From Lifeline to Liability: Rethinking India’s CC/OD Trap (Perpetual Cash Credit in India)

Over the past five years, working capital loans — dominated by Cash Credit (CC) and Overdraft (OD) facilities — have accounted for a substantial share of bank credit in India. Designed to bridge short-term liquidity gaps, these facilities were never intended to behave like permanent debt. Yet RBI data and supervisory observations reveal a disconcerting reality: high utilization rates, minimal reduction in principal over time, and governance lapses that threaten to undermine financial discipline and stability.

A lifebuoy (symbolizing support) gradually morphing into a heavy chain tied to someone’s leg — from help to burden.

This blog unpacks the numbers, the practices, and the way forward — examining whether CC/OD has indeed become a “perpetual” form of credit.

🔷 Cash Credit (CC) Facility

A Cash Credit facility is a short-term working capital arrangement provided by banks, wherein a borrower is sanctioned a credit limit against the security of stock-in-trade, receivables, or other acceptable collateral, and is permitted to withdraw funds up to this limit, repay, and redraw during the tenure of the facility.

✅ Key features:

• Sanctioned after assessing working capital requirements based on projected turnover or cash flow cycles.

• Limit is fixed for a period (usually 12 months) and reviewed annually.

• Drawing Power (DP) is computed periodically (monthly or quarterly) based on current assets minus margin, as per stock & receivables statements.

• Interest is charged only on the amount utilized, not the entire limit.

RBI describes this under its working capital finance norms and emphasizes the need for proper assessment of DP and periodic adjustment.

🔷 Overdraft (OD) Facility

An Overdraft facility is a credit line allowed to a borrower, typically linked to their current account, permitting them to withdraw more than their available balance, up to a sanctioned limit, for short-term liquidity needs.

✅ Key features:

• Commonly provided to individuals, proprietors, firms, and corporates.

• Can be secured (against fixed deposits, stocks, etc.) or unsecured (clean OD for salaried professionals or trusted clients).

• Interest is charged only on the overdrawn amount, for the number of days the account remains overdrawn.

• Unlike CC, which is strictly tied to working capital assessment and DP, OD is often more flexible & convenient for smaller, short-term needs.

Cash Credit (CC): A revolving credit line sanctioned for working capital, secured against current assets, allowing withdrawals & deposits up to a fixed limit based on drawing power.

Overdraft (OD): A facility linked to a current account, enabling withdrawals beyond the available balance, up to a sanctioned limit — typically more flexible, sometimes unsecured.

📍 The Data — Sectoral Trends (2019–2025)

To test this hypothesis, we analyzed RBI’s Sectoral Deployment of Non-Food Gross Bank Credit data (2019–2025), focusing on sectors that are inherently working-capital intensive — such as Micro, Small, and Medium Enterprises (MSMEs), Trade, and Services.

Key Data Highlights:

Sector/Industry	2019 (₹ Cr)	2025 (₹ Cr)	Growth %	CAGR %	Working Capital Intensity	Likely Facility Type
Micro & Small Enterprises	3,71,374	7,91,721	113%	13.4%	High	CC/OD (Working Capital)
Medium Enterprises	1,00,786	3,60,475	257%	23.7%	High	CC/OD (Working Capital)
Trade (Retail + Wholesale)	4,79,994	11,86,787	147%	16.3%	High	CC/OD (Working Capital)
Services (Total)	23,40,659	51,61,462	120.5%	14.1%	High	CC/OD + Term Loans
Industry (Overall)	28,40,663	39,37,885	38.8%	5.6%	Moderate	Mix
Personal Loans	23,03,144	59,52,299	158.4%	17.1%	Low	Term / Consumer Credit

The fastest-growing sectors — MSMEs, Trade, and Services — are also the ones most dependent on working capital, suggesting that their rising credit levels are closely tied to CC/OD usage.

📍 Why Perpetual is Convenient — For Borrowers, Bankers, and Even the Regulator

Why Borrowers Like It:

• Flexibility & No Installments — Fits their fluctuating cash flows.

• Interest on Drawn Amount Only — Initially cheaper.

• Easy Rollovers — Renewed annually with little resistance.

  
  

Why Banks Like It:

• Sticky Clients & Fee Income — Annual renewals bring fees and loyalty.

• Lower Apparent NPAs — Keeps exposure standard as long as interest is paid.

• Easier to Manage (Superficially) — Less intensive monitoring than term loans.

  
  

Why Regulators Don’t Stop It:

• Economic Dependence — MSMEs & Trade sectors rely on it.

• PSL Compliance — Helps banks meet priority lending targets.

• Gradualism — RBI prefers nudging banks toward better governance rather than imposing hard bans.

  
  

📍 The Illusion of Contingency — Where Does the Money Go?

