by Maximum Permissible Banking Finance in Indian Banking Sector. MPBF is mainly a method of working capital assessment. As per the recommendations of Tandon Committee, the corporate is discouraged from accumulating too much of stocks of current assets and are recommended to move towards very lean inventories and receivable levels. This is where MPBF comes into picture. There are 2 methods for MPBF calculation.
Major recommendations of the Tandon committee were as follows:
Assessment of need-based credit of the borrower on a rational basis on the basis of their business plans.
Bank credit would only be supplementary to the borrower’s resources and not replace them, i.e., banks would not finance one hundred percent of borrower’s working capital requirement.
Bank should ensure proper end use of bank credit by keeping a closer watch on the borrower’s business, and impose financial discipline on them.
Working capital finance would be available to the borrowers on the basis of industry wise norms (prescribe first by the Tandon Committee and then by Reserve Bank of India) for holding different current assets, viz.
- Raw materials including stores and others items used in manufacturing process.
- Stock in Process.
- Finished goods.
- Accounts receivables.
Credit would be made available to the borrowers in different components like cash credit; bills purchased and discounted working capital, term loan, etc., depending upon nature of holding of various current assets.
In order to facilitate a close watch under operation of borrowers, bank would require them to submit at regular intervals, data regarding their business and financial operations, for both the past and the future periods.
MPBF Calculation: (Total Current Assets – Other Current Liabilities) – 25/100*(Total Current Assets – Other Current Liabilities)
Or MPBF = 75/100*Working Capital Gap
Depending on the size of credit required, two methods of maximum permissible banking finance are in practice to fund the working capital needs of the corporate.
MPBF Method I:
For corporate whose credit requirement is less than Rs.10 lakhs, banks can find the working capital required. Working capital is calculated as difference of total current assets and current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF). Banks can finance a maximum of 75 per cent of the required amount and the rest of the balance has to come out of long-term funds.
MPBF = 75% of (Current assets – Current liabilities other than bank borrowings)
The borrowing firm should provide the remaining 25% from long-term sources.
The minimum current ratio under this method works out to 1: 1.
MPBF Method II:
For corporate with credit requirement of more than Rs.10 lakhs this method is used. In this method, the borrower finances minimum of 25% of its total current assets out of long-term funds. The rest will be provided by the bank through MPBF. Thus, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets.
MPBF = (75% of Current assets) – (Current liabilities other than bank borrowings)
The borrowing firm should raise finance to the extent of 25% of current assets from long-term sources.
The minimum current ratio under this method works out to 1.33: 1.
MPBF Method III:
MPBF = [75% of (Current assets – Core current assets)] – Current liabilities other than bank borrowings
The borrower should contribute 100% core current assets and 25% of balance current assets from long-term sources.
A minimum current ratio under this method works out to above 1.5: 1.
