Short answer: A cash credit (CC) limit is secured mainly by your stock and receivables, and what you can draw depends on the drawing power worked out from your stock statement. An overdraft (OD) is a running limit on a current account, sanctioned against a fixed deposit, property or your business financials, with no stock-based drawing power. On both, interest is generally charged only on the amount used.
Both are revolving: you draw, repay and draw again within the limit, and both are normally reviewed and renewed by the bank, usually every year. The practical difference is what the bank lends against and how closely it tracks your stock and debtors.
Cash credit vs overdraft at a glance
| Point | Cash credit (CC) | Overdraft (OD) |
|---|
| What it is secured by | Hypothecation of stock (raw material, work in progress, finished goods) and book debts, often with collateral as well | A fixed deposit, property or other security, or in some cases the business's financials and banking track record |
| How the limit is decided | Working-capital requirement, based on turnover and the operating cycle | Value of the security, or the bank's view of the business's financials and account conduct |
| How much you can draw today | The lower of the sanctioned limit and the drawing power from your latest stock and debtor statement | Up to the sanctioned limit |
| Interest | Generally on the amount drawn, for the days it is drawn | Generally on the amount drawn, for the days it is drawn |
| Monitoring | Regular stock and debtor statements; stock audits or inspections as per sanction | Lighter; depends on the security and the sanction terms |
| Typical users | Traders, manufacturers and distributors that carry stock and give credit to customers | Service businesses, professionals and businesses with a deposit or property to offer as security |
| Review | Periodic review and renewal by the bank, commonly annual | Periodic review and renewal by the bank, commonly annual |
These are typical features. The actual security, margins, rate and review cycle are whatever your bank's sanction letter says.
How is drawing power worked out? A worked example
Short answer: Drawing power is your eligible stock and receivables, less what you owe your suppliers, less debtors older than the bank's cut-off, less the margin in your sanction letter. You can draw the lower of this figure and your sanctioned CC limit.
Take a distributor with a sanctioned cash credit limit of ₹30,00,000. The margins and the 90-day debtor cut-off below are illustrative round numbers; your sanction letter sets the real ones.
Stock as per this month's statement ₹40,00,000
Less: trade creditors (unpaid suppliers) ₹10,00,000
Net stock ₹30,00,000
Less: 25% margin on stock ₹7,50,000
Drawing power on stock ₹22,50,000
Book debts (receivables) ₹20,00,000
Less: debtors older than 90 days ₹4,00,000
Eligible debtors ₹16,00,000
Less: 40% margin on debtors ₹6,40,000
Drawing power on debtors ₹9,60,000
Total drawing power (22,50,000 + 9,60,000) ₹32,10,000
Sanctioned limit ₹30,00,000
You can draw the lower of the two ₹30,00,000
If stock falls to ₹30,00,000 next month with everything else the same, net stock becomes ₹20,00,000, drawing power on stock becomes ₹15,00,000, and total drawing power drops to ₹24,60,000. You could then draw only ₹24,60,000, even though the sanctioned limit is still ₹30,00,000. This is why a CC limit moves with the business, and why late or weak stock statements reduce what you can use.
An overdraft against a fixed deposit does not move this way: the limit follows the deposit, not the stock.
Is interest charged on the full limit?
Short answer: No. On both CC and OD, interest is generally charged only on the amount drawn and for the days it stays drawn. This is the key difference from a term loan, where interest runs on the whole outstanding balance and principal leaves the business every month as EMI.
Using the example above: if the distributor's average balance used over a month is ₹18,00,000 of the ₹30,00,000 limit, interest for that month is worked out on about ₹18,00,000, not ₹30,00,000. In a month when collections come in early and usage drops to ₹10,00,000, the interest cost drops with it. Processing, renewal, inspection or commitment charges can still apply, so compare the full fee schedule as well as the rate.
When does a CC or OD account become irregular or an NPA?
Short answer: Under RBI's prudential norms, a CC or OD account is "out of order" if the balance stays above the sanctioned limit or drawing power continuously for 90 days, or if there are no credits for 90 days or credits do not cover the interest. An account that remains out of order is classified as a non-performing asset (NPA).
RBI's norms also treat drawings based on a stock statement older than three months as irregular, and a working-capital account becomes an NPA if such irregular drawings continue for 90 days. In practice this means three habits protect a CC limit: submit stock statements on time, keep usage within drawing power, and route sales collections through the account so it shows regular credits.
Which is better for your business?
Short answer: Neither is better in general. Cash credit usually suits a business whose need comes from stock and customer credit. An overdraft usually suits a business with short, irregular cash gaps and a deposit, property or strong financials to offer instead of stock.
- Lean towards cash credit if you trade or manufacture, hold meaningful stock, sell on credit and can submit regular stock and debtor statements.
- Lean towards an overdraft if you run a services business with little stock, need a buffer for uneven receipts, or hold a fixed deposit or property you are willing to offer as security.
- Several unsecured business loans funding day-to-day needs? It can be worth asking whether a structured CC or OD limit fits better. See working capital limit vs unsecured business loans. The bank decides eligibility, limit and terms.
Personal loans or salaried debt consolidation are covered on advancecred.com.
Frequently asked questions
What is the main difference between overdraft and cash credit?
A cash credit limit is a working-capital facility secured mainly by the business's stock and receivables, and how much you can draw depends on the drawing power worked out from your stock statement. An overdraft is a running limit on a current account, sanctioned against a fixed deposit, property or the business's overall financials, without a stock-based drawing power.
Is interest charged on the full cash credit or overdraft limit?
No. On both facilities, interest is generally charged only on the amount you have actually drawn and for the days it stays drawn. Banks may still charge processing, renewal or other fees as per the sanction letter, so read the fee schedule as well as the rate.
What is drawing power in a cash credit account?
Drawing power is the amount you are allowed to draw at a given time. Banks work it out from your latest stock and debtor statement: eligible stock and receivables, less creditors, ineligible old debtors and the margin set in your sanction. You can draw the lower of the drawing power and the sanctioned limit.
When does a cash credit or overdraft account become an NPA?
Under RBI's prudential norms, a CC or OD account is treated as out of order if the balance stays above the sanctioned limit or drawing power continuously for 90 days, or if there are no credits for 90 days or credits do not cover the interest. An account that stays out of order is classified as a non-performing asset.
Can I move several unsecured business loans into one cash credit or overdraft limit?
Sometimes, for an eligible operating business whose loans were funding recurring working capital. The bank decides based on turnover, stock and receivables, banking conduct, credit history and security. There is no automatic conversion, and the limit, rate and security are set only by the lender.
Sources
All checked on 24 October 2026.
- Reserve Bank of India, Master Circular: Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, paragraphs 2.1.2 and 2.2 (out of order, NPA) and 4.2.4 (stock statements older than three months). Latest edition 1 April 2025 on RBI's master circulars page.
- Kerala Grameena Bank, Cash credit: working capital against hypothecation of stock and book debts, collateral above small limits, annual review.
- Ujjivan Small Finance Bank, Cash credit vs overdraft: overdraft can be secured or unsecured; interest on the utilised amount; annual review.
- Quicko, How drawing power is calculated: method (stock less creditors and margin, plus eligible debtors less margin) and commonly used margins, which vary by bank.
