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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Under the Tandon Committee's lending norms, which method of assessing the maximum permissible bank finance (MPBF) requires the borrower to finance at least 25% of total current assets from long-term sources?

The second method of lending requires the borrower to fund at least 25% of total current assets from long-term sources, with the bank financing the balance after deducting other current liabilities. The first method applies the 25% only to the working capital gap.

  1. AFirst method of lending
  2. BSecond method of lendingCorrect
  3. CThird method of lending
  4. DTurnover method

Explanation

Under the first method the borrower contributes at least 25% of the working capital gap. Under the second method the borrower contributes at least 25% of total current assets, and the MPBF is 75% of current assets less current liabilities other than bank borrowings. The first method is therefore the wrong choice, as it applies 25% to the gap and not to current assets.

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