Vinu: Hey Manu, I have a question about determining the Drawing Power (DP) for a loan. Can we include the advance payments made to suppliers in the DP calculation?

Manu: That's a great question, Vinu. Actually, advances to suppliers shouldn't be included in the DP calculation.

Vinu: Why not? Aren't advances also part of the business's current assets?

Manu: They are part of current assets, but there's a specific reason they're excluded. In the event of a default, the bank can't enforce the advance given to suppliers as security. Unlike inventory or receivables, which can be converted into cash, the advance isn't something the bank can readily recover or liquidate to settle the outstanding loan.

Vinu: So, it's about the recoverability of the asset?

Manu: Exactly. Advances to suppliers are considered a non-recoverable asset in the event of default because they're not directly tied to a tangible product or service that the bank can take possession of. This makes them a risky asset to include in DP calculations, as they don't provide the same level of security to the bank as other assets might.

Vinu: That makes sense. It's about ensuring the bank has a clear path to recovering its funds if necessary.

Manu: Precisely. The main goal is to secure the bank's interest and ensure that the assets considered in the DP are easily realizable in case of a default. That's why advances to suppliers are typically excluded from this calculation.