MSME cash credit renewal: drawing power against a stale stock statement
A proprietary engineering unit in Ludhiana holds a cash credit limit of Rs 1.00 crore sanctioned 14 months ago, with drawing power computed monthly on inventory and receivables at a 25% margin. Current outstanding is Rs 62.00 lakh. The stock statement received today is dated 78 days earlier: stock Rs 95 lakh, sundry creditors Rs 38 lakh, book debts Rs 22 lakh of which Rs 4 lakh are over 90 days. The hypothecation insurance on stock lapsed 40 days ago. The unit has won an export order and needs Rs 35 lakh of additional inventory for a four-month cycle; it has asked for a temporary enhancement to Rs 1.40 crore. A spot survey reports that the unit's godown is shared with a sister concern and that stock is not physically segregated. The account has never been classified as an NPA, and the promoter is a long-standing customer of the branch.
1. Compute the drawing power and state the immediate action on the account.
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Computation.
- Paid stock = Rs 95 lakh − Rs 38 lakh creditors = Rs 57 lakh.
- Eligible receivables = Rs 22 lakh − Rs 4 lakh (over 90 days) = Rs 18 lakh.
- Drawing power = (57 + 18) × (1 − 0.25) = Rs 75 lakh × 0.75 = Rs 56.25 lakh.
- Outstanding Rs 62.00 lakh, so the account is Rs 5.75 lakh in excess of drawing power.
Immediate action. Two further defects make the figure unreliable: the statement is 78 days old against a monthly covenant, and insurance has lapsed. Until a fresh statement and a valid policy are received, the bank should not rely on Rs 56.25 lakh as a supportable DP at all.
Stop further drawings, issue a written call for the fresh stock statement and insurance cover, and record the excess in the register. Do not capitalise interest or adjust the position by debiting the CC account. Confirm the excess position to the borrower in writing so that the record shows the bank acted on the date the defect was noticed.
2. How should the request for enhancement to Rs 1.40 crore be handled?
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Reasoning. The request must be assessed on the new underlying transaction, not on the customer's tenure. A permanent enhancement on a four-month inventory cycle would convert working-capital need into long-term leverage on a stock position that is currently not even verifiable.
Recommendation.
- Ask for the export order or letter of credit and the projected cash flow for the four-month cycle. Without that document, there is no basis for any enhancement.
- Consider a separate, time-bound ad-hoc limit of up to the documented requirement, at a higher rate, with a stated expiry date and a defined liquidation source from export proceeds - rather than raising the core CC limit.
- Ring-fence the enhancement: earmark export receivables, obtain assignment of proceeds where permissible, and release in tranches against evidence of actual inventory build-up.
- Do not release funds while the existing Rs 5.75 lakh excess and the lapsed insurance remain unresolved; require both to be cured first.
- Push the proposal up the sanctioning ladder at the officer's own discretionary power level. If it exceeds that level, forward it with a clear note of the two deficiencies rather than splitting it to fit.
3. What conditions should you impose before any release, given the shared godown and lapsed insurance?
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Reasoning. When the security is physically weak, no amount of documentation substitutes for verifiable possession. The shared godown is the more serious finding because it undermines the very basis of the DP computation.
Conditions.
- Physical segregation of the hypothecated stock with the bank's name board, a demarcated area and a written undertaking from the sister concern acknowledging the bank's charge and non-interference.
- A fresh valuation and a stock audit by an external auditor approved by the bank, given the related-party sharing arrangement.
- Renewal of hypothecation insurance in the bank's name, with the bank as loss payee, before any disbursement.
- Monthly stock statements and quarterly book-debt statements with a defined non-submission consequence written into the sanction.
- Periodic inspection by the branch, recorded with date, quantity and quality observations.
- A specific covenant that any drawing beyond DP requires written approval - otherwise the branch will drift back into the same excess within two quarters.