Skip to content

Financial Management and Business Data Analytics · Financing Working Capital

Bank Finance and Methods of Lending: Tandon and MPBF

Updated 10 October 2026

Bank finance for working capital comes as cash credit, overdraft, loans and bill discounting. The Tandon Committee set norms to limit how much a bank lends. Maximum Permissible Bank Finance (MPBF) is found by three methods, each requiring the borrower to fund a minimum share of current assets from long-term sources.

Understand Bank Finance and Methods of Lending

A firm rarely funds all its working capital from its own money. Banks are the main outside source. A bank gives credit in different forms, and each form suits a different need.

Cash credit lets the borrower draw up to a sanctioned limit against stock and receivables. Interest is charged only on the amount actually used, on a daily balance. Overdraft lets a current account holder withdraw more than the balance, up to a limit. Overdraft is usually meant for temporary needs and is often secured; cash credit is meant for ongoing working capital. A term loan is a fixed amount repaid on a schedule, with interest on the whole amount. Bill discounting means the bank pays the seller the bill value less a discount today, and collects the full amount from the buyer on the due date.

Before the Tandon Committee, banks lent mostly on security of stock, and borrowers leaned heavily on bank credit. The Tandon Committee asked for discipline. It wanted the borrower to bring in a minimum share of current assets from long-term funds, so that banks financed only the gap. It also asked for credit to be tied to a production plan and for information to be given to the bank regularly.

The committee gave three methods of lending. They differ in how much the borrower must fund from long-term sources, called the margin. Method 1 is the most liberal to the borrower and Method 3 the strictest. The Chore Committee later reviewed these norms. It recommended that Method 2 should be the minimum norm for bank lending, with banks gradually moving borrowers toward it. It also recommended that the bank separate the working capital limit into a part that is normal need and a part that is peak need, with the latter charged at a higher rate. Any excess borrowing over the MPBF should be shown as a separate demand loan carrying a penal rate of interest. Borrowers should also submit information to the bank quarterly.

Current ratio is the test. Under Method 1, the current ratio = CA ÷ (0.75 × CA + 0.25 × OCL). It is 1.33:1 only when OCL is nil and falls below 1.33:1 as OCL rises. So Method 1 has no fixed ratio. The figure of 1.17:1 that you may see in textbooks holds only for one particular level of OCL. In the worked example below, Method 1 gives 1.23:1. Method 2 always gives 1.33:1. Method 3 gives a higher ratio when core current assets are greater than zero, because more is funded from long-term sources.

Key rules to remember

MPBF Method 1
MPBF = 75% × WCG = 75% × (Current Assets − Current Liabilities other than bank borrowings)
Working Capital Gap (WCG) = Current Assets − Current Liabilities other than bank borrowing. The borrower funds 25% of WCG from long-term sources.
Working Capital Gap
WCG = Total Current Assets − Current Liabilities (excluding bank borrowings)
Current liabilities here means trade creditors and other short-term liabilities, not bank credit.
MPBF Method 2
MPBF = 75% × Current Assets − Current Liabilities (excluding bank borrowings)
The borrower funds 25% of total current assets from long-term sources. Current ratio works out to 1.33:1.
MPBF Method 3
MPBF = 75% × (Current Assets − Core Current Assets) − Current Liabilities (excluding bank borrowings)
Core current assets are the permanent part of current assets, funded from long-term sources in full. Current ratio is higher than 1.33:1 when core current assets are greater than zero.
Minimum Net Working Capital (NWC)
Method 1: 25% of WCG; Method 2: 25% of CA; Method 3: 25% of (CA − Core CA) + Core CA
Net working capital is the part funded from long-term sources. Under all three methods, MPBF = WCG − Minimum NWC. Use this as a cross-check.

How to solve Bank Finance and Methods of Lending questions

Use this order for any MPBF question. Keep the three methods separate and compute only what the question asks.

  1. 1List the current assets (stock, receivables, cash, others) and total them as CA.
  2. 2List current liabilities other than bank borrowings (creditors, provisions, outstanding expenses) and total them as OCL.
  3. 3Note whether the question gives core current assets. If yes, Method 3 is possible.
  4. 4Apply the formula for the method asked. Method 1: 75% × (CA − OCL). Method 2: 75% × CA − OCL. Method 3: 75% × (CA − Core CA) − OCL.
  5. 5Check the result against the actual bank borrowing or the permissible limit. Where the question asks, find the excess borrowing or the available limit.
  6. 6Compute the current ratio under each method if asked: (CA) ÷ (OCL + MPBF).
  7. 7State a short conclusion: which method gives the lowest bank finance and why.

