The ₹7 lakh season loan: cash credit or gold loan?

Cost comparison for a 100-day need

• Cash credit: interest only on the amount drawn. Even at full drawdown, ₹7,00,000 × 11.75% × 100/365 ≈ ₹22,500. He will actually draw over three to four weeks and repay from sales, so average utilisation of about 60% gives roughly ₹13,500, plus processing fee.
• Gold loan: ₹7,00,000 × 9.4% × 100/365 ≈ ₹18,000, but it is a bullet repayment - he must produce about ₹7.18 lakh on day 100 whether or not sales have come in - and the jewellery stays pledged.
• Personal loan: EMI on ₹7 lakh at 14.5% for 36 months is roughly ₹24,100, so total repayment ≈ ₹8.67 lakh and interest ≈ ₹1.67 lakh. He would be paying for three years for a 100-day need.
• Invoice discounting: cheapest per rupee but only ₹3.2 lakh and only on approved dealer invoices, so it cannot fund the full requirement.

Recommendation: the cash credit limit. It is need-based, drawn and repaid as stock converts to cash, needs no family asset as security, and builds his credit history. The low nominal gold rate is a trap here: the bullet repayment does not match a seasonal cash cycle. The FD should be kept as a buffer, not broken, because premature withdrawal costs interest and leaves him with no liquidity.

Assess, do not simply penalise. A single return eight months ago, caused by a delayed dealer payment and cleared on re-presentation, is a technical return, not a default. The branch should:

1. Read the CIBIL report for the reason code attached to the return and check whether any other lender reports an overdue or a second return in the last 12 months.
2. Obtain Harpreet's written explanation and evidence of the delayed receipt.
3. Check his current account behaviour - average balance, whether any cheque was returned for want of funds since.

What it legitimately justifies:

• A slightly higher margin - say 25% on stock and 40% on book debts instead of the standard 20%/40% - so the drawing power is computed conservatively.
• Stock statement by the 10th of every month as a condition precedent to drawing power.
• Quarterly review rather than annual, and no ad-hoc enhancement during the season.

What it does not justify: rejection. A 688 score with six years of satisfactory banking and clean GST is a normal small-trader profile. Section 138 of the Negotiable Instruments Act is irrelevant here because no notice was served and the cheque was honoured later. Two more returns within 12 months, however, should convert this into a decline.

Refuse the drawal for that purpose and regularise the account.

Why: cash credit is a working capital facility sanctioned against stock and book debts. Using it for a personal, non-business expense is diversion of end-use, a breach of the sanction terms. The consequence is not theoretical: the drawing power is computed from the last stock statement, and with the statement missing the branch cannot certify how much of the ₹7 lakh is actually secured. If the stock is not there, the limit is unsecured lending at working-capital pricing.

Steps:

1. Tell Harpreet in writing that the limit cannot be used for the fee, and explain recall, penal interest and credit-rating consequences.
2. Get the stock statement within seven days; recompute drawing power and block any excess over it.
3. Offer an honest alternative - a small personal loan against his ₹4 lakh FD, or a loan against the FD, or use of his savings - so the genuine family need is met without breaking the sanction.
4. Record all of this on file. If the branch later discovers the diversion and finds no contemporaneous note, the officer, not the customer, is exposed to a conduct inquiry.