Cash Credit is an overdraft facility, usually granted for one year and renewed normally. This facility tends to be a perennial credit facility, if properly conducted.
Normally banks stipulate several conditions while sanctioning the limit:
The limit should be availed as need-based from day to day and not be at optimum level as in loans.
The sale proceeds should be deposited into the account invariably.
Purchases should be paid by drawing cheques payable to the seller/supplier.
Proper stock register should be maintained wherein daily entries are made as to the purchases of major items in quantity as well as value and for miscellaneous items on a consolidated value basis.
Purchases and sales should be supported by bills/invoices.
Insurance of stock in trade as well as any building taken as collateral security.
Stock statements/purchase and sales statements should be submitted monthly/quarterly.
Periodical inspection by bank of stock, stock register and statements submitted at borroer's cost.
Renewal should be sought before the expiry date with trading and profit and loss account and balance sheet, duly audited, if so stipulated by law.
Income Tax, wealth tax, sales tax, CST,VAt,service tax etc should not be in arrears.
There would be many more conditions in fine print, which usually no borrower cares to read and understand.
Regarding quantum of 'drawing limit', this would be limited to value of closing stock for the previous month less margin stipulated say 25 or 30 %, but not exceeding credit limit sanctioned.
Overdue interest/penal interest is levied, for breach of major conditions: Non-submission or delayed submission of stock statement; drawing above the drawing limit or sanctioned limit as the case may be; non-submission of renewal papers in due time; non-maintenance of stock register.
In your case reasons are not known. However, the overdue/penal interest @2% can be on the amount of liability in excess of drawing/sanctioned limit as applicable, or for number of days of delay in submitting stock statement or for entire liability in case of delay in submitting renewal papers.
So, please ask the bank in writing, the reasons for charging such interest. If they don't reply or reply not to your satisfaction, within a month, make a complaint to the Banking Ombudsman.