Bank provides different kind of working capital loans to large corporate and SMEs which includes Traders, Manufacturers, Service Enterprises, Retailers, Stockist, Distributors, Merchant Establishments, Departmental Stores, Supermarkets, Restaurants and Multi Brand Outlets etc to finance their day-to-day requirements.
Cash Credit or CC is part of bank’s working capital loan facility.
Cash Credit is a short term cash loan granted against hypothecation of stock such as raw materials, work-in-process, finished goods and stock-in-trade, including stores and spares under which a customer of the bank or financial institution is allowed an advance up to the credit limit.
Credit limit extended by the bank on cash credit account is normally derived as a percentage of the total value of the security offered.
Cash credit account can be overdrawn to the extent of cash credit limit that the bank sanctioned.
Cash Credit is granted by way of a running account, drawings to be regulated within the drawing limit permissible which is arrived at on the basis of composition of current assets and current liability based on the declaration in the stock statement in the prescribed format submitted by the borrower.
This means, applicant can withdraw money for its business use up to the drawing limit fixed by the bank even though the applicant’s account does not have enough credit balance.
The drawing power of applicant is determined periodically based on the inventory and book debt statements submitted to the bank at a monthly interval against the security by hypothecating of stocks and/ or book debts.
Cash Credit Vs Overdraft
Overdraft or OD is simply a current account with the facility to withdraw money “more” than the balance available in their respective current accounts.
For instance, if you have Rs. 5, 000 in your current account, but you want to issue a cheque of Rs. 6500 then this can happen only when you have the current account with over draft facility to allow you to pay Rs. 1500 more than the current account balance.
Cash credit is operated almost in the same manner as an Overdraft account. The distinction between an Overdraft and a Cash Credit is in the nature of the security.
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Cash Credit (CC) |
Overdraft (OD) |
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| Meaning | Cash Credit Limit is fixed by the bank against hypothecation of receivables and stocks such as raw materials, work-in-process, finished goods and stock-in-trade based on which the applicant can use the credit facility for business purpose to fulfill its working capital requirements. |
Overdraft or OD is a short credit facility given to the applicant against asset. As and when required, the applicant can keep withdrawing money from this overdraft account. |
| Account | Cash Credit Account Created to avail this facility | Can be availed on the existing current account. |
| Security | Stocks & receivables (debtors) | May be without security or with security. Bank takes assets like land & building, shares, fixed deposits, life insurance policies, and debentures to offer secured overdraft facility. |
| Limit | Drawing power or limit is fixed based on the stock and receivables of the applicant. Generally bank allow up to 75% or 80% of stock and 20% or 25% of sales | Calculated based on the security and financial positions of the applicant. |
| Period | For a short period and renewed every year. It can also be renewed half yearly. | For a short period but less than one year. |
| Interest | Interest will be charged on the withdrawal amount not on the CC limit amount. Interest rate is less compare to overdraft interest rate. | Interest is charged on the amount utilized not on the limit sanctioned for the time availed. Interest rate is higher than the interest rate applicable to CC account. |
| Insurance | Insurance of stock is required | Insurance of the property is required |
Before approving cash credit facility, bank will verify CIBIL score of the applicant. In case of partnership firms or company, partners and director’s individual CIBIL score will also be verified.
