans and other borrowings with repayment status

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Common mistakes and how to fix them

Routing sales to another account. If customers pay into a separate current account, the CC shows little "turnover," your interest is higher, and the bank suspects diversion. Route collections through the CC.

Funding capital expenditure from CC. A machine bought from the CC permanently uses drawing power meant for stock. Ask for a term loan and refinance the purchase if it has already happened.

Inflating stock to lift drawing power. Stock audits and GST cross-checks catch it, and the consequence at renewal is a reduced limit or recall. If your drawing power is tight, the honest levers are collecting old debtors, paying creditors (which raises paid stock) or asking for a higher limit with fresh projections.

Missing the renewal date. A limit that isn't renewed within 180 days of the due date can become an NPA even if you have never missed interest. Submit renewal papers a month before expiry.

Showing TReDS-financed invoices as debtors. Once an invoice is discounted on TReDS it is no longer your receivable. Drop it from the statement.

Official links

• RBI FAQs on MSME lendingTurnover method, interest linkage, collateral-free loans
• RBI Lending to MSME Sector (Amendment) Directions, 2026Collateral-free limit raised to ₹20 lakh from 1 April 2026
• Master Direction — Lending to MSME SectorBase directions on MSME credit
• Nayak Committee report (DC-MSME)Origin of the 25% / 20% turnover method

What to do next

Pull out your sanction letter and find three numbers: your stock margin, your book-debt margin and the debtor age cut-off. Then redo the drawing-power table above with last month's figures — if the answer is well below your limit, collecting old debtors will help more than asking for a bigger limit. Use the working capital calculator to check whether your limit fits your operating cycle, and compare a CC with a business overdraft or TReDS before your next renewal.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is a cash credit limit?

A cash credit (CC) limit is a running working-capital account in which a bank lets you withdraw up to a sanctioned amount, secured by hypothecation of your stock and receivables. You can draw and repay any number of times, and interest is charged only on the daily balance you actually use. How much you can draw each month is capped by your drawing power, worked out from your stock statement.

How is the cash credit limit calculated for MSMEs?

For micro and small units with limits up to ₹5 crore, RBI's guidance based on the Nayak Committee is that the limit should be at least 20% of projected annual turnover. The need is taken as 25% of turnover and you bring the remaining 5% as margin. Larger borrowers are assessed on projected balance sheets or a cash budget under each bank's own policy.

What is drawing power in a cash credit account?

Drawing power (DP) is the amount you can actually withdraw in a given month. The bank takes your paid-for stock and eligible receivables from the latest stock statement, deducts the margins in your sanction letter, and the result — or the sanctioned limit, if lower — is your DP. If your balance exceeds DP, the account is irregular and you must bring it down.

What happens if I don't submit the stock statement?

Your bank will calculate drawing power from the last statement it has. Under RBI's asset-classification norms, drawing power based on a stock statement more than three months old is treated as irregular, and if that irregularity continues for 90 days the account becomes a non-performing asset. Most banks also charge a penalty for late statements.

What is the interest rate on a cash credit limit?

Loans to micro and small enterprises must be linked to an external benchmark, usually the RBI repo rate. Axis Bank's small-business grid shows cash credit at repo plus 4.95%–5.20%, and it disclosed that secured working capital disbursed in April–June 2026 carried 7.5%–13.65% (mean 8.79%). With repo at 5.50%, your rate depends on your rating and collateral.

Does a cash credit limit need to be renewed every year?

Yes. CC limits are sanctioned for 12 months and reviewed annually on fresh financials. RBI's norms expect a review within three months of the due date, and an account whose limit is not reviewed or renewed within 180 days of the due date is treated as NPA. Banks usually charge a renewal fee — HDFC Bank lists up to 1% of the facility plus taxes.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 9 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.RBI FAQs on MSME lending (Q.7 working capital assessment, Q.10 interest, Q.11 collateral) — Reserve Bank of India · accessed 9 October 2026
2. 2.Report of the Nayak Committee on credit to SSI units — Office of the DC (MSME), Ministry of MSME · accessed 9 October 2026
3. 3.Lending to MSME Sector (Amendment) Directions, 2026 — RBI/2025-26/206 — Reserve Bank of India · accessed 9 October 2026
4. 4.Consumer education literature on SMA and NPA classification — Union Bank of India · accessed 9 October 2026
5. 5.Axis Bank — Small Business Banking Rate Grid — Axis Bank · accessed 9 October 2026
6. 6.Axis Bank — Rate of interest disbursed, small business products (Apr–Jun 2026) — Axis Bank · accessed 9 October 2026
7. 7.HDFC Bank — Working Capital Loan (turnover up to ₹7.5 crore) — HDFC Bank · accessed 9 October 2026
8. 8.HDFC Bank — Dukandar Overdraft (SME charges) — HDFC Bank · accessed 9 October 2026
9. 9.Canara Bank — Service charges (MSME working capital processing charges) — Canara Bank · accessed 9 October 2026