CC vs WCDL vs OD — choosing the right working capital limit

The sanctioned working capital limit is a single number in the credit sanction letter. But underneath it, banks typically carve it into two or three sub-facilities — Cash Credit (CC), Working Capital Demand Loan (WCDL), and sometimes a standalone Overdraft (OD). Each behaves differently, is priced differently, and optimised differently. Using them interchangeably is expensive.

This piece covers what each instrument actually is, how the interest arithmetic works, when each is the cheaper choice, and the one drawing power trap that catches companies off-guard at every quarter-end.

Cash Credit — the revolving workhorse

Cash Credit is a revolving limit against which the borrower can draw and repay freely, up to a ceiling called the Drawing Power (DP). The DP is not fixed — it is recomputed every month from a stock and debtor statement the bank requires.

The standard DP formula: 75% of book debtors aged up to 90 days + 65% of stock (at cost) − creditors outstanding. Banks vary the percentages slightly, but this is the Tandon Committee-era convention most still use. The sanctioned limit acts as a ceiling: the actual usable amount on any given day is whichever is lower — the sanctioned limit or the DP.

Interest is charged only on the daily outstanding balance, calculated as:

The rate floats — typically EBLR (External Benchmark Lending Rate, i.e. repo rate + spread) plus a credit-risk-based margin. For a mid-market manufacturing company, expect EBLR + 0.50% to EBLR + 1.50%. The EBLR itself resets whenever RBI moves the repo rate.

The monitoring burden of CC is significant. The bank requires a monthly stock and debtor statement (to compute DP), a quarterly/half-yearly stock audit by an empanelled auditor (at the company's cost, typically ₹15,000–₹50,000 per audit), an annual renewal of the facility, and a periodic collateral review on the mortgage. Miss the stock statement, and the bank can — and does — freeze drawings.

Working Capital Demand Loan — the fixed-rate sprint

A WCDL is a lump-sum disbursement for a fixed tenor — typically anywhere from 7 days to 180 days. Unlike CC, it is not revolving. The full amount is disbursed at the start; interest accrues from day one on the entire principal regardless of whether you "use" it; and at maturity the principal is repaid (or rolled into a fresh WCDL).

The rate is usually repo-linked but fixed for the tenor. At the time of drawing, the bank quotes EBLR ± a spread, and that rate is locked until the WCDL matures. This matters in a rate-cutting cycle: a 90-day WCDL drawn at 8.75% stays at 8.75% even if RBI cuts by 50 bps during those 90 days. It also matters in a rate-hiking cycle — the reverse protection.

Because WCDL interest starts from day one, the effective cost is higher than CC for the same notional rate if you are not fully utilising the amount. A ₹5 Cr WCDL at 8.75% costs ₹3.60 lakh for 30 days — whether you deploy all ₹5 Cr or let it sit. A CC at 9.25% on ₹3 Cr average utilisation costs ₹2.28 lakh for 30 days. So the lower WCDL rate can still be more expensive if utilisation is partial.

WCDL carries much lighter monitoring: no monthly DP statement, no stock audit on the WCDL tranche, no drawing power computation. This alone makes it attractive for companies that hate the stock-audit cycle.

Overdraft — the collateral play

An OD in the working capital context is usually not a current-asset-backed facility. It is typically secured against fixed deposits, property, LIC policies, or listed shares. The bank lends a percentage of the collateral value — 85–95% on FD, 60–70% on property, lower on shares — and charges interest only on utilisation, like CC.

The rate is collateral-driven. FD-backed OD is usually FD rate + 1–2%, making it the cheapest possible working capital money if you have surplus FDs. Property-backed OD is closer to home loan rates. Neither requires stock statements or stock audits — only the underlying collateral is periodically valued.

The practical limit: OD is sized by the collateral, not by the business's current-asset cycle. A company with ₹2 Cr in FDs can get an OD of ₹1.7 Cr — no more. This makes OD a supplement to CC/WCDL, not a replacement.

