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Maximum Permissible Bank Finance (MPBF)
Maximum Permissible Bank Finance (MPBF) is a method introduced by the Reserve Bank of India (RBI)
based on the recommendations of the Tandon Committee. It is used by banks to determine the maximum
amount of working capital finance that can be sanctioned to a borrower. The concept ensures that
borrowers maintain a proper margin of their own funds in current assets and do not depend entirely
on bank finance. By fixing limits through MPBF, banks promote financial discipline, encourage
efficient use of working capital, and reduce the risk of over-financing.
Objectives of Maximum Permissible Bank Finance (MPBF)
Maximum Permissible Bank Finance (MPBF) aims to provide adequate working capital to borrowers while
avoiding over-financing. It promotes financial discipline by ensuring that businesses use their own
funds along with bank finance. MPBF protects banks from excessive credit risk and encourages
efficient management of current assets and liabilities. By requiring a minimum contribution from
promoters, it ensures proper utilization of resources and strengthens financial stability for both
borrower and lender.
Benefits of Maximum Permissible Bank Finance (MPBF)
| *Provides enough working capital without excess. |
*Offers a systematic method for financing decisions. |
| *Ensures promoters invest their own funds too. |
*Helps banks keep control over utilization of funds. |
| *Minimizes chances of over-financing and defaults. |
*Motivates businesses to plan working capital effectively. |
| *Promotes proper management of assets and liabilities. |
*Restricts diversion of funds to non-business activities. |
| *Improves financial soundness of both banks and borrowers. |
*Provides a balance between bank finance and own funds, supporting healthy
expansion. |
Types of Maximum Permissible Bank Finance (MPBF)
"Maximum Permissible Bank Finance (MPBF) is a concept introduced by the
Tandon Committee (1974) to standardize the way banks in India assess working capital finance
requirements of borrowers. Since working capital needs vary from business to business, the
committee suggested three lending methods. These methods ensure that the borrower contributes a
certain portion of the funds from their long-term sources (equity, reserves, term loans, etc.),
while the bank provides finance for the remaining gap."
First Method of Lending
- Working Capital Gap (WCG) = Current Assets (CA) - Current Liabilities (CL other than
bank borrowings).
- Borrower must bring 25% of WCG from long-term funds / own funds
- Balance 75% of WCG can be financed by bank.
Second Method of Lending
- Borrower should finance 25% of Current Assets (CA) from long-term funds / own funds.
- Bank will finance the balance.
Third Method of Lending
- Borrower should finance 25% of Current Assets (CA) AND core current assets fully from
long-term funds.
- Bank finances the rest.
| METHOD |
BORROWER'S CONTRIBUTION |
BANK FINANCE |
| 1 |
25% of WCG |
75% of WCG |
| 2 |
25% of CA |
75% of CA - CL |
| 3 |
25% of CA + 100% Core CA |
Balance of CA after borrower + CL |
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