Introduction

At some point in your investment journey, you may have come across the terms drawdown and disbursement. Both terms relate to accessing funds, but in many instances, they mean different things, which could affect your financial decisions.

The following article outlines drawdowns vs. disbursements to clarify how each might influence loans and investments in India. We will define disbursement, explain what drawdown means, and go through some examples.

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What Is a Drawdown?

A drawdown refers to withdrawing part of the funds of a previously approved commitment or credit facility (Loan, line of credit, etc). For example, you may have arranged a ₹1 crore house loan to be used against an under-construction property. Still, rather than receiving all the funds at once, you ask for the funds to be taken in stages – for example, ₹20 lakh for the foundation of the building and ₹30 lakh for the framework of the building. This is a loan drawdown.

The definition of drawdown is closely aligned to flexibility: you determine when and how much you want to draw down, subject to a limit you accept. In India, drawdown loans are commonplace in home construction, MSME finance, or working capital loans. For example, SBI provides a home loan for under-construction projects, and a borrower can draw down scheduled amounts based on milestones of construction verified by a site visit. The benefit is that you only accrue interest on the amount you draw down at a time instead of borrowing everything up-front.

Disbursement – What is it?

Disbursement is the actual transfer or payment of money from a lender (or other payer) to you, generally as a single amount or a scheduled payment. To define disbursement, consider it when cash lands in your account or is paid to a third party on your behalf. Disbursement also considers the payer or disbursing action. The bank or institution can decide when and how much to disburse funds at any time, per the loan agreement. In the Indian context, disbursement is common in personal loans, car loans, or schemes in the government, like PMAY (Pradhan Mantri Awas Yojana), which sends the subsidy payment to builders or directly to your account.

Key Differences between Drawdown and Disbursement

Understanding drawdown versus disbursement is essential in India's context of loans or investments. The following are our key differences:

• Control: You control when to draw the funds during a drawdown. A drawdown facility typically suits situations involving staggered drawdown needs, e.g., construction projects, or businesses needing to plan growth expansion. A disbursement is when the lender releases the payment to you based on the full amount requested or for a pre-determined instalment amount.

• Timings: In drawdown, you draw in phases, e.g. your request for funds. In disbursement, the loan payment is either paid as a single payment or by a fixed, predetermined payment schedule.

• Interest Impact: In a drawdown loan structure, you pay interest only on the amount you withdraw. For example, if you have a ₹50 lakh loan and draw down ₹10 lakh, you only pay interest on ₹10 lakh of the loan. In a disbursement loan, you will start paying interest on the entire loan amount from the outset.

• Use Cases: Drawdown loans suit projects with phased funding and stage gates that have iterations based on funding or project scope (e.g., royalty funding for real estate, MSME loan under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE scheme). Disbursement loans are standard loans requiring a fixed sum with no stage gates between funding milestones (e.g., education loan, government grant).

For Example: Home Loan in India

Suppose you are building a house in Bengaluru and have got a ₹75 lakh loan from a Bank. The bank provided you with a drawdown loan, but disbursed the loan funds in three disbursements, based on the bank's definition of the drawdown. The first drawdown is ₹15 lakh for land preparation, the second drawdown is for ₹25 lakh for the house construction stage, and the next drawdown is ₹35 lakh for the furniture.   After submitting progress reports, you request each loan drawdown, paying interest only on the drawn amount. If the same loan were fully disbursed, you'd receive ₹75 lakh upfront, accruing interest on the entire sum even if construction takes years.

In contrast, a friend taking a ₹10 lakh education loan for an MBA receives a loan disbursement in one go, credited to the college. The full amount is charged interest from minute one, but it is more straightforward since there are no incremental withdrawals.

So, how do you choose wisely?

When you sign the agreement, you must clarify as an Indian borrower whether your loan is a drawdown or disbursement loan. If it is a drawdown loan, you will want to check that you understand the RBI guidelines on the drawdown interest pool and document submission to avoid delays. If your loan is a disbursement loan, check when you have surplus capital, how to use or invest with percolating interest costs in mind. This can help determine how to use BSE or the bank portal for loan term movement.

In summary, drawdown versus disbursement, loan usage and repayment. It is essential to gather your knowledge of drawdown and disbursement definitions to ascertain which loan structure best fits your needs; it may be a flexible drawdown loan for your dream home or a disbursement loan to pay down an urgent expense.