MPBF Calculation Explained: Formula, Worked Example and Common Mistakes

MPBF — maximum permissible bank finance — is the working capital limit a Tandon Committee computation supports. Take total current assets, subtract other current liabilities to get the working capital gap, then subtract the borrower's margin. Method I takes that margin as 25% of the gap; Method II takes 25% of total current assets.

Key facts

• Two methods, one difference. Method I measures the borrower's 25% stake against the working capital gap. Method II measures it against total current assets. On the worked example below, that single change moves the limit by ₹1.50 crore.
• The gap between the two methods is not arbitrary — it is exactly 25% of other current liabilities. The algebra is set out further down, and it holds on every file where the margin test binds.
• Method II's 1.33 : 1 current ratio is an identity, not a norm. When the margin test binds, total current liabilities always come to exactly 75% of total current assets, so the ratio is always 1.33 : 1 by construction.
• RBI withdrew the prescription; the method survived in lender policy. The Master Circular records that the MPBF prescription "based on a minimum current ratio of 1.33:1, recommended by Tandon Working Group has been withdrawn" and that banks "may evolve an appropriate system for assessing the working capital credit needs of borrowers" (RBI, Master Circular — Management of Advances (UCBs), RBI/2023-24/51, paras 3.1.2–3.1.3).
• MPBF is not what the borrower can draw. Drawing power is, and it moves monthly. YuSight computes both from the source documents with 100% of figures cited, each number one click from the document and page it came from.

What is the MPBF formula?

Start with three inputs, all of them from the borrower's CMA data:

• TCA — total current assets, projected for the assessment year
• OCL — other current liabilities, excluding short-term bank borrowing
• NWC — the borrower's own projected net working capital

Then:

Working capital gap (WCG) = TCA − OCL

Method I MPBF = the lower of:

• WCG − 25% of WCG, and
• WCG − actual projected NWC

Method II MPBF = the lower of:

• TCA − 25% of TCA − OCL, and
• WCG − actual projected NWC

The second test is the one people forget. It stops a borrower with genuinely thin net working capital from being credited with a margin they have not put in. Whichever test gives the smaller number is the answer.

A worked example: Method I and Method II on the same borrower

Illustrative only. Constructed figures. Margin percentages and ratio norms are lender policy choices, not regulatory minimums.

Step 1 — Build total current assets

Finished goods at 48 days is the line to interrogate: a seasonal pulp processor genuinely does build stock ahead of the off-season, so the number may be right — but it is 30% of total current assets and it needs a stated reason, not a default.

Step 2 — Other current liabilities, excluding bank borrowing

Working capital gap = 26.00 − 6.00 = ₹20.00 crore

Borrower's projected net working capital = ₹4.60 crore

Step 3 — Method I

• Minimum margin = 25% of WCG = 0.25 × 20.00 = ₹5.00 crore
• Test (a) = WCG − 25% of WCG = 20.00 − 5.00 = ₹15.00 crore
• Test (b) = WCG − actual NWC = 20.00 − 4.60 = ₹15.40 crore
• MPBF Method I = lower of (a) and (b) = ₹15.00 crore

Resulting total current liabilities = OCL + MPBF = 6.00 + 15.00 = ₹21.00 crore Resulting current ratio = 26.00 ÷ 21.00 = 1.24 : 1 Implied NWC the borrower must hold = 26.00 − 21.00 = ₹5.00 crore

Step 4 — Method II, same borrower, same numbers

• Minimum margin = 25% of TCA = 0.25 × 26.00 = ₹6.50 crore
• Test (a) = TCA − 25% of TCA − OCL = 26.00 − 6.50 − 6.00 = ₹13.50 crore
• Test (b) = WCG − actual NWC = 20.00 − 4.60 = ₹15.40 crore
• MPBF Method II = lower of (a) and (b) = ₹13.50 crore

Resulting total current liabilities = 6.00 + 13.50 = ₹19.50 crore Resulting current ratio = 26.00 ÷ 19.50 = 1.33 : 1 Implied NWC the borrower must hold = 26.00 − 19.50 = ₹6.50 crore

Step 5 — Side by side

Same borrower, same projections, ₹1.50 crore of difference in the limit and ₹1.50 crore of difference in what the promoters have to put in. On a file assessed under Method II, Nandini's promoters must find ₹1.90 crore — typically as an unsecured subordinated loan with a non-withdrawal undertaking — before the limit is operative.