The rate arithmetic side by side

When to use which — the decision logic

Use CC as the base

CC suits day-to-day working capital where drawings fluctuate with the order cycle. The interest-on-utilisation structure means idle days cost nothing. If your average CC utilisation is 60–70% of the limit, CC is almost certainly cheaper than a WCDL for the same average requirement — even if the WCDL rate is nominally lower.

Layer a WCDL for the peak

Most manufacturing and trading businesses have a seasonal peak — raw material buildup before the busy quarter, or a large export order that requires stocking. This peak is predictable in size and duration. Drawing a WCDL for the peak amount for 60–90 days is often cheaper than pushing CC utilisation to 100%, because full utilisation eliminates CC's idle-day advantage. The WCDL rate is typically 25–75 bps lower than the CC rate for the same borrower.

Use OD to kill the monitoring burden

If you have surplus FDs or unencumbered property, use OD to handle the portion of working capital that fluctuates most unpredictably. The rate is usually lowest among the three, there is no stock audit, and no DP computation. The constraint is that the limit is capped by the collateral, not the business need.

The drawing power trap

This is the most dangerous operational risk in CC management, and it catches companies at precisely the worst moment — quarter-end, when debtors and stock tend to dip as collections come in and inventory gets dispatched.

The sequence: CC is drawn at ₹8 Cr. Quarter-end arrives. Stock dips by ₹2 Cr (cleared for billing), debtors age past 90 days (not eligible for DP). DP recomputation shows DP of ₹6.5 Cr. The CC account is now overdrawn relative to DP by ₹1.5 Cr.

The bank's system flags this as an overdrawn position. In practice, most bankers give a 15–30 day window to regularise — but if the DP stays low, the bank can ask for part-repayment or refuse fresh drawings. A company in the middle of its peak production cycle, with cash locked in debtors and stock on the floor, does not want a bank call asking it to reduce CC utilisation by ₹1.5 Cr.

The fix is proactive monitoring: run the DP computation yourself every month before the bank does. Most finance teams leave this to the bank's stock audit. That is the wrong cadence. Build the DP formula into your monthly MIS close. If DP is trending toward the utilisation level, draw a WCDL to replace part of the CC exposure — WCDL has no DP constraint.

What banks won't tell you

Banks push CC for three reasons that have nothing to do with your interests. First, CC comes with a stock audit that generates fee income for the bank's empanelled auditors (and keeps the relationship stickier). Second, the monthly DP statement gives the bank visibility into your inventory and receivables — essentially a free early-warning system for credit risk. Third, CC renewal every year creates an annual touchpoint where the bank can reprice the facility upward.

WCDL, by contrast, is lower-maintenance for the bank. The rate is fixed, the tenure is short, and there is no stock audit. Some bankers actively discourage WCDL because it reduces their monitoring leverage. Ask anyway — for any defined, large requirement with a predictable repayment timeline, WCDL will almost always be cheaper net of the CC idle-period advantage.

Similarly, banks rarely proactively offer OD against FD for working capital. They prefer you deploy the FD as margin for CC — where they count the FD toward collateral coverage but still charge full CC interest on drawings. If you have surplus FDs, an FD-backed OD at FD-rate-plus-one is almost always the cheapest working capital money available to you.

The one-page framework

When reviewing your working capital structure, ask three questions in order:

1. Do I have surplus FDs or unencumbered collateral? If yes, convert a portion to OD. This is the cheapest tranche. Size it to the amount you'd otherwise draw on CC for predictable purposes.

2. Is there a predictable seasonal or order-driven peak of known size and duration? If yes, draw a WCDL for the peak amount for the relevant tenor. This avoids pushing CC to 100% utilisation where the idle-day advantage disappears — and locks a potentially lower rate for the period.

3. Is the residual requirement variable and hard to predict? That is the CC portion. Keep it at a level where average utilisation stays in the 50–70% range — that is where the interest-on-utilisation structure gives you the most benefit over a same-rate WCDL.

The working capital limit in your sanction letter is one number. The mix underneath it is a decision that can save meaningful basis points at scale. On a ₹20 Cr working capital portfolio, restructuring from all-CC to a CC-WCDL-OD mix typically saves ₹15–35 lakh annually — without renegotiating a single rate.