MPBF Method: How Banks Set Working Capital Limits

You ask your bank for a ₹1 crore cash credit limit. The officer comes back with ₹62 lakh. No explanation you can use, just a number. That number has a name: MPBF, Maximum Permissible Bank Finance. It is the maximum working-capital loan a bank will sanction you, computed from your own current assets and current liabilities.

The arithmetic comes from three RBI committees. The Tandon Committee (1975) gave three methods: Method 1 lets the bank fund 75% of your working-capital gap, Method 2 funds 75% of current assets minus current liabilities, and Method 3 (never used in practice) excludes core current assets first. The Chore Committee (1980) made Method 2 the standard for all borrowers. The Nayak Committee (1992) gave smaller borrowers a simpler rule: working-capital finance of at least 20% of projected annual turnover, for credit limits up to ₹5 crore per case.

This guide works every method with real numbers, so you can check the bank's math before you sign. A free calculator and an Excel sheet with visible formulas are included below.

What Is MPBF in Banking?

MPBF is the maximum amount of working-capital finance a bank is permitted to extend to a borrower, calculated from the borrower's current assets and current liabilities. Think of it as the bank's answer to one question: after you put in your own share, how much of your day-to-day funding gap are we willing to cover?

The logic behind it is simple. A business needs working capital (stock, debtors, cash) to run. Part of that should be funded by the owner's own long-term money. The bank funds the rest, but only up to the MPBF limit. Ask for more than the MPBF and the bank will either cut your request or ask you to bring in more of your own funds first. The MPBF computation sits at the heart of every working-capital appraisal in Indian banking, and it feeds directly into the credit appraisal memorandum the officer prepares for your loan.

What Is the Full Form of MPBF?

The full form of MPBF is Maximum Permissible Bank Finance. In Hindi banking parlance you will see it written as अधिकतम स्वीकार्य बैंक वित्त, and the concept is identical: it is a ceiling, not a promise. A sanctioned limit can be lower than the MPBF (banks often sanction less for weak borrowers), but it should not be higher without the borrower bringing in additional long-term funds.

Who Created the MPBF Methods?

Three RBI committees built the MPBF framework, one on top of the other. You need about ninety seconds of history to understand why banks compute it the way they do.

The Tandon Committee (1974–75). The RBI set up the Study Group to Frame Guidelines for Follow-up of Bank Credit under Prakash Tandon in 1974; it submitted its report in August 1975. Tandon's core idea: bank credit should follow the borrower's genuine production needs, not just the security offered. It laid down three methods of computing MPBF, each stricter than the last, with the borrower required to contribute a minimum share from long-term sources.

The Chore Committee (1979–80). RBI's working group under K. B. Chore reviewed Tandon's framework and made a decisive call: place all borrowers under Tandon's Method II. That single recommendation is why Method II is the working norm in Indian banks to this day. Chore also said any borrowing beyond the Method II figure should be segregated as a Working Capital Term Loan (WCTL), repayable in half-yearly instalments over five years or less, at a higher interest rate.

The Nayak Committee (1991–92). Constituted by the RBI in December 1991 under Deputy Governor P. R. Nayak, it dealt with small borrowers. Its turnover method scrapped the balance-sheet math for smaller limits: working-capital finance of at least 20% of projected annual turnover. The RBI's master circular on lending to the MSME sector carries this norm to this day (section 4.12.2), with the coverage since raised from ₹2 crore to ₹5 crore of credit limit per case.

One more milestone worth knowing: in October 1993, the RBI gave banks operational autonomy on inventory and receivables norms for borrowers with aggregate fund-based working-capital limits of ₹1 crore and above, while retaining the 1.33:1 minimum current ratio. The direction of travel since has been consistent: banks get flexibility, but the Tandon–Chore arithmetic remains the reference point.

The decisive break came in April 1997. The RBI did away with the tight regulation of credit and withdrew the prescription of maximum permissible bank finance, giving banks full operational freedom in working-capital assessment. So the Tandon–Chore arithmetic survives as the reference framework banks still teach and use by convention, not as a live RBI mandate. Any article that presents MPBF as a current RBI rule is about thirty years out of date.

