Cash Credit Facility

A Cash Credit Facility (CCF) is a short-term borrowing arrangement offered by banks to businesses for meeting their working capital requirements. It allows a company to withdraw funds from its account up to a pre-approved credit limit, even if the actual account balance is lower. The facility provides flexibility to manage day-to-day operations such as purchasing raw materials, paying wages, or covering temporary cash flow shortages.
Cash credit is one of the most common forms of working capital finance extended by commercial banks and is secured by the borrower’s current assets, such as inventory, receivables, or other tangible assets.

Definition

A Cash Credit Facility is a type of revolving credit under which a bank sanctions a borrower to withdraw funds up to a specific limit against the security of assets. Interest is charged only on the amount actually utilised, not on the entire sanctioned limit.
In simple terms, it acts as a running account between the bank and the borrower, where deposits and withdrawals can be made multiple times within the sanctioned limit, ensuring continuous liquidity for business operations.

Features of Cash Credit Facility

• Working Capital Finance: Primarily designed to finance short-term operational needs such as procurement, production, and trade expenses.
• Revolving Credit: The borrower can withdraw, repay, and re-borrow funds within the sanctioned limit any number of times.
• Interest on Utilised Amount: Interest is charged only on the amount actually drawn, not on the total credit limit.
• Security-Based Lending: The facility is usually backed by collateral, including stock, receivables, or other current assets.
• Renewable Arrangement: Typically sanctioned for one year but renewable upon review of business performance and creditworthiness.
• Flexible Withdrawals: Funds can be accessed through cheques, online transfers, or promissory notes as needed.

Eligibility and Purpose

Eligible Borrowers:

• Businesses with regular operations such as manufacturers, traders, wholesalers, and service providers.
• Firms with a proven track record, stable turnover, and sound financial statements.
• Start-ups or small businesses with sufficient collateral and a good banking relationship.

Primary Purpose:

• To meet day-to-day working capital needs like payment of salaries, purchase of raw materials, inventory maintenance, and managing receivables.
• To smoothen cash flow gaps between income and expenditure cycles.

Security and Documentation

A cash credit facility is typically granted against adequate collateral security and compliance with documentation requirements.
Common Securities:

• Hypothecation of current assets such as raw materials, finished goods, and accounts receivable.
• Pledge of stock or movable goods.
• Additional collateral such as property or fixed deposits (in some cases).
• Personal or corporate guarantees by promoters or directors.

Documentation:

• Application form with business details.
• Balance sheets and profit and loss statements (past 2–3 years).
• Stock statements and projections.
• Details of debtors and creditors.
• Security and hypothecation agreements.

Types of Cash Credit

1. Secured Cash Credit:
   • Provided against tangible collateral such as inventory, property, or receivables.
   • Most common form used by small and medium enterprises.
2. Unsecured Cash Credit:
   • Granted based on the borrower’s financial credibility and business reputation, without specific collateral.
   • Usually extended to large, financially strong corporations.
3. Key Loan or Key Cash Credit:
   • Advanced against the physical pledge of goods stored in a warehouse under the bank’s control.
4. Hypothecation Cash Credit:
   • Granted against hypothecation of movable assets, where goods remain in the borrower’s possession but are pledged as security.

Procedure for Availing a Cash Credit Facility

1. Application and Assessment: The borrower submits a formal application with business and financial details.
2. Credit Appraisal: The bank evaluates the applicant’s creditworthiness, financial stability, repayment capacity, and security offered.
3. Sanctioning of Limit: Based on assessment, a credit limit is sanctioned (commonly 60–75% of the value of hypothecated assets).
4. Documentation and Execution: Legal documents, hypothecation deeds, and security agreements are executed.
5. Operation of Account: The borrower operates the cash credit account like a current account, drawing funds as needed.

Calculation of Interest

Interest under a cash credit facility is calculated only on the amount utilised, not on the total sanctioned limit.
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For example, if a business has a ₹10,00,000 cash credit limit but withdraws only ₹4,00,000 for 30 days at an interest rate of 10%, interest is charged only on ₹4,00,000, i.e., ₹4,000 (₹4,00,000 × 10% × 30/365).
Banks may also levy commitment charges on the unutilised portion of the limit to ensure efficient use of funds.

Advantages of Cash Credit Facility

For Businesses:

• Provides continuous liquidity and flexibility in managing working capital.
• Interest is payable only on utilised funds, reducing financial burden.
• Eliminates the need for repeated loan applications.
• Facilitates smooth business operations even during cash flow gaps.
• Can be renewed annually with an increased limit based on business growth.

For Banks:

• Generates steady income through interest and processing fees.
• Maintains long-term client relationships and ensures business retention.

Disadvantages and Risks

• Overdependence: Continuous reliance on borrowed funds may reduce financial discipline.
• Interest Liability: Prolonged utilisation can lead to heavy interest costs if not managed properly.
• Collateral Risk: In case of default, pledged assets may be seized by the bank.
• Monitoring Requirements: Banks must frequently review stock statements and financial data to ensure adequate security coverage.
• Short-Term Tenure: Needs periodic renewal and assessment, which may lead to uncertainty for borrowers.

Comparison: Cash Credit vs Overdraft

Regulation and Control

In India, cash credit facilities are governed by guidelines issued by the Reserve Bank of India (RBI) and internal credit policies of individual banks. Key regulatory aspects include:

• Periodic review of borrower’s financial position and collateral adequacy.
• Maintenance of prescribed drawing power (DP), determined by the value of stock and receivables.
• Adherence to prudential norms for Non-Performing Assets (NPAs) classification and provisioning.

Practical Example

A textile manufacturer with a cash credit limit of ₹50,00,000 uses ₹30,00,000 to buy raw materials and pay suppliers. The bank charges 9% annual interest only on the ₹30,00,000 used. If the company repays ₹10,00,000, interest is then calculated only on the remaining ₹20,00,000 balance. This revolving nature ensures liquidity without requiring separate loans.