MPBF or Maximum Possible Bank Finance Tandon Committee

Example :

Let total Current Assets of a company is Rs. 560

lakhs and total Current Liability is also Rs. 560 lakh. The current
liability includes short term bank borrowings ofRs. 360 lakhs.
1) Calculate MPBF using Tandon Committee recommendations
Method-I
2) Calculate MPBF using Tandon Committee recommendations
Method-II
3) Calculate MPBF using Tandon Committee recommendations
Method-III
Solution:
Current assets, CA = 560
Current Liability, CL = 560
Current Liability excluding bank finance = 560 360 = 200
So Working capital Gap (WCG) = 560 - 200 = 360 ..
(a)
(1) Method I
Margin = 25 % ofWCG = 25% of 360 = 90
MPBF = WCG Margin = 360 90 = 270
Existing bank borrowing = 360
Hence excess bank finance = 360 270 =90
(2) Method-II
Margin = 25% CA = 25% of 560 = 140
Working capital Gap(WCG) = 360
MPBF = WCG Margin = 360 140 = 220
Existing bank borrowing = 360
Hence excess finance = 360 220 = 140
If bank borrowing is reduced from 360 to 220, current
liability will be reduced
from 560 to 560-140 = 420 (CL)
Current ratio after this change = CA/CL = 560/420 = 4/3
= 1.33:1
Banks follow Tandon Committees second method of
lending
(3) Method-III
The core current assets of the company should be
excluded for determining working capital requirements.

Core current asset is permanent component of current assets which are required throughout
the year for a company to run continuously and to stay viable. Sometimes core current assets are
also referred as Hardcore Working Capital.
These assets are not liquid and so when companies are in need of money, they initially sell off non-core
assets (assets which are not important for continuous functioning of a business) to raise money.

Say 100 lakh is the core current asset of a company.

So real current asset = 560 100 = 460 lakh
Margin = 25% real CA = 25% of 460 = 115
Working capital Gap(WCG) = Real Current Asset CL
excluding bank
= 460 200 = 260
MPBF = WCG Margin = 260 115 = 145
Existing bank borrowing = 360
Hence excess finance = 360 145 = 215
Banks follow Tandon Committees second method of
lending

Example2 :

Let total Current Assets of a company is

Rs. 560 lakhs and total Current Liability is also Rs. 360
lakh.
The current liability includes short term bank borrowings
of Rs. 100 lakhs and bills payable of 210 lakh and other
current liabilities of Rs. 50 lakh
Solution : Gross working capital = CA = 560
CL = 360
Net working capital = CA CL = 200
Working capital gap(WCG) = CA CL excluding bank
finance
So
WCG
= 560 360 = 300
Method I :
Margin = 25 % of WCG = 25% of 300 = 75
Maximum possible bank finance(MPBF) = WCG Margin =
300 75 = 225
His existing bank loan is only 100 lakh, his finance can be
in creased up to 225 by giving additional finance of 125
lakh
Method II:
Margin = 25% of CA = 25% of 560 = 140
MPBF = WCG Margin = 300 140 = 160
His present short term bank loan is 100 lakh,

So he can be given further finance of 60 lakh

In that case his total CL will be 360+60 = 420
If CL = 420 , CA/CL = 560/ 420 =
1.33 :1