What Is the MPBF Formula?

There are three Tandon formulas. Here they are, plainly stated, before we work through them with numbers.

Two details most online guides get wrong or skip. First, current liabilities here mean current liabilities excluding bank borrowings. You do not count the very loan you are computing. Second, core current assets in Method III means the permanent minimum pipeline of raw material, work-in-progress, finished goods, and stores that a business must always carry. Method III was never implemented in practice, so you will rarely see it outside textbooks, but you should know it exists because examiners and old PDFs keep citing it.

How Is MPBF Calculated? (Worked Example)

Meet Sharma Textiles Pvt Ltd, a fictional Surat-based fabric trader. All figures are in ₹ lakh. Its current liabilities exclude bank borrowings, as the rule requires.

• Current Assets (CA): 120 (stock 70, debtors 40, cash 10)
• Current Liabilities (CL): 40 (creditors 30, other current liabilities 10)
• Core Current Assets (CCA): 20
• Projected annual turnover: 400

Method I. The working-capital gap is CA minus CL: 120 − 40 = 80. The bank funds 75% of the gap: 0.75 × 80 = 60. Sharma brings the remaining 25% (₹20 lakh) from long-term funds. Result: MPBF = ₹60 lakh.

Method II. Take 75% of total current assets, then subtract current liabilities: (0.75 × 120) − 40 = 90 − 40 = 50. Here Sharma must bring 25% of total current assets (₹30 lakh) from long-term funds. Result: MPBF = ₹50 lakh.

Method III. Exclude the core current assets first: 0.75 × (120 − 20) − 40 = 75 − 40 = 35. Result: MPBF = ₹35 lakh (textbook only; not used in practice).

Nayak turnover method. Total working-capital need is 25% of projected turnover: 0.25 × 400 = 100. The borrower brings 5% (₹20 lakh). The bank finances the remaining 20%: ₹80 lakh.

Notice what the table tells you. Method II gives a lower limit than Method I for the same balance sheet. That is exactly why the Chore Committee picked it: it forces the borrower to commit more of their own long-term money. And the Nayak method, where it applies, is usually the most generous of the lot.

A quick cross-check so you trust the arithmetic: a standard textbook case has CA of ₹900 lakh and CL of ₹200 lakh. Method II gives (0.75 × 900) − 200 = 675 − 200 = ₹475 lakh. The current ratio after borrowing is 900 ÷ (200 + 475) = 1.33:1, which is precisely the minimum current ratio the framework demands under Method II. When the numbers tie out like that, you know the method is applied correctly.

What Is the Difference Between MPBF Method 1 and Method 2?

Method 1 asks the borrower to fund 25% of the working-capital gap (current assets minus current liabilities) from long-term sources, and the bank funds the remaining 75% of that gap. Method 2 asks the borrower to fund 25% of total current assets from long-term sources, which is a bigger commitment, and the bank funds 75% of current assets minus the full current liabilities.

Because 25% of total current assets is almost always larger than 25% of the gap, Method 2 leaves the bank with a smaller exposure and the borrower with more skin in the game. Since the Chore Committee's 1980 report, Indian banks have used Method 2 as the standard. If your bank's appraisal mentions MPBF without specifying a method, assume Method 2.

What Is the Nayak Committee Turnover Method?

The Nayak Committee's turnover method sets working-capital finance at a minimum of 20% of the borrower's projected annual turnover, and it applies where the credit limit in an individual case is up to ₹5 crore. The whole method hangs on that one projected figure. If you are unsure which of your numbers count as projected, read provisional vs projected vs audited financials before you file them.

The structure is deliberately simple. The committee assumed a business needs working capital equal to 25% of its annual turnover. The borrower contributes a 5% margin. The bank finances the remaining 20%. For Sharma Textiles with projected turnover of ₹400 lakh: total need ₹100 lakh, borrower margin ₹20 lakh, bank finance ₹80 lakh.

