Tandon Chore Nayak Methods: How Your Bank Limit Is Set

TL;DR

• The method your bank picks can move your limit by Rs. 85 lakh on the same balance sheet.
• On current assets of Rs. 400 lakh, Method I gives Rs. 225 lakh, Method II gives Rs. 200 lakh, and Method III gives Rs. 140 lakh.
• Since April 1997, MPBF is bank practice, not a live RBI mandate. Your sanction letter binds you.
• Most banks start from Method II, giving a current ratio of 1.33. Small files may use the Nayak turnover method.
• Negotiate inputs, not just the formula: genuine long term funds, cleaner receivables, and a named method in writing.

Rohan runs an auto components unit in Pune. His projected balance sheet shows current assets of Rs. 400 lakh and current liabilities other than bank borrowings of Rs. 100 lakh. His working capital gap is therefore Rs. 300 lakh. He expected a limit near that gap. His bank sanctioned Rs. 200 lakh. Nothing in his sales had fallen. Nothing in his stock had vanished. The difference was the method. His bank had applied Method II, and Method II asks the borrower to fund 25 percent of total current assets from long term sources before the bank funds the rest of the gap. This guide follows his file, because it shows the question borrowers should ask before renewal: not what is MPBF, but which method was applied to my file, and what does each other method give on the same numbers.

One reading rule. This page is general information under Indian banking practice as of October 2026, not legal or credit advice. Where a rule comes from the Reserve Bank of India, this page says so. Where a number comes from bank practice, a committee recommendation, or a worked example, this page says that too. The distinction matters, because only your sanction letter binds your bank.

What are the Tandon, Chore and Nayak methods in brief?

The Tandon, Chore and Nayak methods are three generations of the same idea: a borrower must fund part of working capital from long term sources, and the bank funds the rest. The Tandon Study Group, set up by the Reserve Bank of India in July 1974, created the Maximum Permissible Bank Finance framework, known as MPBF. It defined the working capital gap as current assets minus current liabilities other than bank borrowings, and it proposed three methods that ask for progressively more borrower contribution. The Chore Committee, in 1979, reviewed the cash credit system and pushed larger borrowers toward the stricter second method. The Nayak Committee examined credit to small scale industries and offered a simpler turnover method for smaller files.

The table below states the three Tandon methods in one place. It is a summary only. Our MPBF method guide carries the full derivation, and this guide does not repeat it. What matters here is the last column: each method produces a different current ratio floor on the same balance sheet, and that floor is what the bank is really testing.

Two phrases in that table need plain definitions. Current liabilities other than bank borrowings means trade creditors, advances from customers, statutory dues and similar items, but not the bank limit itself. If you counted the bank limit inside the liabilities, the formula would chase its own tail. Core current assets means the permanent minimum level of inventory and receivables the business must always carry. Method III is the strictest method precisely because it makes the borrower fund that whole permanent layer from long term money.

Are these methods still RBI law today, or just bank practice?

These methods are bank practice today, not a live RBI mandate, and that distinction changes how you negotiate. In April 1997, the Reserve Bank of India gave banks greater freedom to assess working capital requirements, and the MPBF prescription was withdrawn. A later RBI speech records the change in plain terms: in April 1997 the central bank took measures to give greater freedom to banks and their customers, and it notes that the response on abolition of MPBF was slow in some areas. Most banks kept an MPBF-like structure anyway, with their own classification of current assets and liabilities, because the structure was familiar and their credit systems were built around it.

The practical consequence is simple. You cannot quote Tandon or Chore to your bank as if they were current RBI directions. You can quote your own balance sheet, your own long term funds, and the method your bank states in its loan policy and your sanction letter. If a bank officer tells you that RBI requires 1.33, ask politely for the current direction. In most files the honest answer is that 1.33 is the bank policy benchmark that follows from Method II, applied through the sanction letter you signed. Our sanction letter guide shows where such a covenant appears in the letter itself.

How much does each method give the same borrower in rupees?

Each method gives a different limit on identical numbers, and the table below is the heart of this guide. Rohan projected figures are current assets of Rs. 400 lakh, current liabilities other than bank borrowings are Rs. 100 lakh, core current assets are Rs. 80 lakh, and projected annual turnover is Rs. 1,200 lakh. The working capital gap is Rs. 300 lakh in every row. Only the borrower contribution changes, and the limit follows it. The workbook linked at the end of this guide recomputes every figure in this table from your own inputs.

Read the differences, not just the limits. Method I exceeds Method II by Rs. 25 lakh. Method II exceeds Method III by Rs. 60 lakh. Method I exceeds Method III by Rs. 85 lakh. That Rs. 85 lakh is the entire negotiation at stake in a method discussion, and it comes from one input: how much long term money the borrower is treated as bringing. Under Method I the borrower brings Rs. 75 lakh. Under Method II the borrower brings Rs. 100 lakh. Under Method III the borrower brings Rs. 160 lakh, because the whole Rs. 80 lakh core layer must come from long term sources plus a quarter of the rest. A borrower who can genuinely show higher long term funds is not arguing about a formula. The borrower is changing the input the formula runs on.

