MPBF and the Tandon Committee Methods
Same balance sheet, three answers. Here is how each Tandon method sets the borrower's share and the bank's limit.
Maximum Permissible Bank Finance (MPBF) is the most a bank will lend a borrower for working capital. The idea comes from the Tandon Committee, and its three methods are among the most tested calculations in the CCP paper.
The rule behind all three is the same: bank credit should support the borrower's own money, not replace it. The methods differ only in how much the borrower must bring. Below, all three are worked on one balance sheet so you can see the difference.
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The Tandon Committee in Brief
- check_circleFormally the Working Group to Frame Guidelines for Follow-up of Bank Credit, set up by RBI in 1974 under P. L. Tandon.
- check_circleIt submitted its report in August 1975.
- check_circleIt moved banks from security-based lending to need-based lending. Its view: the best security for a bank loan is a business that works well.
- check_circleIt set norms for how much raw material, work in progress, finished goods and receivables a borrower should hold.
- check_circleIt asked large borrowers for regular reports, including quarterly information system (QIS) returns and stock and receivables statements.
- check_circleIts lending framework shaped Indian bank lending for more than 20 years. RBI withdrew the mandatory rule in 1997, but banks still use MPBF, often in a modified form.
The Building Blocks
- Current assets (CA)
- Raw material, work in progress, finished goods, receivables and other current assets, at the levels the bank accepts as reasonable.
- Other current liabilities (OCL)
- Current liabilities other than bank borrowings, such as trade creditors and expenses payable.
- Working capital gap (WCG)
- CA − OCL. The bank and the borrower fill this between them.
- Core current assets (CCA)
- The minimum level of current assets a business always carries. Only the third method uses it.
The Three Methods
First
Borrower must bring
25% of the working capital gap
MPBF formula
75% × (CA − OCL)
Second
Borrower must bring
25% of total current assets
MPBF formula
(75% × CA) − OCL
Third
Borrower must bring
All core current assets, plus 25% of the rest of the current assets
MPBF formula
75% × (CA − CCA) − OCL
| Method | Borrower must bring | MPBF formula |
|---|---|---|
| First | 25% of the working capital gap | 75% × (CA − OCL) |
| Second | 25% of total current assets | (75% × CA) − OCL |
| Third | All core current assets, plus 25% of the rest of the current assets | 75% × (CA − CCA) − OCL |
One Balance Sheet, Three Answers
A manufacturer's projected position, in ₹ lakh. Current assets total 150: raw material 40, work in progress 10, finished goods 30, receivables 60, other 10. Other current liabilities are 40. Core current assets are 30.
Current assets (CA)
First method
150
Second method
150
Third method
150
Less: other current liabilities
First method
40
Second method
40
Third method
40
Working capital gap
First method
110
Second method
110
Third method
110
Borrower's minimum contribution
First method
25% × 110 = 27.5
Second method
25% × 150 = 37.5
Third method
30 + 25% × (150 − 30) = 60
MPBF (gap − contribution)
First method
82.5
Second method
72.5
Third method
50
| Step | First method | Second method | Third method |
|---|---|---|---|
| Current assets (CA) | 150 | 150 | 150 |
| Less: other current liabilities | 40 | 40 | 40 |
| Working capital gap | 110 | 110 | 110 |
| Borrower's minimum contribution | 25% × 110 = 27.5 | 25% × 150 = 37.5 | 30 + 25% × (150 − 30) = 60 |
| MPBF (gap − contribution) | 82.5 | 72.5 | 50 |
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What Each Method Does to the Current Ratio
If the bank lends the full MPBF, total current liabilities become OCL plus bank finance. Same borrower, in ₹ lakh.
First
Total current liabilities
40 + 82.5 = 122.5
Current ratio (CA ÷ CL)
about 1.22 : 1
Second
Total current liabilities
40 + 72.5 = 112.5
Current ratio (CA ÷ CL)
1.33 : 1
Third
Total current liabilities
40 + 50 = 90
Current ratio (CA ÷ CL)
about 1.67 : 1
| Method | Total current liabilities | Current ratio (CA ÷ CL) |
|---|---|---|
| First | 40 + 82.5 = 122.5 | about 1.22 : 1 |
| Second | 40 + 72.5 = 112.5 | 1.33 : 1 |
| Third | 40 + 50 = 90 | about 1.67 : 1 |
Why the Second Method Always Gives 1.33
Under the second method the borrower funds 25% of current assets from long-term money, so current liabilities can be at most 75% of current assets. 100 ÷ 75 = 1.33. That is why 1.33 : 1 is called the minimum current ratio under the second method, whatever the balance sheet. The second method is the one banks have used most; the third was recommended but not widely enforced because it asked so much of borrowers.
Solving an MPBF Question in the Exam
- 1
Separate bank borrowings out
Strip any existing bank finance out of current liabilities. Only other current liabilities go into the gap.
- 2
Find the working capital gap
Current assets minus other current liabilities.
- 3
Work out the borrower's share
25% of the gap (first), 25% of current assets (second), or core current assets plus 25% of the remaining current assets (third).
- 4
Subtract
MPBF is the gap minus the borrower's share. Check the method the question names before you subtract.
Common Traps
Leaving the existing bank overdraft inside current liabilities shrinks the gap and gives a wrong, smaller MPBF. Taking 25% of the gap when the question asks for the second method gives the first-method answer instead. And under the third method, the 25% applies only to current assets above the core level, not to all current assets.
FAQs
What is MPBF in banking?expand_more
Maximum Permissible Bank Finance: the most a bank will lend for working capital. It is the working capital gap minus the share the borrower must fund from long-term sources.
Which Tandon method is most commonly used?expand_more
The second method, where the borrower funds at least 25% of total current assets. It leads to a minimum current ratio of 1.33 : 1.
When was the Tandon Committee set up?expand_more
In 1974, by RBI, under the chairmanship of P. L. Tandon. It submitted its report in August 1975.
Is MPBF mandatory today?expand_more
No. RBI withdrew the mandatory requirement in 1997. Banks still use MPBF, or a modified version of it, in their own credit policies.
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