Three things people get wrong about this method. First, the 20% is a floor, not a ceiling: the RBI's wording says “minimum 20%”, so banks can sanction more if the regular assessment justifies it. Second, the ₹5 crore refers to the credit limit per case, not the turnover (many blogs state this backwards). Third, where the turnover method is used, banks are not supposed to demand full CMA data from the borrower, precisely to spare small businesses the paperwork. Our CAM in banking guide shows where CMA data fits in the appraisal.

What Is the Minimum Margin Under MPBF?

The minimum margin depends on the method: 25% of the working-capital gap under Method 1, 25% of total current assets under Method 2, and effectively 5% of projected turnover under the Nayak method. “Margin” here means the portion the borrower must fund from long-term sources (own capital, term loans, retained profits), not from the bank's working-capital limit. If you cannot bring the margin, the bank reduces the MPBF by a corresponding amount. There is no negotiation around this ratio; it is baked into the formula.

How Do Banks Use MPBF Inside a CAM?

The MPBF computation is a standard exhibit inside the Credit Appraisal Memorandum, the bank's internal note recommending sanction, enhancement, or renewal of a limit. The credit officer places the MPBF working alongside the ratio analysis, and the sanctioning authority checks the requested limit against the MPBF ceiling before approving.

This is also where MPBF meets its monthly cousin, drawing power. MPBF is computed once a year at sanction or renewal. Drawing power is recomputed every month from the stock statement you submit: the bank applies the margins to your current stock and debtors and lets you draw only up to that figure. Your sanctioned limit is the MPBF-based ceiling; your drawing power is what you can actually use this month. If your stock falls, your drawing power falls with it, even though the sanctioned limit has not changed.

For borrowers, the practical takeaway is this: the CAM is the bank talking to itself, and the MPBF is the number it trusts most in that conversation. Walk into a renewal with your own MPBF working ready, computed correctly, and you change the dynamic of the meeting. You are no longer asking for a number; you are defending one.

One more split matters before you run the numbers. The MPBF formula is the same on paper for a trader and a manufacturer, but the current assets behind it are not. A manufacturer carries raw material, work-in-progress, and finished goods; a trading firm carries mostly stock and receivables. On the same Rs. 12 crore turnover, that difference can move the Method II answer from Rs. 195 lakh to Rs. 80 lakh. See the worked comparison in MPBF for traders vs manufacturers before you assume your limit is low because of the formula. It is usually the asset mix.

Try the MPBF Calculator

Enter your figures in ₹ lakh. Current liabilities should exclude bank borrowings.

Download the MPBF Excel Sheet

The calculator above is quick. For a real submission to your CA or your bank, you want a sheet with visible formulas. The free Excel workbook has three sheets: an MPBF calculator where every formula is inspectable (nothing hardcoded), the Sharma Textiles worked example fully filled, and a methods quick-reference with every formula and margin rule.

Building this by hand in Excel is exactly where errors creep in. Most MPBF mistakes we see are not conceptual; they are spreadsheet mistakes, a wrong cell reference here, a margin applied to the wrong base there. If you want the wider picture on why manual spreadsheet analysis keeps failing in credit work, read why manual Excel bank analysis fails.

How Is MPBF Different From Drawing Power?

MPBF is the annual ceiling, computed once at sanction or renewal from your balance sheet. Drawing power is the monthly usable amount, recomputed from each month's stock statement by applying the bank's margins to your current stock and receivables. Your sanctioned limit (MPBF-based) is the roof; your drawing power is the tap. A falling stock level squeezes the tap even when the roof has not moved. Banks track both, and slippage between the two is one of the early warning signals credit monitors watch.

Frequently Asked Questions

Last updated: October 2026. Method formulations follow the standard Tandon Committee, Chore Committee, and Nayak Committee framework used in Indian banking practice; the Nayak 20% norm is carried in the RBI's Master Circular on lending to the MSME sector (section 4.12.2).