Cash Credit Limit

What is Cash Credit Loan?

Cash credit is a cash loan given to a company. The bank provides the funding only after they acquire the required security to secure the loan. When the security has been provided, the company can continuously draw money from the bank to the specified limit set by the bank. In India, cash credit is offered to businesses to finance their working capital requirements. The businesses can buy raw materials, machinery or buildings. The cash credit account is very much similar to the current account. But current account allows overdraft facility occasionally whereas cash credit account is supposed to be overdrawn continuously. The overdrawing limit will be set by the bank and the limit is sanctioned based on the working capital requirement of the company minus the margin. The cash credit facility is generally given for a period of 12 months and reviewed / revised at the end of the year. To some extent, the Cash Credit facility is problematic for the banks. This is because customers can draw the credit up to their maximum approved credit limit, but practically they seldom reach the maximum limit. This creates a liquidity problem for the banks. Due to this, RBI encourages the businesses in India avail the working capital finance in the form of two components viz. a short-term loan component and a cash credit component. Out of these two, the borrower would fully withdraw the loan component while use the cash credit component as per requirements. The RBI guidelines say that a business that enjoys working capital credit limit of Rs. 10 crore should avail 80% as loan component while 20% as cash credit component. However, RBI gives banks the freedom to define / alter this composition.