What is a Cash Credit Limit?
A Cash Credit (CC) limit is the most common form of working capital finance in India. The bank sanctions a revolving credit line — you can draw up to the limit, repay when receivables come in, and draw again. Interest is charged only on the amount actually utilised, not the full sanctioned limit.
CC limits are typically secured against:
- Hypothecation of stocks — raw materials, WIP, finished goods
- Book debts (debtors) — outstanding receivables up to 90 days old
- Both stocks and debtors — combined security
The bank conducts stock and debtor inspections periodically (quarterly or monthly for large limits) and will reduce the drawing power if security value falls below the utilised amount.
Why Banks Require CMA Data for CC Limits
The CC limit is not just "how much money you ask for" — banks calculate how much you are entitled to borrow based on your actual working capital cycle. This entitlement is computed through the MPBF formula in Form V of the CMA report.
Without CMA data, the bank has no objective basis to assess the working capital need. A business asking for ₹5 crore CC might only genuinely need ₹2.8 crore based on its stock and debtor levels — and the bank will sanction accordingly.
How MPBF Determines Your CC Limit
The Maximum Permissible Bank Finance (MPBF) is computed using the Tandon Committee methodology. Banks use Method 2 as the standard (more conservative than Method 1).
Method 2 Formula
Less: 25% of TCA (borrower's own margin)
Less: Current Liabilities other than Bank Borrowings (CL)
= MPBF (Maximum Permissible Bank Finance)
Worked Example
| Item | Amount (₹ Lakhs) |
|---|---|
| Raw Material Stock (45 days) | 60.00 |
| WIP (15 days) | 22.50 |
| Finished Goods (30 days) | 45.00 |
| Debtors (60 days) | 100.00 |
| Other Current Assets | 12.50 |
| Total Current Assets (TCA) | 240.00 |
| Less: 25% margin (borrower's contribution) | 60.00 |
| Less: Trade Creditors & other CL (excl. bank) | 48.00 |
| MPBF — Maximum CC Limit Entitled | 132.00 |
In this example, even if the business applies for ₹150 lakhs CC, the bank will sanction only ₹132 lakhs based on MPBF. The borrower must fund the ₹60 lakh margin (25% of TCA) from own sources — this is called the Net Working Capital (NWC) contribution.
Working Capital Day Assumptions — The Key Inputs
The entire MPBF calculation rests on working capital day assumptions. These days are entered in Form IV and drive the TCA figure. Use industry norms — not what you wish they were.
| Working Capital Item | Formula | Industry Norms |
|---|---|---|
| Raw Material (RM) Stock | RM Cost × RM Days ÷ 365 | 15–45 days (manufacturing) |
| Work in Progress (WIP) | Cost of Production × WIP Days ÷ 365 | 7–30 days |
| Finished Goods (FG) | Cost of Sales × FG Days ÷ 365 | 15–60 days |
| Debtors / Receivables | Net Sales × Debtor Days ÷ 365 | 30–90 days |
| Trade Creditors (deducted) | RM Cost × Creditor Days ÷ 365 | 15–45 days |
Banks scrutinise day assumptions carefully. If your industry peers hold 30 debtor days and you project 90, the bank will ask for justification. Always match the projections to your actual business practices and contracts.
Industry-Specific Norms
- Trading: No WIP, minimal FG. Higher RM and debtor days.
- Manufacturing: Full WIP cycle. RM days depend on procurement lead time.
- Food Processing: Low debtor days (cash-heavy retail), but high RM days for seasonal procurement.
- Jewellery: Very high FG holding (90–120 days) as stock is displayed inventory.
- IT / Services: No physical stocks. Only debtors (milestone billing cycles).
Documents Required Along with CMA
CMA data is submitted as part of a larger credit application package. The typical document set for a CC limit application:
- Duly filled CMA Data (Forms I to VI) — signed by CA if above ₹5 crore
- Last 2–3 years audited Balance Sheets and P&L
- Last 3 years ITR acknowledgements
- Current year provisional accounts (if year-end is more than 6 months away)
- GST returns — last 12 months (Form GSTR-3B)
- Bank statements — last 12 months (existing bankers)
- Stock statement (as on last month-end)
- Debtors and creditors ageing statement
- KYC of promoters — PAN, Aadhaar, passport
- Entity documents — incorporation certificate, MOA, partnership deed, etc.
- Property documents (if collateral security is offered)
Why CC Limits Get Reduced — Common Reasons
Many businesses apply for a CC limit only to receive a sanction significantly lower than what was applied for. Common reasons:
MPBF is lower than applied limit
The most common reason. The CMA projections don't support the applied limit — MPBF Method 2 comes out lower. Solution: review working capital day assumptions or build a stronger revenue case.
Current Ratio below 1.33
RBI requires a minimum current ratio of 1.33 (i.e., current assets must be 33% more than current liabilities including CC). If projections show CR below this, the limit gets cut until CR is restored.
Revenue projections inconsistent with GST or past performance
CMA projections significantly above historical trend or GST turnover raise credibility concerns. Banks apply a haircut to revenue — and by extension, to MPBF.
High existing debt and poor Debt-Equity ratio
If the business already has high leverage (DE ratio above 3:1), the bank may cap the CC limit based on net worth rather than pure MPBF.
Overdue or irregular repayment history
Even if the CMA is excellent, a history of irregularity in the existing CC account (frequent overdrawn, returned cheques, over-limit) will reduce the renewal or enhancement amount.
CMA for CC Renewal vs Fresh Application
Most CC limits are sanctioned for 1 year and renewed annually. The renewal CMA has slightly different requirements:
| Fresh Application | Renewal / Enhancement | |
|---|---|---|
| Historical years required | Last 2 audited years | Last 2–3 audited years + current provisional |
| Account conduct reviewed | Not applicable | Yes — utilisation, overdrawn days, returns |
| Stock statement | Estimated | Actual — as on application date |
| GST cross-check | Sometimes | Always — 12-month GSTR turnover vs CMA revenue |
| Projections required | 2–3 years | Usually 1–2 years forward |
For enhancement (increasing an existing CC limit), you need to justify why you need more — higher sales orders, expanded operations, or new product lines. Present the enhanced revenue projections and the resulting higher MPBF to make the case.
Calculate MPBF for Your CC Limit Application
The JS & Co CMA Tool computes MPBF under both Tandon methods, checks current ratio compliance, and generates all 6 forms — ready for bank submission.
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The JS & Co CMA Data Tool is purpose-built for working capital CMA preparation. It covers all 20+ industry profiles and automatically sets working capital day defaults appropriate to your sector — so you start with realistic assumptions, not guesses.
Key features for CC limit applications:
- Form IV — Detailed working capital days with editable assumptions
- Form V — MPBF under Method 1 and Method 2, with comparison
- Current Ratio check — flags if ratio drops below 1.33 in any year
- GST-reconcilable revenue inputs
- Excel export with bank-ready formatting
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