Here lies the uncomfortable truth:

• In theory, CC/OD is a contingent, revolving facility, drawn and repaid as needed.

• In reality, many borrowers draw their entire limit and never repay the principal — treating it as a permanent loan.

• Banks continue to renew the limits as long as interest is serviced — with little scrutiny of underlying repayment capacity.

  
  

📌 Supporting Data — MSME Pulse Evidence

According to the SIDBI–TransUnion MSME Pulse (June 2025):

“Cash credit and overdraft facilities were preferred products for new-to-credit borrowers with exposure ≤ ₹1 crore, with 28% opting for these products — making them the single most preferred product in this segment.”

In the trade sector — inherently working-capital-intensive — CC/OD facilities dominate:

• ~58% of MSME loans in the ≤ ₹1 crore segment (Feb 2024) were for trade, overwhelmingly using CC/OD.

• In Uttar Pradesh (May 2025), cash credit, overdraft, demand loans, and unsecured business loans accounted for ~54% of the MSME portfolio.

• Private banks, as of March 2025, reported ~38% of their MSME portfolio in overdraft products.

Source	Segment / Geography	Finding	Year
MSME Pulse (June 2025)	≤ ₹1 crore, NTC borrowers	28% preferred CC/OD — single most popular	2025
MSME Pulse (Feb 2024)	Trade sector (≤ ₹1 crore)	~58% MSME loans in trade — dominated by CC/OD	2024
MSME Pulse (May 2025)	Uttar Pradesh MSME	~54% portfolio: CC/OD, demand loans, unsecured	2025
MSME Pulse (June 2025)	Private Banks, MSME	~38% MSME exposure in overdraft products	2025

These findings corroborate the qualitative view expressed by RBI that MSME borrowers heavily rely on revolving working capital facilities — which are often fully drawn and renewed perpetually — blurring the line between contingent credit and permanent debt.

📍 The Risks & Governance Gaps — Why This Matters

On the surface, CC/OD facilities appear to work well for everyone — borrowers get easy, flexible funding, banks earn steady interest income, and regulators see priority sector lending goals being met. But underneath, this model carries serious risks for both financial institutions and the economy.

📍 Governance Lapses at the Bank Level

🎯 Ritualistic Renewals — Annual reviews are often a tick-box exercise, with no real scrutiny of borrower viability.

🎯 Over-Drawn Accounts — Borrowers exceed sanctioned limits, and banks accommodate rather than enforce discipline.

🎯 Collateral Erosion — Securities lose value over time, yet limits are renewed without revalidation.

🎯 Dependence on Inflated Projections — Working capital assessments rely on self-reported financials.

📍 Why Perpetual CC/OD Reduces Borrower Creditworthiness

Even if borrowers pay interest regularly, persistently maintaining fully utilized CC/OD limits erodes their creditworthiness:

• Signals Stress: Fully drawn limits suggest insufficient internal cash generation.

• No Cushion: No headroom to absorb shocks.

• Weakened Ratios: Debt-to-equity and liquidity ratios deteriorate.

• Limits Future Credit: Banks become reluctant to lend more; risk ratings may be downgraded.

“When borrowers keep their CC/OD limits fully drawn for years, their creditworthiness actually declines — even if they pay interest on time. This behaviour signals weak cash flows, lack of financial flexibility, and poor debt management — undermining their ability to access additional credit on favourable terms.”

🚀 The Way Forward — Fixing the Perpetual CC/OD Trap

📍 What Banks Should Do

✅ Move to cash-flow based assessments.

✅ Impose periodic principal reductions.

✅ Flag fully-utilized accounts for corrective action.

✅ Revalidate collateral and DP calculations.

📍 What Borrowers Must Understand

CC/OD is not a substitute for permanent capital. Treating it as perpetual debt traps them in a cycle of high costs and diminished credibility. They must develop discipline to use it judiciously — as a bridge, not a crutch.

📍 What Regulators Can Do

✅ Mandate disclosure of fully drawn, long-term CC/OD accounts.

✅ Incentivize conversion to structured term loans.

✅ Enforce clean-up cycles through policy measures.

🎯 Conclusion & Call-to-Action

Credit, by its very nature, is meant to be a time-bound obligation — drawn to meet specific needs, and repaid from future cash flows. The gradual normalization of perpetual CC/OD facilities undermines this principle.

For borrowers, treating CC/OD as permanent debt weakens financial flexibility, increases costs, and damages creditworthiness.

For banks, it masks asset quality risks and erodes governance.

For regulators, it distorts the spirit of credit discipline even as formal targets are met.

It is time for banks, borrowers, and regulators to act — and restore CC/OD to its rightful role: a flexible, revolving lifeline for working capital, not a perpetual burden.