Why the difference is exactly ₹1.50 crore

It is not a coincidence, and knowing the identity lets you sanity-check any MPBF sheet in seconds.

• Method I = WCG − 0.25 × WCG = 0.75 × (TCA − OCL) = 0.75·TCA − 0.75·OCL
• Method II = TCA − 0.25 × TCA − OCL = 0.75·TCA − OCL

Subtract: Method I − Method II = (0.75·TCA − 0.75·OCL) − (0.75·TCA − OCL) = 0.25 × OCL

Check it: 0.25 × 6.00 = ₹1.50 crore, which is 15.00 − 13.50.

Method I always exceeds Method II by exactly a quarter of other current liabilities. A borrower with heavy trade creditors gains most from Method I — which is precisely why lenders moved to Method II.

The same algebra explains the current ratio. Under Method II, total current liabilities = OCL + (0.75·TCA − OCL) = 0.75·TCA, so the current ratio is TCA ÷ 0.75·TCA = 1.33 : 1, always. The 1.33 was never a separate norm bolted onto the method; it is what the method produces. Under Method I the ratio slides with the creditor position, from 1.33 : 1 when OCL is nil down towards 1.00 : 1 as OCL approaches TCA.

Both identities hold only where test (a) binds. Where the borrower's actual NWC is thinner than the margin, test (b) governs and both methods return the same answer.

Is MPBF still used by Indian banks?

Yes in practice, no as a mandate.

RBI withdrew the MPBF prescription and told banks to devise their own assessment systems — the withdrawal is recorded in the Master Circular at para 3.1.2, but the exact year of the original credit-policy announcement should be confirmed before it is stated in print. What banks then did, largely, was write Method II into their own board-approved loan policy and carry on. No published survey establishes what proportion of Indian lenders use Method II today; treat "most" as an industry impression, not a measured figure.

Where MPBF sits among the alternatives:

The turnover method figures come from RBI's Master Circular: the requirement "is to be assessed at 25% of the projected turnover to be shared between the borrower and the bank, viz. borrower contributing 5% of the turnover as Net Working Capital (NWC) and bank providing finance at a minimum of 20%" (RBI/2023-24/51, paras 2.1–2.3). At the top end, borrowers with aggregate fund-based working capital limits of ₹150 crore and above must hold at least 40% of the limit as a working capital loan, raised to 60% from 1 July 2019 (RBI, Guidelines on Loan System for Delivery of Bank Credit, RBI/2018-19/87).

A third Tandon method, excluding core current assets from the financeable base, was proposed but is not in general use. Confirm before referring to it in a client-facing note.

MPBF is not the limit, and the limit is not the drawing power

Three different numbers, computed at three different times, from three different sources:

• MPBF — computed once at assessment, from the projected annual figures on the CMA pack.
• Sanctioned limit — what the sanctioning authority actually approved. It can be below MPBF, and on a first sanction it usually is.
• Drawing power — what the borrower may draw this month, from the latest stock and book-debt statement after margins.

Nandini's drawing power as at 31 July 2026:

Sanctioned limit ₹13.50 crore. Drawing power ₹12.10 crore. The borrower may draw ₹12.10 crore.

And the DP has a shelf life. Stock statements used to compute drawing power "should not be older than three months", drawings on an older basis are "deemed as irregular", and "a working capital borrowal account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days" (RBI, Master Circular on IRAC Norms, RBI/2023-24/06, para 4.2.4).

Eight mistakes that show up in MPBF sheets

1. Bank borrowing inside OCL. Short-term bank finance is the output of the computation, not an input. Include it and the working capital gap shrinks, taking the limit with it.
2. Skipping test (b). Quoting the formula answer without checking it against working capital gap minus actual NWC. On a thin-NWC borrower this overstates the limit materially.
3. Non-current items in TCA. Loans to group entities, security deposits with utilities, disputed tax refunds outstanding beyond a year, investments in associates. All out.
4. Accepting projected holding periods without re-deriving the audited ones. Receivable days that improve in a year of aggressive sales growth are an assumption, not a plan.
5. Confusing MPBF with drawing power. MPBF sizes the limit annually; DP controls the draw monthly. They are rarely equal and the borrower always gets the lower of limit and DP.
6. Applying the turnover method above its threshold, or blending the two — taking the higher of turnover-method finance and MPBF without a policy basis for doing so.
7. Double-counting export receivables already financed under packing credit or bill discounting limits, both in TCA and again in the DP computation.
8. Mixing 360 and 365 days across statements. Invisible on any single row, obvious as soon as the ratios are recomputed against the balance sheet.

