How to Calculate MPBF: Maximum Permissible Bank Finance Explained Step by Step
MPBF determines how much working capital finance a bank can extend. This guide breaks down the Tandon Committee methods, walks through a real calculation, and explains what credit officers actually look for.
What is MPBF?
Maximum Permissible Bank Finance (MPBF) is the upper ceiling of working capital credit that a bank can sanction to a borrower. The concept was introduced by the Tandon Committee (1975) and later refined by the Chore Committee (1979) to bring discipline and uniformity to working capital lending by banks in India.
The fundamental principle is simple: a borrower must bring in a minimum margin (promoter's contribution) towards working capital, and the bank finances only the permissible balance.
The Three Methods of MPBF Calculation
Method I — First Method of Lending
Under Method I, the bank finances up to 75% of the working capital gap.
Working Capital Gap = Total Current Assets − Total Current Liabilities (other than bank borrowings)
MPBF (Method I) = 0.75 × Working Capital Gap
The borrower must bring in a minimum margin of 25% of the working capital gap from long-term sources.
Example:
- Total Current Assets: ₹100 lakhs
- Current Liabilities (excl. bank borrowings): ₹40 lakhs
- Working Capital Gap: ₹60 lakhs
- MPBF = 0.75 × 60 = ₹45 lakhs
- Promoter's margin required: ₹15 lakhs
Method II — Second Method of Lending
Method II requires the borrower to bring in a minimum of 25% of total current assets from long-term sources.
MPBF (Method II) = Total Current Assets × 0.75 − Current Liabilities (other than bank borrowings)
Example:
- Total Current Assets: ₹100 lakhs
- Current Liabilities (excl. bank borrowings): ₹40 lakhs
- 75% of Current Assets: ₹75 lakhs
- MPBF = 75 − 40 = ₹35 lakhs
- Promoter's margin: ₹25 lakhs
Method II is more conservative than Method I and is the most commonly used method by banks today.
Method III — Third Method of Lending
Method III requires the borrower to bring in a minimum of 25% of current assets and the entire core current assets from long-term sources.
Core current assets represent the permanent or minimum level of current assets that the business needs at all times (e.g., minimum raw material stock, permanent debtors).
This method was rarely prescribed and is largely academic today.
Step-by-Step MPBF Calculation (Method II)
Let us walk through a realistic calculation.
Company: ABC Manufacturing Ltd
| Particulars | Amount (₹ Lakhs) |
|---|---|
| Raw Materials | 45.00 |
| Work-in-Progress | 12.00 |
| Finished Goods | 28.00 |
| Stores & Spares | 5.00 |
| Sundry Debtors | 38.00 |
| Cash & Bank Balances | 2.00 |
| Other Current Assets | 5.00 |
| Total Current Assets | 135.00 |
| Sundry Creditors | 30.00 |
| Advances from Customers | 5.00 |
| Statutory Liabilities | 8.00 |
| Other Current Liabilities | 7.00 |
| Total Current Liabilities (excl. bank) | 50.00 |
Computation:
- 75% of Total Current Assets = 135 × 0.75 = ₹101.25 lakhs
- Less: Current Liabilities = ₹50.00 lakhs
- MPBF = ₹51.25 lakhs
- Minimum promoter's margin required = 135 × 0.25 = ₹33.75 lakhs
What Banks Check Beyond the Formula
The MPBF formula gives a ceiling. The actual sanctioned limit may be lower based on:
- Inventory and debtor norms — Banks prescribe holding period norms. If your inventory is 90 days but the industry norm is 60, the bank will assess current assets at the lower norm.
- Drawing power — Even after sanction, the monthly drawing power based on stock and debtor statements determines how much you can actually draw.
- Credit rating — A lower rating means the bank may apply a stricter margin.
- Track record — New businesses may get lower limits despite a higher MPBF calculation.
- Consortium/multiple banking — Your MPBF is shared across all banks. Each bank finances a proportionate share.
Nayak Committee Norms for Small Enterprises
For MSMEs with fund-based working capital limits up to ₹5 crores, banks often use the Nayak Committee recommendation: working capital requirement is assessed at 25% of projected annual turnover, of which the bank finances 80% (i.e., 20% of turnover).
This simplified method avoids the complexity of detailed MPBF computation for smaller borrowers.
Why Getting MPBF Right Matters
An incorrect MPBF calculation can lead to:
- Under-financing: The business doesn't get enough working capital, leading to operational stress
- Over-financing: The bank extends more than needed, increasing NPA risk
- Loan rejection: If the projected current assets are unrealistic or inconsistent with sales projections
CMA Report automates MPBF computation under both Method I and Method II, applying the correct formulas to your financial data and flagging inconsistencies before you submit to the bank.