Note also what the current ratio column is telling you. Method I leaves the ratio at 1.23, below the familiar 1.33 benchmark. That is not an error. Method I was designed as the most liberal method, and its ratio floor is lower by construction. Method III leaves the ratio at 1.67, which looks strong, but it is strong because the borrower funded so much of the balance sheet itself. A high ratio bought by a low limit is not a win. It is a smaller business, financed more conservatively.

Which method will my bank actually use for my file?

Your bank will most likely start from Method II, unless your file fits a different assessment route, and the table below states the usual pattern. This is bank practice, not a rulebook, so treat it as a starting expectation and confirm it against your own sanction letter. Banks differ in how they classify current assets and liabilities, and that classification alone can move your limit even when the method name stays the same. Our credit appraisal process guide shows where the working capital assessment sits inside the full sanction journey.

The most useful question at your first meeting is therefore a short one: which method are you applying to my file, and what current ratio or contribution are you targeting. If the officer cannot answer, the file is being assessed on habit rather than on a stated policy, and habit is negotiable. If the officer answers Method II with a 1.33 target, you now know the exact input to work on: your long term contribution relative to total current assets. Our traders versus manufacturers guide shows how the same method gives different limits when the asset mix changes, which is the other half of this discussion.

Why does Method II give less than Method I?

Method II gives less than Method I because it measures your contribution against a larger base. Method I asks for 25 percent of the gap, which is current assets minus other current liabilities. Method II asks for 25 percent of total current assets, before subtracting those liabilities. On Rohan figures, the gap base is Rs. 300 lakh, so Method I asks for Rs. 75 lakh. The total current assets base is Rs. 400 lakh, so Method II asks for Rs. 100 lakh. The Rs. 25 lakh difference in contribution is exactly the Rs. 25 lakh difference in limit, because the gap is fixed and every extra rupee you fund is one less rupee the bank funds.

The current ratio tells the same story from the other side. Under Method I, total current liabilities after the limit are other liabilities of Rs. 100 lakh plus the bank limit of Rs. 225 lakh, which is Rs. 325 lakh, and 400 divided by 325 is 1.23. Under Method II, total current liabilities are Rs. 100 lakh plus Rs. 200 lakh, which is Rs. 300 lakh, and 400 divided by 300 is 1.33. The Chore Committee preference for Method II was, in effect, a preference for that stronger cushion. When a bank insists on 1.33, it is insisting on Method II arithmetic, whether or not it names the method.

What is core current assets, and why does Method III cut your limit hardest?

Core current assets are the stock and receivables that never leave the balance sheet, even in a slow month. Think of the minimum raw material that must always sit in the store, the work in progress that is always on the floor, and the receivables that are always outstanding because customers pay on credit terms. Method III treats that permanent layer as if it were a fixed asset: it must be funded entirely from long term sources, not from bank credit. Only the fluctuating layer above the core gets the usual 25 percent treatment.

On Rohan figures, core current assets are Rs. 80 lakh. The borrower contribution under Method III is therefore Rs. 80 lakh for the core layer, plus 25 percent of the remaining Rs. 320 lakh, which is another Rs. 80 lakh, for a total of Rs. 160 lakh. The limit is the gap of Rs. 300 lakh minus Rs. 160 lakh, which is Rs. 140 lakh. The cut is severe because the core layer is large relative to the gap. Two practical points follow. First, a bank that overstates your core layer understates your limit, so ask how the core figure was estimated and what evidence supports it. Second, a business that genuinely reduces its permanent stock, by faster turnover or tighter ordering, reduces its core layer and raises its Method III limit without changing sales at all.

How does the Nayak turnover method work, and who does it help?

The Nayak turnover method works from sales, not from the balance sheet, and that simplicity is its whole appeal. Working capital need is taken as 25 percent of projected annual turnover. The bank finances 20 percent of projected annual turnover. You bring 5 percent of projected annual turnover as margin. On Rohan turnover of Rs. 1,200 lakh, working capital need is Rs. 300 lakh, the bank limit is Rs. 240 lakh, and your margin is Rs. 60 lakh. Notice that the need figure matches the MPBF gap in this example by design, which makes the comparison clean: the same Rs. 300 lakh need gives Rs. 240 lakh by turnover against Rs. 200 lakh by Method II.

The turnover method helps smaller borrowers most, because it avoids a long argument about which current assets count and which liabilities are excluded. It also helps borrowers whose balance sheets are thin but whose sales are real and verifiable through GST returns and bank credits. It does not help every borrower, and it is not a right you can claim by quoting Nayak. Banks apply their own eligibility thresholds, which have changed over time, and a bank may assess a larger or more complex file by MPBF even when turnover arithmetic looks better. Our CMA data guide explains the projected figures the bank will test before it accepts any turnover number you present.

