Page 42 - Banking Finance December 2022

ARTICLE

Important FBF is different Features of MPBF METHOD
Flexible Bank Finance (FBF) method is a re-engineered Tandon Committee came up with the findings and
version of Maximum Permissible Bank Finance (MPBF) recommendations on financing working capital requirements
Method with borrower friendly approach where the scope and suggested three approaches (report submitted in year
of Current Assets is broadened. 1975)
I. Committee considered bank credit as the source of last
Under Flexible Bank Finance (FBF) method a more liberal resort which should be tapped only after all the internal
approach is adopted in working out current assets with (promoter's contribution) and external sourced (Sundry
changed business scenario and economic ecosystem in our Creditors) of funding working capital requirement at the
country. disposal of enterprise is exhausted. The role of NWC as
promoter's margin towards WC requirement is firmly
Various Assessment Methods for established in the process.

Working Capital Requirement II. In view of the above observations Tandon committee
prescribed three alternative methods of WC finance also
The prevalent Working Capital assessment methods
known as MPBF (Maximum Permissible Bank Finance).
are -
III. All three methods recognised that banks would lend only
1) Maximum Permissible Bank Finance (MPBF) Method
a portion of working capital gap (WCG), which is the
2) Turnover Method
value of acceptable level of CA after netting of the other
3) Cash Budget Method sources of funding WC requirement.

A working Group headed by Shri P. L. Tandon was
First Method of Lending
constituted by RBI in July 1974 to suggest methods for
Under this method, margin contribution of borrowing
effective delivery of industrial credit based on performance
enterprise which would be at minimum level of 25% of WCG.
and projections of borrower. This committee came out with
Such margin is contributed by NWC of enterprise. This
inventory and receivables norms meaning thereby that
method required current ratio at a minimum level of 1.17:1.
borrowing entity should maintain only required level of
current assets and move towards leaner inventory and
Second Method of Lending
receivables holding period. Concept of Maximum
Under this method, borrower contribution is minimum 25%
Permissible Bank Finance (MPBF) was enunciated by the
of total current assets requiring current ratio at a minimum
committee for assessment of working capital and suggested
level of 1.33:1.
methods to ensure judicious allocation of bank credit.
Turnover Method was prescribed by Shri. P.R.Nayak and is Third Method of Lending
based on sales cycle of an industry, where bank credit to Under this method, borrower's contribution is to the extent
the borrowers' margin should be maintained in the range of entire core current assets comprising of absolute
of 80:20 i.e working capital limit shall be computed at 20% minimum level of raw materials, stock in process, finished
of the projected sales turnover accepted by the bank. The goods and stores to ensure continuity of production and a
most important and basic assumption of this method was minimum of 25% of balance current assets is financed out
the working cycle which was accepted to be of 3 months of the long term funds and term borrowings. This method
(90 days). was not accepted for implementation and is of academic
interest only.
Cash Budget Method is adopted in case of specific industries/
seasonal activities such as Software development, Some prescriptions of Tandon Committee in above methods
Construction industry, Film industry, Sugar, Fertilizers etc and were very stringent and could not find place in Indian
working capital short term loans. Here, required finance is business environment, post liberalisation of Indian economy
arrived at from the projected cash flows and not from the and hence RBI made it optional in 1997, giving greater
projected values of assets and liabilities. operational freedom to banks in dispensation of credit.

42 | 2022 | DECEMBER | BANKING FINANCE