Priya runs a garment manufacturing unit and applies for a ₹50 lakh cash credit limit. Her bank comes back with ₹38 lakhs. She assumes it’s negotiable andd maybe even arbitrary. Behind that figure is a structured calculation that every Indian bank credit officer runs before sanctioning a single rupee of working capital. It’s called MPBF i.e. Maximum Permissible Bank Finance.
All characters and scenarios are fictional and created purely for educational illustration.
What MPBF Actually Is
MPBF is the maximum amount of working capital finance a bank is permitted to extend to a borrower. The concept was introduced by the Tandon Committee, constituted by the RBI in July 1974, to bring discipline into working capital lending. The core principle is straightforward, a bank will not finance 100% of your working capital requirement. You must bring in a portion from your own long-term funds. The bank supplements your resources. It does not replace them.
Although the RBI withdrew the mandatory application of MPBF in 1997, the framework remains deeply embedded in how Indian banks assess working capital limits today particularly for MSMEs. Most banks continue to use it, especially Method II, as their standard baseline.
The Two Methods You Must Know
The Tandon Committee proposed three methods. Indian banks today primarily use Method I and Method II.
Method I: The More Liberal Approach
Here, the borrower must contribute 25% of the Working Capital Gap from long-term funds. The bank finances the remaining 75%.
Working Capital Gap = Total Current Assets − Current Liabilities (excluding bank borrowings)
MPBF = 75% × Working Capital Gap
The minimum current ratio under this method is 1:1. Banks use this for smaller limits or borrowers with strong track records.
Method II: The Standard Most Banks Apply
Here, the borrower must contribute 25% of Total Current Assets not just 25% of the gap. This is a larger margin requirement, which means the bank lends less.
MPBF = (75% × Total Current Assets) − Current Liabilities (excluding bank borrowings)
The minimum current ratio under this method is 1.33:1. The Chore Committee (1979) further recommended that all borrowers with working capital limits of ₹50 lakhs and above be placed under Method II ensuring stronger borrower skin in the game.
Method II consistently gives a lower MPBF than Method I. That is why borrowers are often surprised by the sanctioned limit.
Example
Assume Total Current Assets = ₹100 lakhs and Other Current Liabilities = ₹20 lakhs.
Under Method I: MPBF = 75% × (100 − 20) = ₹60 lakhs
Under Method II: MPBF = (75% × 100) − 20 = ₹55 lakhs
Same business and same balance sheet but two different limits, depending on which method your bank applies.
For Bankers: What to Watch Beyond the Formula
MPBF gives you the ceiling not the recommendation. Always cross-verify the calculated limit against the borrower’s actual operating cycle, their debtor and creditor aging, and their banking turnover. A borrower can have a high MPBF on paper but show slow inventory movement and stretched collections in practice. The formula is the starting point. Credit judgment is what completes the picture.
The Key Takeaway
If you are a business owner, understanding MPBF tells you exactly how your bank sees your balance sheet and what you need to strengthen to justify a higher limit. If your current assets are bloated with slow inventory or old receivables, your MPBF will be lower than your actual cash need. Clean up your working capital quality first. The limit follows.
👉 Do you know which MPBF method your bank is using to calculate your working capital limit?
For informational and educational purposes only.
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