Quickest way: Three-line MPBF shortcut

When to use it: Use when the question gives CA and OCL and asks for MPBF under two or three methods.

  1. Write CA and OCL once at the top.
  2. Method 1: 0.75 × (CA − OCL). Method 2: 0.75 × CA − OCL. Method 3: 0.75 × (CA − Core CA) − OCL.
  3. Cross-check order: Method 1 ≥ Method 2 ≥ Method 3. This holds because OCL and core current assets cannot be negative. If core current assets are zero, Methods 2 and 3 give the same figure. If your answers are not in this order, recheck the arithmetic.

Common mistakes in Bank Finance and Methods of Lending

  • Including bank borrowings in current liabilities when finding WCG or MPBF.

    Students take total current liabilities from the balance sheet.

    Fix: Use only liabilities other than bank borrowings. Bank credit is what you are solving for.

  • Writing Method 2 as 75% × (CA − OCL).

    It is mixed up with Method 1.

    Fix: In Method 2 the 25% margin is on total current assets. Take 75% of CA first, then subtract OCL.

  • Using Method 3 without treating core current assets separately.

    The word core is skipped when reading the question.

    Fix: Remove core current assets from the 75% part. They are financed fully from long-term funds.

  • Confusing cash credit with overdraft.

    Both allow drawing up to a limit.

    Fix: Cash credit funds regular working capital against stock and debtors. Overdraft is for short-term needs on a current account. Say this difference in descriptive answers.

  • Treating bill discounting as a loan with interest paid later.

    Loan logic is applied to every bank product.

    Fix: The discount is deducted upfront. The seller receives bill value less discount, so the effective rate is higher than the stated rate.

Worked examples

Example 1

A firm has current assets of ₹40,00,000 and current liabilities other than bank borrowings of ₹10,00,000. Find MPBF under Method 1 and Method 2.

Show the solution
  1. Method 1: WCG = 40,00,000 − 10,00,000 = ₹30,00,000.
  2. MPBF = 75% × 30,00,000 = ₹22,50,000.
  3. Method 2: 75% × 40,00,000 = ₹30,00,000.
  4. MPBF = 30,00,000 − 10,00,000 = ₹20,00,000.
  5. Check: Method 1 is higher than Method 2, as expected.

Answer: MPBF under Method 1 is ₹22,50,000 and under Method 2 is ₹20,00,000.

Example 2

A firm has current assets of ₹60,00,000, of which core current assets are ₹12,00,000. Current liabilities other than bank borrowings are ₹15,00,000. Find MPBF under Method 3 and the current ratio after the bank finance.

Show the solution
  1. CA − Core CA = 60,00,000 − 12,00,000 = ₹48,00,000.
  2. 75% × 48,00,000 = ₹36,00,000.
  3. MPBF = 36,00,000 − 15,00,000 = ₹21,00,000.
  4. Total current liabilities including bank finance = 15,00,000 + 21,00,000 = ₹36,00,000.
  5. Current ratio = 60,00,000 ÷ 36,00,000 = 1.67:1 (approx).

Answer: MPBF under Method 3 is ₹21,00,000 and the current ratio is about 1.67:1.

Exam tips

  • Write the formula for each method before the numbers. Step marks are given for the right formula.
  • Show the current ratio when the question asks about the Tandon norms. The 1.33:1 link is often tested.
  • In MCQs, check whether the question says total current liabilities or liabilities other than bank borrowings.
  • For theory answers, give two or three points each on cash credit and overdraft and the Chore Committee recommendations.
  • No negative marking applies, so attempt every MCQ.

Practice questions from Financing Working Capital

Bank Finance and Methods of Lending: frequently asked questions

What is MPBF?

Maximum Permissible Bank Finance is the largest working capital credit a bank may give under Tandon norms. It is the working capital gap less the borrower's required contribution from long-term funds.

What is the difference between cash credit and overdraft?

Cash credit is a sanctioned limit against stock and receivables for regular working capital needs. Overdraft allows withdrawal beyond the balance of a current account, up to a limit, and suits temporary needs. Interest in both is charged on the amount used.

What did the Chore Committee recommend?

It recommended that Method 2 be the norm and that banks push borrowers toward it. It asked banks to split the limit into normal and peak needs with a higher rate for peak. Excess borrowing over MPBF should be a separate demand loan at a penal rate, and borrowers should give quarterly information.

Which MPBF method gives the least bank finance?

Method 3 gives the least, because it treats core current assets as funded fully from long-term sources. Method 1 gives the most.