One caution on turnover figures. A projected turnover that the bank does not believe will be cut back before any method is applied, so inflating sales to raise a turnover limit usually backfires. The bank tests turnover against past GST filings, past bank credits, order books and capacity. A credible Rs. 1,200 lakh projection beats an incredible Rs. 1,500 lakh projection, because only the credible figure survives into the limit calculation.

When does a cash budget beat MPBF for your limit?

A cash budget beats MPBF when your business is seasonal, because MPBF sizes an annual average while a seasonal business needs a peak. Consider a sugar or tea trading file, or a construction supplier whose sales bunch into a few months. An annual MPBF figure may look adequate on paper and still leave the business short in the peak month, when stock and receivables are both at their highest and cash is at its lowest. A cash budget sizes the limit to the peak monthly cash deficit instead, month by month, so the limit matches the month it must actually fund.

The cash budget route has its own discipline. The bank will test every monthly receipt and payment assumption, and a peak deficit built on optimistic collections will be cut back. Our cash budget versus fund flow guide works through a full 12 month example, including the peak deficit logic. For this guide, the point is narrower: if your business is seasonal, ask the bank whether it will assess you by cash budget as well as by MPBF, and compare the two answers before you accept the lower one. A seasonal borrower who accepts an annual MPBF limit without asking that question may be accepting a limit that fails in exactly the month it matters.

What can you negotiate to raise your limit without faking numbers?

You can negotiate the inputs, the classification, and the method, in that order, and every lever below is honest. Faking stock, receivables or sales is not a negotiation lever. It is a misrepresentation that surfaces at stock audit or renewal, and it can cost you the whole relationship. Our limit renewal guide covers the renewal meeting itself, including the documents the bank re-tests.

A warning on the second lever. Cutting current assets does not automatically raise your limit, because a smaller current assets figure also shrinks the gap. If you cut Rs. 20 lakh of dead stock, current assets fall to Rs. 380 lakh, the gap falls to Rs. 280 lakh, and Method II gives Rs. 185 lakh, which is lower than before. The benefit of cutting dead stock is credibility and a cleaner audit, not a mechanically higher limit. Run the numbers with the bank method before you present a cut as a limit-raising move. Our margin money guide explains the contribution logic behind the percentages in this table, and our drawing power guide explains why the sanctioned limit and the amount you can actually draw are two different caps.

What should you check in your sanction letter and at renewal?

You should check four things in your sanction letter before you sign it, and re-check the same four at renewal. First, the method named, if any, and the current ratio or net working capital covenant that follows from it. Second, the treatment of current assets and liabilities: which items were excluded from current assets, and which items were counted as current liabilities. Third, the drawing power arrangement, because a sanctioned limit you cannot draw against eligible stock and receivables is a paper limit. Fourth, the renewal condition: what figures the bank will re-test, and whether a method change at renewal can cut your limit even when sales are flat.

At renewal, bring the same balance sheet the bank used last time, with the changes highlighted, and ask one direct question: what changed, the method, my contribution, or the classification. If the method changed from Method I to Method II without explanation, that alone explains a Rs. 25 lakh cut on Rohan numbers. If the classification changed, ask for the excluded items list. If your contribution fell because profits were withdrawn, the fix is retention, not argument. Renewal is also the moment to ask whether a turnover or cash budget assessment would give a better answer for your file type, with the comparison run on the same audited figures. Our credit appraisal glossary defines the method, gap and ratio terms in this guide in plain language, for use in that meeting.

Sources

• Reserve Bank of India speech on credit delivery and liberalisation, noting that in April 1997 measures were taken to give greater freedom to banks and customers, and that the response on abolition of MPBF was slow in some areas. Source
• Banking School summary of Tandon methods, Chore Committee push toward Method II for larger borrowers, and the Nayak turnover method at 25 percent need, 20 percent bank finance and 5 percent margin. Source
• Bankkeeping summary of the MPBF withdrawal, the 1.33 current ratio peg under the Tandon framework, and banks freedom to choose their own minimum current ratio thereafter. Source
• Worked example figures: all rupee figures in this guide are a single constructed example (current assets Rs. 400 lakh, other current liabilities Rs. 100 lakh, core current assets Rs. 80 lakh, turnover Rs. 1,200 lakh) recomputed by formula and reproduced in the workbook. Committee dates and thresholds are stated only at the precision the sources support, and bank policy figures are labelled as bank practice, not RBI rates.

Frequently Asked Questions

Last updated: October 2026. Framework cited: Tandon Study Group (1974), Chore Committee (1979), Nayak Committee turnover method, and the April 1997 withdrawal of the MPBF prescription.