Explanation of Bank Overdraft Arrived Against Hypothecation of Stock

Bank overdraft is a type of loan facility that is provided by banks to their customers to enable them to withdraw more money than their account balance. In this case, the bank overdraft is arrived against hypothecation of stock. This means that the borrower has pledged their stock as collateral against the loan provided by the bank.

Calculation of Drawing Power

The bank overdraft outstanding as on 31.12.2012 accounted for 80% of drawing power. Drawing power is the amount of money that a borrower can withdraw from their account. It is calculated by deducting 20% as margin from the value of the stock as on that date. Therefore, the calculation of drawing power in this case would be as follows:

Drawing Power = Value of Stock as on 31.12.2012 - 20% Margin

80% of Drawing Power = Bank Overdraft Outstanding as on 31.12.2012

Importance of Margin

Margin is the amount of money that the borrower has to keep with the bank as a security deposit against the loan. It is usually a percentage of the value of the stock that has been pledged as collateral. In this case, the margin is 20%. The purpose of the margin is to provide a cushion to the bank in case the value of the stock falls below the amount of the loan. It also helps to ensure that the borrower has some stake in the business and is motivated to make it a success.

Conclusion

Bank overdraft arrived against hypothecation of stock is a common type of loan facility that is provided by banks to their customers. The drawing power is calculated by deducting the margin from the value of the stock. The margin is an important component of the loan facility as it provides security to the bank and ensures that the borrower has some stake in the business.