MPBF Method Explained: How Banks Calculate Cash Credit (CC) Limits

Maximum Permissible Bank Finance (MPBF) is the standard method mandated by RBI & the Tandon Committee guidelines to determine how much working capital (Cash Credit / Overdraft) a business is eligible for, based on its current assets and current liabilities. Unlike a term loan, a CC/OD limit doesn't repay in fixed EMIs — it's a revolving limit sized to match the gap between what the business needs to fund (inventory + receivables) and what it can fund on its own.

Understanding Current Assets & Current Liabilities

Before the formulas make sense, it helps to know what goes into each side:

• Current Assets (CA): Raw material stock, work-in-progress, finished goods inventory, sundry debtors (receivables), cash & bank balance, and other assets expected to convert to cash within 12 months.
• Current Liabilities Other than Bank Borrowings (CL): Sundry creditors (trade payables), other short-term provisions, and statutory dues — everything the business owes short-term, excluding the bank's own CC/OD limit.
• Working Capital Gap (WCG): Current Assets − Current Liabilities (other than bank borrowings). This is the funding gap the bank and the business's own margin money must together cover.

Why the 75% / 25% Split?

The Tandon Committee (1975) recommended that a borrower should fund at least 25% of the Working Capital Gap from its own long-term sources (equity + retained earnings + long-term borrowings) — called margin money — with the bank financing the remaining 75%. This ensures the borrower has "skin in the game" rather than relying entirely on bank credit to run day-to-day operations.

Method 1 (NWC = 25% of Working Capital Gap)

Under Method 1, the borrower's Net Working Capital (NWC) only needs to be 25% of the Working Capital Gap. This is the more liberal of the two methods and results in a higher permissible bank finance — commonly applied to smaller borrowers.

Method 2 (NWC = 25% of Total Current Assets)

Under Method 2, the 25% margin is calculated on Total Current Assets instead of just the gap — a stricter requirement that results in a lower permissible bank finance than Method 1 for the same borrower. Most public sector banks apply Method 2 for larger working capital limits (typically above ₹6.5 crore–₹10 crore, depending on the bank's internal policy).

Worked Example: Method 1 vs Method 2

A trading business has Current Assets of ₹1,00,00,000 and Current Liabilities (other than bank borrowings) of ₹30,00,000.

Notice Method 2 gives a lower eligible limit (₹45 lakh vs ₹52.5 lakh) for the exact same balance sheet — this is why borrowers should always check which method their bank applies before estimating their eligible CC/OD limit.

The Nayak Committee (Turnover) Method — For Smaller MSME Limits

For working capital limits up to ₹5 crore, most banks (following RBI/Nayak Committee guidelines) skip the Tandon methods altogether and use a simpler turnover-based method:

This means a business projecting ₹2 crore annual turnover could be eligible for a working capital limit of roughly ₹30–40 lakh, without needing detailed current asset/liability workings — making it the preferred route for smaller MSME borrowers.

When Does a Bank Use Which Method?

• Turnover Method (Nayak): Working capital requirement up to ₹5 crore — the default for most MSMEs.
• Tandon Method 1: Mid-sized borrowers where the bank wants a slightly more liberal assessment.
• Tandon Method 2: Larger borrowers/corporates, or where the bank's internal credit policy mandates the stricter margin calculation.

Frequently Asked Questions