MPBF Method — Detailed Calculation
Relevent for JAIIB PPB | CAIIB ABM | CCP Module C
Why It Matters in Branch:
MPBF is the most tested numerical topic in JAIIB Paper 3 and CAIIB ABM. Mastering this one calculation can secure 5-6 marks in the exam.
SHORT NOTES
MPBF = Maximum Permissible Bank Finance
Based on Tandon Committee recommendations. RBI circular applicable to all borrowers with WC limits above Rs.5 crore.
BALANCE SHEET CONCEPT:
Total Current Assets (TCA) are funded by:
1. Bank finance (CC/OD)
2. Long-term sources (NWC — Net Working Capital from owned funds and long-term debt)
3. Trade Creditors (Sundry Creditors — supplier credit)
The Tandon Committee specified that borrowers should fund at least 25% of their Net Current Assets (NCA) from own long-term sources.
FORMULA DERIVATION:
Net Current Assets (NCA) = Total Current Assets (TCA) – Current Liabilities other than Bank Borrowings (CL excl BB)
Minimum NWC contribution from borrower = 25% of NCA
MPBF = NCA – Minimum NWC = NCA – 25% of NCA = 75% of NCA = 75% × (TCA – CL excluding bank borrowings)
STEP-BY-STEP WORKED EXAMPLE:
Total Current Assets (TCA) = Rs.200 lakh
Current Liabilities excluding bank borrowings (CL excl BB):
- Creditors = Rs.40 lakh
- Advance from customers = Rs.10 lakh
Total CL excl BB = Rs.50 lakh
NCA = TCA – CL excl BB = 200 – 50 = Rs.150 lakh
MPBF = 75% × 150 = Rs.112.5 lakh
If existing NWC (Long-term sources funding current assets) = Rs.30 lakh:
Then MPBF = NCA – Actual NWC = 150 – 30 = Rs.120 lakh
But ceiling = 75% of NCA = Rs.112.5 lakh
So MPBF = Rs.112.5 lakh (lower of the two)
KEY RULES:
- Bank advances only up to MPBF — not the full NCA
- Borrower must bring in minimum 25% of NCA as NWC
- Current Ratio under MPBF Method = Minimum 1.33:1
- Drawing Power calculated separately from stock statements
BRANCH CONTEXT
✦ MPBF calculation is done at annual review/renewal of all CC accounts. The calculation gives you the maximum you can lend — but you should also check whether the borrower actually needs that much (based on business turnover). Over-sanctioning leads to diversion of funds.
