Introduction

In the world of business finance, access to timely funds can make or break growth. Among various tools developed to assess and streamline credit lending, the Maximum Permissible Bank Finance (MPBF) remains a foundational concept—especially in the realm of working capital financing.

Understanding what is maximum permissible bank finance is crucial for businesses aiming to secure structured and bank-approved working capital limits such as cash credit limits and working capital term loans. Whether you’re an entrepreneur, finance student, or a loan consultant, this guide dives deep into MPBF’s background, its methodology, and modern-day relevance in today’s lending ecosystem.

History & Background

The concept of determining a borrower’s credit eligibility through Maximum Permissible Bank Finance (MPBF) was first proposed by the Tandon Committee in 1975, constituted by the Reserve Bank of India (RBI). The committee’s objective was to streamline bank lending for working capital loans and ensure financial discipline among borrowers.

Before MPBF, banks largely followed discretionary lending practices, which often resulted in over-financing, diversion of funds, and inefficient working capital utilization. To address this, MPBF was introduced as a formula-based and structured approach to assess the genuine working capital requirement of a business.

Under this framework, banks primarily sanctioned funds in the form of cash credit (CC) limits, ensuring that borrowers maintained adequate contribution through their own funds rather than relying entirely on bank finance.

MPBF was recommended as a scientific and disciplined method to calculate the working capital finance a business genuinely requires. Although the RBI withdrew the mandatory implementation of MPBF in 1997, the principles laid down by the Tandon Committee continue to influence how banks assess working capital limits, especially for MSMEs and growing businesses.

Even today, while evaluating eligibility for secured or unsecured working capital loans, lenders often refer to MPBF logic to decide the appropriate funding structure and exposure.

What is Maximum Permissible Bank Finance?

Maximum Permissible Bank Finance (MPBF) refers to the maximum amount of working capital finance that a bank is willing to extend to a borrower, based on the business’s financial position, operating cycle, and current assets–liabilities structure. The objective of MPBF is to ensure that a company does not rely entirely on bank funding and contributes a reasonable portion of its own funds toward working capital needs.

The concept of maximum permissible bank finance promotes financial discipline by maintaining a healthy debt-equity balance and preventing excessive leverage. From a lender’s perspective, MPBF helps control risk exposure, while for businesses, it creates a structured framework for managing short-term liquidity.

In practical terms, MPBF determines the upper limit of bank-funded working capital, which is commonly sanctioned through facilities such as cash credit limits or structured working capital arrangements.

Methods of Maximum Permissible Bank Finance

The Tandon Committee introduced three separate methods for assessing the maximum amount of bank finance that can be permitted:

Method I

• • Borrower must bring 25% of the total current assets from long-term sources (equity or long-term debt).

• • Bank can finance the remaining 75%.

Formula:

MPBF is derived by taking 75% of Total Current Assets and then subtracting Other Current Liabilities (not including bank borrowings)

Method II

• • The borrower is required to bring in 25% of the total Working Capital Gap (WCG) from their own funds.

• • Bank funds the remaining 75%.

Working Capital Gap = Current Assets – Current Liabilities (excluding bank borrowings)

Formula:

MPBF = 75% of (Current Assets – Current Liabilities)

This method became the most widely used and acceptable among banks and NBFCs.

Method III

• • Not commonly implemented.

• • Core current assets (minimum assets needed for uninterrupted operations) must be funded fully by the borrower.

• • Remaining gap funded as per method II.

Formula:

MPBF = 75% × (Current Assets – Core Current Assets) – Other Current Liabilities

The 3 methods of maximum permissible bank finance provide varying degrees of conservative lending. Method II is still considered industry standard in many assessments.

Example of Maximum Permissible Bank Finance

Let’s break it down with an example to understand how Method II is used to calculate maximum permissible bank finance: 

• • Current Assets = Rs. 100 lakh

• • Current Liabilities (excluding bank borrowing) = Rs. 30 lakh

The Working Capital Gap amounts to ₹70 lakh, calculated by subtracting ₹30 lakh (current liabilities) from ₹100 lakh (total current assets).

