Inventory valuation, monthly stock statements and bank drawing power

In most banks, working-capital limits for manufacturers are still operated on the basis of a monthly stock and book-debt statement. The same stock appears in the financial statements under AS 2 or Ind AS 2. Its movements are recorded again in GST returns and e-way bills. When these three sources disagree, the bank responds in a predictable way: drawing power falls, and renewal questions become more demanding.

This note is addressed to the owners and finance managers who sign those statements each month, and the practice it describes is stated as at 1 October 2026. The sums involved are direct. Drawing power, and with it the usable part of the cash-credit limit, is computed from the statement after the bank's margins are applied. An inflated statement increases borrowing for a period and creates a shortfall once a stock audit corrects it.

The sections below show how the statement, the books and the renewal projections should be reconciled, so that a factory can borrow against stock it actually holds.

1. What the monthly stock statement is for

As at each month-end, the statement tells the bank:

• quantities and values of raw material, work-in-progress, finished goods and stores;
• age or category breaks the sanction requires;
• sundry debtors, often aged, sometimes split into domestic and export;
• creditors for goods (or a confirmation that stock is valued on a paid basis);
• the drawing power (DP) computation in the bank's format.

Operations are then allowed up to the lower of the sanctioned limit and the DP. Other conditions also apply, including stock audit, insurance, documentation and the cure of irregularities.

2. Valuation: books, tax and the bank

Inventory cost is built from product cost sheets, although a cost sheet cannot replace a quantity count. The companion article on product cost sheets covers build-up and under-absorbed overhead.

WIP. A WIP figure that never moves, or that rises without matching production, attracts the bank's suspicion. The method should be written down and applied consistently, whether it uses stage of completion or a standard percentage build-up tied to the cost sheet.

Dead and slow stock. NRV write-downs are recorded in the books. Divergence between DP and the balance sheet arises when non-moving finished goods stay at full cost in the bank statement while the auditor expects a provision.

3. Three-way alignment: stock statement, books and GST

Each month, before the statement is sent to the bank, at least the following should be bridged:

1. Stores ledger / ERP stock → quantities in the stock statement.
2. Inventory in the trial balance → values in the stock statement (after the bank's exclusions).
3. GST and e-way bill movement → receipts and dispatches for the month (including job work).

Typical legitimate bridges:

• material at job worker (challans / ITC-04);
• goods in transit inward or outward;
• rejected stock awaiting debit notes;
• customer-owned tools or free-issue material (should not be in your DP stock).

Some factories file GST on time yet prepare the stock statement from a spreadsheet that is never tied to the ERP. Such a factory will in time face a stock audit exception. ITC and job-work mechanics are covered in ITC for manufacturers and GST on job work.

4. Drawing power in plain terms

A simplified DP sketch follows. The margins are examples only, and the sanction letter governs.

With a cash-credit sanction of ₹1.50 crore, usable DP is ₹1.50 crore even though the computation is higher. If DP falls to ₹1.20 crore, the account must operate within ₹1.20 crore whatever the sanction says.

Creditors for goods. Suppose ₹20 lakh of the raw material is unpaid. Many banks then require stock to be reduced by that amount before the margin is applied, because inclusion at full value overstates DP.

5. Stock audit

A stock auditor is appointed by the lender at intervals set in the sanction (often annual or half-yearly for larger limits). The auditor tests:

• existence and condition of stock;
• whether unpaid or third-party stock was included;
• valuation and margins against the sanction;
• receivables ageing and ineligible debts (disputed bills, related parties if excluded, long overdue);
• alignment with books and, increasingly, with GST turnover.

Preparation resembles that for a statutory inventory attendance. Cut-off, the job-work list and the rejection bay should be ready, together with the last six stock statements and their DP workings.

6. Projections at renewal (the "CMA" pack)

At renewal or enhancement, banks request projected financials and a working-capital assessment. Practitioners still call this CMA data. Whatever the label, it serves as a credit memorandum input and carries no separate compliance status under the Companies Act.

A usable pack usually includes:

• audited (or provisional) financials for recent years;
• estimated profit and loss and balance sheet for the current year;
• projections for the next year;
• working-capital computation (operating cycle or turnover method, as the bank applies it);
• short notes on capacity, order book, and major raw-material price moves.

Consistency test. Suppose the monthly stock statements showed finished goods of ₹2 crore throughout the year. A projection that assumes five inventory days and a rise in sales, with no explanation of the draw-down, will be challenged. Projected inventory days should therefore follow the pattern the bank has already seen.

7. Worked example: a Nashik fabrication unit

The figures are illustrative. No real business is described.

A fabrication company in Sinnar MIDC has a cash-credit limit of ₹2.5 crore. At 30 September 2026 its draft stock statement shows:

Bank-ready adjustments (per a typical sanction):

• reduce RM by unpaid ₹18 lakh → ₹77 lakh;
• exclude debts over 90 days → ₹95 lakh eligible;
• write down slow-moving FG to NRV of ₹6 lakh for books; for the bank statement, either exclude the doubtful ₹6 lakh above NRV or carry only ₹49 lakh FG if the sanction follows cost with a quality comment. Here, FG is carried at ₹49 lakh after the write-down.

After margins (25% RM, 30% WIP, 25% FG, 25% debtors), DP computes to about ₹2.11 crore. Operations must stay within that figure, and the ₹2.5 crore limit is not available.

GST bridge for the same month: purchases in GSTR-2B were ₹62 lakh and production issues per stores were ₹58 lakh. Job work sent amounted to ₹9 lakh, and taxable outward supplies to ₹71 lakh. The quantity roll-forward in the stock statement agrees within a documented ₹2 lakh of goods in transit. The renewal projection uses 55–60 inventory days, which is consistent with the last four stock statements. A target of 35 days would not be supported by that history.

8. Mistakes that cut limits

• Stock statements in selling price or round figures that never match the trial balance.
• Unpaid stock and customer-supplied material inside DP.
• WIP used as a balancing figure to reach a target DP.
• Book debts that include retainership or quality holds the OEM will not pay on the aged date.
• Omission of job work outside the factory when the bank expects a location-wise annexure.
• Renewal projections with margins the cost sheet and GST records never supported.

What this means for a manufacturer

• The stock statement should be built from the ERP and the books first, and the bank's margins applied afterwards.
• A monthly bridge among stock, trial balance and GST/job-work records should be maintained.
• A stock audit should be handled as a planned close, with cut-off and rejection bays ready.
• At renewal, the projections should agree with the last twelve stock statements.
• MSME payment timing is relevant to creditor reductions: prompt payment of small suppliers affects tax and also the creditors-for-goods line in DP.

This article is general information on accounting and lending practice as at 1 October 2026 and is not advice on any particular facility. Sanction terms, margins and audit scopes differ by bank and by account. The sanction letter and current RBI / lender guidance should be followed.