Every one of these is arithmetic on numbers that arrived as a PDF, which is why they survive as long as they do. Building the workbook with live cross-sheet links — set out in CMA data format in Excel — catches most of them before the file leaves the borrower's office, and the assessment then flows into the credit appraisal memorandum the sanctioning authority signs.

Frequently asked questions

What is MPBF and how is it calculated?

MPBF is the maximum permissible bank finance — the working capital limit the assessment supports. Take total current assets, subtract other current liabilities excluding bank borrowing to get the working capital gap, then subtract the borrower's 25% margin, and cross-check against the gap less the borrower's actual net working capital.

What is the difference between MPBF Method I and Method II?

Only where the 25% margin is measured. Method I takes it on the working capital gap, Method II on total current assets. Method II always gives the lower limit, and the difference between the two is exactly a quarter of other current liabilities.

Is MPBF still used by Indian banks?

As a regulatory prescription, no — RBI withdrew it and left banks to design their own systems. In practice most lenders wrote Method II into their own loan policy and still assess on it above the turnover-method thresholds.

Why does Method II always give a current ratio of 1.33 : 1?

Because when the margin test binds, total current liabilities work out to exactly 75% of total current assets, and dividing gives 1.33. The ratio is a consequence of the formula rather than a separate rule sitting on top of it.

What is the working capital gap?

Total current assets minus other current liabilities, where other current liabilities exclude short-term bank borrowing. It is the funding requirement the borrower and the bank then split between them.

Can MPBF be higher than the sanctioned limit?

Yes, and often is. MPBF is the ceiling the assessment supports; the sanctioning authority can approve less on account conduct, security, internal rating or industry exposure caps. It can never approve more without recording a deviation.

Does the turnover method replace MPBF?

For micro and small enterprises with fund-based working capital limits up to ₹5 crore, yes, that is the usual basis. Above that the more detailed working capital gap assessment takes over.

What happens if the borrower's net working capital falls short of the margin?

The limit is capped at whichever test gives the lower figure, and the shortfall is usually made good by a condition — promoter infusion as unsecured subordinated loan, with an undertaking not to withdraw it while the facility runs.

How often is MPBF recalculated?

At every sanction, enhancement and annual renewal, on the fresh projected year. Drawing power, by contrast, is recomputed every month from the stock and book-debt statement.

Key takeaways

• The MPBF formula has two tests, not one. Skipping the working-capital-gap-less-actual-NWC test overstates the limit on exactly the borrowers where it matters.
• The gap between Method I and Method II is 25% of other current liabilities — a two-second check on any MPBF sheet.
• Method II's 1.33 : 1 current ratio is arithmetic, not a norm.
• MPBF, sanctioned limit and drawing power are three separate numbers. The borrower draws the lowest of the applicable ones.
• Drawing power computed from a stock statement older than three months makes the drawings irregular, and 90 continuous days of that makes the account an NPA.
• Exclude short-term bank borrowing from other current liabilities. It is the single most common error in the whole computation.

The arithmetic here is not hard; getting the inputs out of a scanned CMA pack and a locked spreadsheet is. YuSight's Financial Spreading module extracts and standardises the financials, computes the working capital, liquidity and leverage ratios, and returns every figure with 100% of figures cited and one-click verification back to the source document and page — analyst-editable, so the credit judgement stays where it belongs. The full credit assessment memo is built on the same cited numbers.

Watch YuSight spread a real balance sheet.

Sources

• RBI — Master Circular: Management of Advances (UCBs), RBI/2023-24/51, 25 July 2023
• RBI — Master Circular: Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, RBI/2023-24/06
• RBI — Guidelines on Loan System for Delivery of Bank Credit, RBI/2018-19/87, 5 December 2018