MPBF Explained: How Banks Compute Your Working-Capital Limit (Tandon Second Method, With a Worked Example)
- MPBF under the Tandon second method is 75% of projected current assets minus other current liabilities; the other 25% of current assets must come from the promoter's long-term funds.
- Limits up to ₹5 crore for MSMEs are usually assessed by the simpler turnover method: 25% of projected turnover as working capital, 20% from the bank and 5% from the borrower.
- Holding periods drive everything — a ten-day change in debtor days can move a limit by lakhs — so they must be defensible from the last audited year.
Every cash-credit or overdraft sanction letter in India rests on one number the borrower rarely sees computed: the Maximum Permissible Bank Finance, or MPBF. It is the bank's estimate of how much of your working-capital requirement it is willing to fund, and it is derived mechanically from the CMA data you submit. Understanding the computation lets you ask for the right limit, structure the projections honestly, and know in advance where the bank will cut. This guide works through the two methods banks use for MSMEs and shows a full example.
Two methods, by size of limit
| Method | Typically used for | Formula |
|---|---|---|
| Turnover method (Nayak Committee) | MSME working-capital limits up to ₹5 crore (varies by bank) | Working-capital requirement = 25% of projected annual turnover; bank finance = 20% of turnover; borrower margin = 5% of turnover |
| Tandon second method (MPBF) | Larger limits, and any case where the cycle is long or seasonal | MPBF = 75% × (total current assets) − other current liabilities; borrower funds 25% of current assets from long-term sources |
| Cash-budget method | Seasonal industries, contractors, sugar, tea | Peak cumulative cash deficit from a month-wise cash budget |
Banks often compute both the turnover method and MPBF and sanction the lower, or the higher where the business can justify a longer cycle with documents.
Building current assets from holding periods
MPBF is only as good as the current-asset figure, and banks require it to be built from holding periods, not typed in.
- Raw material: days of consumption × (annual consumption ÷ 365)
- Work in progress: days of cost of production × (cost of production ÷ 365)
- Finished goods: days of cost of sales × (cost of sales ÷ 365)
- Receivables: days of credit sales × (credit sales ÷ 365)
- Other current assets: advances to suppliers, GST input credit receivable, cash minimum
"Other current liabilities" for the formula are current liabilities other than bank borrowing: trade creditors (days of purchases × purchases ÷ 365), statutory dues, advances from customers, instalments of term loans due within a year.
Worked example — a components manufacturer
Projected year: sales ₹12 crore (all on credit), raw-material consumption ₹7.2 crore, cost of production ₹9.6 crore, cost of sales ₹10 crore, purchases ₹7.5 crore.
| Item | Holding period | Computation | Amount (₹ lakh) |
|---|---|---|---|
| Raw material | 45 days | 720 × 45 ÷ 365 | 88.8 |
| Work in progress | 10 days | 960 × 10 ÷ 365 | 26.3 |
| Finished goods | 20 days | 1,000 × 20 ÷ 365 | 54.8 |
| Receivables | 60 days | 1,200 × 60 ÷ 365 | 197.3 |
| Other current assets (GST ITC, advances, cash) | — | given | 22.0 |
| Total current assets | 389.2 | ||
| Trade creditors | 40 days | 750 × 40 ÷ 365 | 82.2 |
| Other current liabilities (statutory, term-loan instalments) | — | given | 18.0 |
| Other current liabilities | 100.2 |
- Working-capital gap = 389.2 − 100.2 = ₹289.0 lakh
- Minimum margin (25% of current assets) = 0.25 × 389.2 = ₹97.3 lakh
- MPBF = 289.0 − 97.3 = ₹191.7 lakh
- Turnover method check: 20% of ₹12 crore = ₹240 lakh bank finance, with ₹60 lakh borrower margin
The bank would likely sanction around ₹1.9 crore under MPBF, because the longer receivable cycle has already been priced in; it may go to ₹2.4 crore only if order books support the higher turnover-based figure. The projected current ratio is 389.2 ÷ (100.2 + 191.7) = 1.33 — exactly the benchmark, which is not a coincidence: the 25% margin rule is what produces a 1.33 current ratio.
Where the promoter's 25% comes from
Net working capital of ₹97.3 lakh must be funded by capital, reserves or long-term unsecured loans from promoters that the bank treats as quasi-equity (usually with a subordination undertaking). If the projected balance sheet does not show this, the bank cuts the limit until the ratio holds or asks for fresh contribution. Term loans from the same bank for machinery do not count; they fund fixed assets.
Seasonal and project businesses — when averages mislead
MPBF assumes a steady cycle. A sweets manufacturer whose sales triple in October, a school-uniform supplier who ships in March, or a contractor billing on milestones will show an average holding period that understates the peak requirement for two months and overstates it for the rest. Banks handle this in two ways: a peak and non-peak limit within the same sanction, with the higher limit available for the named months, or a cash-budget assessment in which you submit a month-wise cash budget and the limit is the maximum cumulative deficit. Ask for whichever matches your pattern rather than inflating the annual holding days — an inflated average fails the holding-period consistency test and gets cut, while a documented peak limit is routinely sanctioned.
What moves the number
- Every 10 days of receivables on ₹12 crore sales ≈ ₹33 lakh of current assets ≈ ₹25 lakh of MPBF.
- Every 10 days of creditors on ₹7.5 crore purchases ≈ ₹20 lakh less gap.
- Seasonal peaks are better handled by a cash-budget limit than by inflating average holdings.
- GST input credit stuck in reconciliation is a genuine current asset; show it, with the GSTR-2B basis.
The DPR and CMA Studio runs this exact computation from your holding periods, shows MPBF and the turnover-method figure side by side, and warns when the projected current ratio or TOL/TNW breaches a benchmark — so the limit you request is the one the officer will compute.
Common mistakes
- Asking for a round figure unrelated to the computed MPBF.
- Holding periods that differ sharply from the audited year without a documented reason.
- Counting bank borrowing in "other current liabilities" — it is the figure being solved for.
- Ignoring term-loan instalments due within 12 months; they reduce the gap and the current ratio.
- No long-term funding for the 25% margin in the projected balance sheet.
- Using sales instead of cost figures for stock holdings, inflating inventory.
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Open DPR and CMA Studio →Frequently asked questions
What is MPBF?
Maximum Permissible Bank Finance — the ceiling on working-capital lending a bank computes from CMA data. Under the Tandon Committee's second method, MPBF equals 75% of total projected current assets less other current liabilities, with the borrower funding the remaining 25% of current assets from long-term sources. It produces a minimum current ratio of 1.33.
What is the turnover method of working-capital assessment?
The Nayak Committee method used for smaller MSME limits: working-capital requirement is taken as 25% of projected annual turnover, of which the bank finances 20% of turnover and the borrower brings 5% as margin. Banks apply it for limits up to around ₹5 crore and may compare it with the MPBF figure.
Why did the bank sanction less than I asked for?
Usually because the MPBF computed from your holding periods and other current liabilities was lower than the request, or because the projected current ratio fell below 1.33 or TOL/TNW above 3. Longer receivable days, lower creditor days or missing promoter contribution each reduce the permissible limit.
Do unsecured loans from promoters count as margin?
Yes, if they are long-term and subordinated to the bank — most banks ask for an undertaking that the loans will not be withdrawn during the currency of the facility. They are then treated as quasi-equity for the 25% margin and for tangible net worth.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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