Borrower’s Contribution = 25% of the Working Capital Gap (Rs. 70 lakh) = Rs. 17.5 lakh

MPBF = 70 – 17.5 = Rs. 52.5 lakh

So, in this case, the maximum permissible bank finance the borrower is eligible for is Rs. 52.5 lakh.

Modern Relevance of MPBF

Although the Reserve Bank of India (RBI) withdrew the mandatory application of Maximum Permissible Bank Finance (MPBF) after 1997, the framework continues to hold strong relevance in modern banking practices. Even today, many banks, NBFCs, and financial consultants rely on the maximum permissible bank finance model—particularly the Tandon Committee Method II—as a baseline for assessing a borrower’s working capital eligibility and creditworthiness.

In practice, small and medium enterprises (SMEs/MSMEs) often request banks to calculate maximum permissible bank finance using Tandon Committee methods, especially while applying for large working capital limits or enhanced credit facilities. This structured approach helps businesses present their funding requirements in a transparent and bank-acceptable manner.

The computation of maximum permissible bank finance for working capital continues to serve an important risk-management function. It ensures that borrowers do not over-leverage their balance sheets, while banks remain protected against asset quality deterioration and non-performing assets (NPAs).

Benefits of Using MPBF

• •  Encourages financial discipline in borrowers

• •  Standardized approach to avoid over-lending

• •  Easy integration with CMA data analysis

• •  Trusted legacy method, even in modern loan evaluations

While MPBF isn’t the only method in use today, it remains a reliable model, especially for consultants helping clients with structured financing.

Limitations of MPBF

• •  Not suitable for seasonal or fluctuating businesses

• •  Rigid formula may not match dynamic market needs

• •  Focuses more on balance sheet than actual cash flow patterns

Today, some banks prefer the Assessed Bank Finance (ABF) method or cash budget method, which considers turnover, cash flow, and operational realities more directly.

How is Maximum Permissible Banking Finance Calculated Today?

While the MPBF framework still influences decisions, many banks now use:

• • Projected turnover method

• • Cash budget method

• • Drawing power calculation using stock and receivables

However, even these approaches often draw indirectly from the maximum permissible bank finance model’s logic.

Practical Tips for Businesses

• • Maintain clear distinction between current assets and liabilities.

• • Avoid relying solely on bank finance—maintain a margin.

• • Understand your working capital cycle to better justify loan amount.

• • Keep CMA data updated and clean.

If you’re unsure how to approach it, consult a professional to help you calculate maximum permissible bank finance by Tondon Committee standards.

Frequently Asked Questions (FAQs)

Q1: What is maximum permissible bank finance?
A: It is the highest loan limit a bank may offer to fund your working capital needs, based on your current financials.

Q2: Who introduced the concept of MPBF?
A: The concept of maximum permissible bank finance was introduced by the Tandon Committee in 1975.

Q3: How do banks calculate MPBF today?
A: Though MPBF isn’t mandatory, many banks use modified versions of Method II or rely on modern tools like turnover and cash budget methods.

Q4: Can I request MPBF calculation for loan applications?
A: Yes, many NBFCs and consultants offer services to calculate MPBF and prepare CMA reports.

Q5: What documents are required?
A: Balance Sheet, Profit & Loss statement, GST returns, bank statements, projected financials, etc.

Final Words On Maximum Permissible Bank Finance

The maximum permissible bank finance concept may be decades old, but its structured approach to loan evaluation still holds strong. Whether you’re seeking working capital finance or understanding your business’s borrowing power, learning how to calculate maximum permissible bank finance by Tondon Committee can give you a competitive edge.

If you want help preparing CMA data or computing your MPBF accurately, feel free to reach out to our expert team at WorkingCapitalLoan.co.in.