Not every business is assessed for working capital the same way. A ₹2 crore trader, a ₹50 crore manufacturer and a seasonal sugar mill each have their limits worked out by a different method. Asking for a limit under the wrong framework is a common reason proposals stall. Here are the three methods Indian banks use, and how to know which one applies to you.
1. The turnover method (Nayak Committee)
The simplest method, designed for small businesses. Under the Nayak Committee norms, working-capital requirement is taken as a flat percentage of projected turnover:
Working capital = 25% of projected annual turnover Bank finance = 20% of projected turnover (the promoter brings the remaining 5% as margin)
Who it applies to: micro and small enterprises, typically for fund-based working-capital limits up to ₹5 crore. It is quick, formula-driven, and avoids detailed current-asset analysis.
The catch: it assumes a roughly three-month working-capital cycle. A business with a much longer cycle may find 20% of turnover inadequate and should be assessed on MPBF instead.
2. The MPBF method (Tandon Committee)
The detailed method for larger borrowers, built on the actual balance sheet rather than a turnover rule of thumb. It calculates the working-capital gap and applies a margin (Method II is the standard), producing both the limit and a minimum current ratio.
Who it applies to: mid-market and larger borrowers, generally for limits above ₹5 crore, where the bank wants to size finance to the genuine current-asset position.
Why it is stricter: it ties the limit to inventory and receivables you can actually justify, and enforces a current ratio of about 1.33:1.
3. The cash budget method
For businesses whose working capital does not flow evenly through the year. Instead of a ratio, the bank funds the peak cash deficit projected in a month-by-month cash budget.
Who it applies to: seasonal and project-driven businesses — sugar, agro-processing, construction, contractors, edible oil — where requirements spike and trough. The borrower submits projected monthly inflows and outflows, and the limit is set to the largest cumulative gap.
Why it fits them: a flat percentage of turnover would either starve the business at peak or over-fund it off-season. The cash budget matches finance to the actual timing of need.
Choosing the right method
| Method | Best for | Limit range | Basis |
|---|---|---|---|
| Turnover (Nayak) | Micro & small units | Up to ₹5 cr | 20% of projected turnover |
| MPBF (Tandon) | Mid-market & larger | Above ₹5 cr | Working-capital gap, current ratio |
| Cash budget | Seasonal / project businesses | Any | Peak monthly cash deficit |
The method is not just an accounting choice — it decides how much you get. A long-cycle manufacturer assessed on the turnover method is usually under-funded; a steady trader assessed on MPBF is usually over-engineered.
The right approach is to match the method to the business’s cash-flow pattern and present it that way from the start. Our working-capital and supply-chain finance team selects the method, builds the CMA data or cash budget and structures the limit to clear credit committee — and where the cycle is the constraint, layers in TReDS or supply-chain finance.
FAQ
What are the methods banks use to assess working capital?
Indian banks primarily use three methods: the turnover method (Nayak Committee) for small units, where the limit is 20% of projected turnover; the MPBF method (Tandon Committee) for larger borrowers, based on the working-capital gap and current ratio; and the cash budget method for seasonal or project businesses, which funds the peak monthly cash deficit.
When is the turnover method used instead of MPBF?
The turnover method is generally used for micro and small enterprises with fund-based working-capital limits up to ₹5 crore. Above that, or where the working-capital cycle is unusually long, banks switch to the more detailed MPBF method that sizes finance to the actual current-asset position.
What is the cash budget method?
The cash budget method assesses working-capital finance by funding the peak cash deficit shown in a borrower’s month-by-month projected cash flows, rather than applying a turnover percentage or current-asset formula. It suits seasonal and project-driven businesses whose requirements rise and fall sharply through the year.
How much working capital does the turnover method allow?
Under the Nayak Committee turnover method, total working capital is taken as 25% of projected annual turnover, of which the bank funds 20% and the promoter contributes 5% as margin. It assumes roughly a three-month working-capital cycle.
Working on something in this area? Get a straight read from a partner.
Book a consultation →