MPBF Explained: Tandon Committee Method I vs Method II

When a business asks a bank for a cash credit limit, the bank does not simply hand over what the promoter requests. It calculates a ceiling — the Maximum Permissible Bank Finance (MPBF) — using a method laid down by the Tandon Committee. Understanding that calculation is the difference between asking for a realistic limit and having your proposal trimmed at the credit desk.

This is the working-capital equivalent of knowing the rules before you play. Here is exactly how MPBF is computed, the two methods banks use, and a worked example.

The starting point: the working-capital gap

Everything begins with the working-capital gap (WCG):

Working-capital gap = Current Assets − Current Liabilities (other than bank borrowing)

The logic is simple. A business needs to fund inventory and receivables (current assets). Part of that is automatically funded by suppliers and other current liabilities (creditors, expenses payable). The gap that remains is what working-capital finance has to cover — partly from the promoter’s own funds, partly from the bank.

Method I vs Method II

The Tandon Committee gave two methods. The difference is how much margin the promoter must bring — and therefore how strong the current ratio has to be.

Method II demands more promoter contribution and produces a healthier current ratio, which is why most banks apply it as the benchmark for anything beyond small limits.

A worked example

Take a business with:

• Current assets (inventory + receivables + other) = ₹100 lakh
• Current liabilities other than bank borrowing (creditors etc.) = ₹20 lakh
• Working-capital gap = 100 − 20 = ₹80 lakh

Method I

• Promoter’s margin = 25% of WCG = 25% of 80 = ₹20 lakh
• MPBF = 75% of WCG = 75% of 80 = ₹60 lakh

Method II

• Promoter’s margin = 25% of current assets = 25% of 100 = ₹25 lakh
• MPBF = (75% of CA) − OCL = 75 − 20 = ₹55 lakh

Same business, two answers. Under Method II the promoter funds ₹5 lakh more and the bank lends ₹5 lakh less — and the current ratio improves from ~1.17 to ~1.33. That is the trade-off the methods are designed to enforce.

Why this matters before you apply

A promoter who walks in expecting the bank to fund the entire working-capital gap is always disappointed. The margin requirement is not negotiable padding — it is the structural reason MPBF exists. Knowing the number in advance lets you:

• Arrange the margin (your contribution) before the file moves
• Right-size the CC limit you ask for, so it clears credit committee cleanly
• Spot when your current ratio is too thin to support the limit you need

MPBF is only one of the methods banks use — smaller units are often assessed on the simpler turnover method, and seasonal businesses on a cash budget. And the limit the bank sanctions is operated day to day through drawing power, not the sanctioned figure alone.

Getting the working-capital assessment right is exactly where structuring help pays off — our supply chain and working-capital finance team builds the CMA data and presents the limit so it survives appraisal.

FAQ

What is MPBF?

MPBF stands for Maximum Permissible Bank Finance — the ceiling a bank will lend a business for working capital, calculated under the Tandon Committee methodology. It is based on the working-capital gap (current assets minus current liabilities other than bank borrowing), less a margin the promoter must contribute.

What is the difference between Tandon Method I and Method II?

Under Method I, the promoter brings a margin of 25% of the working-capital gap and the bank funds 75% of the gap, giving a minimum current ratio of about 1.17:1. Under Method II, the promoter brings 25% of total current assets, the bank funds the rest of the gap, and the minimum current ratio rises to about 1.33:1. Method II requires more promoter contribution and is the standard banks apply today.

How is the working-capital gap calculated?

The working-capital gap is current assets minus current liabilities other than bank borrowing. It represents the portion of inventory and receivables that is not automatically funded by creditors and other current liabilities, and therefore needs to be financed by the promoter’s margin plus bank finance.

What current ratio do banks expect for working-capital finance?

Under Tandon Method II, the structure produces a minimum current ratio of about 1.33:1, which has become the benchmark banks look for. A current ratio below this signals that the business is over-reliant on short-term borrowing and may have its limit trimmed.