- What is MPBF?
- The Tandon Committee — Background
- Key Terms You Must Know
- Tandon Method 1 — Formula and Example
- Tandon Method 2 — Formula and Example
- Method 1 vs Method 2 — Side-by-Side Comparison
- Which Method Do Banks Use?
- Net Working Capital (NWC) — The Borrower's Margin
- Current Ratio Requirement — Minimum 1.33
- How to Present MPBF in CMA Form V
- Calculate MPBF Automatically
What is MPBF?
MPBF — Maximum Permissible Bank Finance — is the mathematical upper limit on how much working capital a bank can lend to a borrower. No matter what CC limit a business applies for, the bank will sanction only up to the MPBF — unless there are other overriding policy reasons.
MPBF is computed from the borrower's working capital cycle:
- How much stock the business holds (RM, WIP, FG)
- How much it is owed by customers (debtors)
- How much it owes to suppliers (creditors — which reduces the need)
- What percentage the borrower must fund from their own sources
The concept is simple: banks should not be funding the entire working capital gap. The borrower must contribute from long-term funds (equity + retained profits + term loans) — and the bank funds the rest.
The Tandon Committee — Background
The RBI constituted the Tandon Committee in 1974, chaired by Shri P.L. Tandon, to study the system of bank credit for working capital. Before this, banks lent on the basis of "security" — whatever collateral a borrower offered. There was no scientific assessment of how much working capital was actually needed.
The Committee's key finding: banks were funding not just the working capital gap but also the borrower's equity gap — effectively financing inefficient or over-leveraged operations. The MPBF formula was the Committee's solution — a ceiling based on actual operational need, not collateral value.
The Committee proposed three methods (Method 3 required 100% NWC from own sources and was never adopted). Methods 1 and 2 remain in active use across all Indian banks today.
Key Terms You Must Know
| Term | Definition |
|---|---|
| TCA (Total Current Assets) | Sum of all short-term assets: RM stock, WIP, FG, debtors, advance payments, other CA. Computed in Form IV from working capital day assumptions. |
| CL (Current Liabilities excl. bank borrowings) | Trade creditors, advance receipts from customers, statutory dues — everything except the CC/OD from the bank itself. |
| NWC (Net Working Capital) | Long-term funds deployed in working capital = TCA − (Bank Borrowings + Other CL). This is the borrower's own margin in the working capital. |
| MPBF | The maximum amount the bank will lend for working capital purposes. |
| Current Ratio | TCA ÷ Total Current Liabilities (including bank borrowings). Must be ≥ 1.33 after the CC sanction. |
Tandon Method 1 — Formula and Example
Formula
Method 1 says: the bank will finance up to 75% of the "net" current assets (after deducting what suppliers and creditors are already funding). The borrower brings the remaining 25% from their own sources.
Method 1 — Worked Example
| Item | ₹ Lakhs |
|---|---|
| Raw Material Stock (30 days) | 40.00 |
| WIP (10 days) | 15.00 |
| Finished Goods (20 days) | 28.00 |
| Debtors (45 days) | 62.00 |
| Other Current Assets | 5.00 |
| Total Current Assets (TCA) | 150.00 |
| Trade Creditors (20 days) | 22.00 |
| Other Current Liabilities | 8.00 |
| Current Liabilities excl. Bank (CL) | 30.00 |
| TCA − CL | 120.00 |
| MPBF Method 1 (75% of above) | 90.00 |
Tandon Method 2 — Formula and Example
Formula
Simplified: = 0.75 × TCA − CL
Method 2 is more explicit: the borrower must fund at least 25% of TCA from their own long-term sources — regardless of what creditors are financing. The bank funds everything else after deducting creditors and this mandatory 25% margin.
Method 2 — Same Example Continued
| Item | ₹ Lakhs |
|---|---|
| Total Current Assets (TCA) | 150.00 |
| Less: 25% of TCA (borrower's margin) | 37.50 |
| Less: CL excl. bank borrowings | 30.00 |
| MPBF Method 2 | 82.50 |
Method 1 vs Method 2 — Side-by-Side Comparison
| Method 1 | Method 2 | |
|---|---|---|
| Formula | 0.75 × (TCA − CL) | TCA − 0.25×TCA − CL (= 0.75×TCA − CL) |
| Borrower's margin requirement | 25% of (TCA−CL) | 25% of TCA — stricter |
| MPBF result (same data) | Higher | Lower (more conservative) |
| Current Ratio implicit | Can be below 1.33 | Ensures CR ≥ 1.33 (when NWC requirement met) |
| Banks' preference | Shown for reference only | Primary benchmark for sanction |
| Borrower-friendly? | Yes — higher limit | No — lower limit, more margin from borrower |
Which Method Do Banks Use?
All major Indian commercial banks — SBI, PNB, Bank of Baroda, Canara Bank, Union Bank, HDFC, ICICI, Axis, Kotak — use Tandon Method 2 as the primary benchmark for sanctioning CC limits.
Method 1 is typically computed alongside for reference and to show in the CMA report — but the sanction amount is based on Method 2. Banks will not sanction more than Method 2 MPBF for working capital facilities.
If the borrower genuinely needs more than Method 2 MPBF, options include:
- Infuse more equity (increases NWC, which increases Method 2 MPBF)
- Reduce creditor days assumption (reduce CL, increasing the MPBF differential)
- Increase revenue projections with supporting evidence (increases TCA)
- Request a Second Banking Arrangement (split the limit across two banks)
Net Working Capital (NWC) — The Borrower's Margin
Net Working Capital is the long-term funds invested in working capital. It equals:
Under Method 2, the required NWC = 25% of TCA. If the borrower's actual NWC (from the Balance Sheet) is less than 25% of TCA, the bank will not sanction the full MPBF — they'll require the borrower to bring in more long-term funds first.
This is why bankers often say: "Increase your NWC before applying for enhancement." Higher equity or retained profits directly increase NWC — and thus the CC limit entitlement.
Current Ratio Requirement — Minimum 1.33
Method 2 MPBF is specifically designed so that when the borrower meets the 25% NWC requirement, the resulting Current Ratio will be exactly 1.33:
If NWC = 25% of TCA:
Bank borrowings = 75% × TCA − Other CL
Total CL = Bank borrowings + Other CL = 75% × TCA
CR = TCA ÷ (75% × TCA) = 1/0.75 = 1.33
This is why RBI mandates a minimum current ratio of 1.33 for all bank-financed accounts — it is the direct mathematical consequence of the Tandon Method 2 requirement. Accounts falling below CR 1.33 are classified as "irregular" and banks must demand rectification.
How to Present MPBF in CMA Form V
Form V in the CMA should present:
- Total Current Assets (carried from Form IV) — for each projection year
- Current Liabilities excluding bank borrowings — from Form III
- MPBF Method 1 computation — year-wise
- MPBF Method 2 computation — year-wise
- Sanction basis — Method 2 or applied limit, whichever is lower
- Net Working Capital check — confirm borrower's NWC ≥ 25% of TCA
- Current Ratio — confirm ≥ 1.33 after proposed borrowings
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