Maximum Permissible Bank Finance (MPBF)

Maximum Permissible Bank Finance (MPBF): Maximum Permissible Bank Finance (MPBF) is the ceiling on working-capital finance a bank extends to a borrower. Under the Tandon Committee methods it is derived from the working-capital gap after a promoter margin funded from long-term sources; under the Nayak turnover method for smaller borrowers, bank finance is at least 20% of projected annual turnover.

Why Maximum Permissible Bank Finance (MPBF) matters in credit and collections

• The working-capital gap is current assets less current liabilities other than bank borrowings; it is the funding need that bank finance and the promoter's margin must cover.
• Tandon Method I finances 75% of the gap; Method II requires the borrower to fund 25% of total current assets from long-term sources; Method III additionally requires core current assets to be funded long-term.
• The Nayak turnover method assesses working capital at 25% of projected annual turnover, of which bank finance is at least 20% and the borrower's margin 5%.
• RBI withdrew MPBF as a mandatory prescription in 1997 and left banks free to choose their method, but the Tandon and turnover methods remain the basis of most CMA-based assessments.

The Tandon methods and the Nayak turnover method

All Tandon methods start from the working-capital gap: current assets — inventory, receivables and other current assets — minus current liabilities other than bank borrowings, chiefly trade creditors and provisions. Under Method I, the borrower funds 25% of the gap from long-term sources and the bank can finance the remaining 75%. Under Method II, the borrower funds 25% of total current assets from long-term sources, so MPBF equals 75% of current assets less other current liabilities. Method III goes further and requires the core, permanently held part of current assets to be funded long-term before the 25% margin is applied to the rest.

Each method asks more of the borrower than the last, so MPBF falls from Method I to Method III. Method II became the most widely used, and the current ratio it implies — about 1.33 — remains a familiar benchmark in working-capital appraisal. The calculation is done on projected figures for the coming year, with holding levels of inventory and receivables tested against past performance and industry norms, which is why the CMA data format includes a dedicated MPBF computation.

For smaller borrowers the Nayak Committee proposed a turnover method: working capital is assessed at 25% of projected annual turnover, the borrower brings in 5% as margin and the bank finances at least 20%. RBI's directions on lending to the MSME sector carry this forward for micro and small enterprise borrowers up to the limit specified there. Once MPBF fixes the sanctioned limit, actual drawings are controlled month to month through drawing power from stock and receivables.

How credit teams apply MPBF today

• Choose the assessment method by segment in policy — the turnover method for smaller MSMEs, gap-based methods for larger businesses, and cash-budget methods where cycles are irregular.
• Test projected inventory and receivable holding periods against the borrower's own history and peers before accepting them.
• Reconcile projected turnover with GST returns and bank credits rather than relying on CMA projections alone.
• Record the method used, the margin and any deviation in the CAM.
• Link the sanctioned limit to drawing power so that actual drawings follow the current assets that support them.

Maximum Permissible Bank Finance (MPBF) — frequently asked questions