Maximum Permissible Bank Finance (MPBF)

The Tandon Committee had suggested three methods for determining the maximum permissible bank finance(MPBF).

Method 1: MPBF=0.75(CA-CL)

Method 2: MPBF=0.75(CA)-CL

Method 3: MPBF=0.75(CA-CCA)-CL

The following are the data of Mercury Company Limited

MPBF for Mercury Company Limited as per above methods are:

Method 1: 075(CA-CL) = 075(50-15) = Rs.26.25 million

Method 2: 0.75(CA)-CL = 0.75(50)-15 = Rs.22.5 million

Method 3: 0.75(CA-CCA)-CL = 075(50-20)-15 = Rs.75 million

Method 2 is adopted and  the minimum current ratio works out to be 1.33.

Under special consideration, within the MPBF so arrived at in terms of the present guidelines, banks/consortia/syndicates are required to restrict sanction of cash credit limits to borrowers up to a certain portion (25% of the MPBF).Where borrowers desire to avail of bank credit for the balance portion (75% of the MPBF), or any part thereof, this will be considered on merit by banks/consortia/syndicates in the form of a short term loan repayable on demand for working capital purpose for a stipulated period.