Finance · 9 min read
Maximum Permissible Bank Finance (MPBF) explained: Tandon Committee Method I and II with worked examples, how banks calculate your CC/OD limit, and how to present MPBF in your CMA data.
What is MPBF and why does it matter?
MPBF (Maximum Permissible Bank Finance) is the maximum working capital loan a bank will sanction, calculated using the Tandon Committee method. It ensures you contribute at least 25% of your current assets from your own funds. If your loan request exceeds the MPBF, the bank will reduce it — so your loan amount in the project report must never exceed the MPBF shown in CMA data.
What is the difference between MPBF Method I and Method II?
Method I: Bank finances 75% of the Working Capital Gap (i.e. 25% margin on net working capital). Method II: Bank finances 75% of Current Assets minus all other current liabilities (25% margin on gross current assets). Method II results in a lower MPBF because the margin is applied on gross current assets. RBI recommends Method II for most businesses, and almost all public sector banks use it.
How is MPBF different from CC limit?
MPBF is the calculation ceiling; CC limit is what the bank actually sanctions. The bank will sanction a CC limit equal to or less than the MPBF. Your CC limit also depends on your projected turnover, credit score, track record, and the bank's internal policy.
Does a trading business have a different MPBF calculation?
The formula is the same, but trading businesses typically have higher inventory and lower debtors, which affects current asset levels. For pure traders, holding period is the key variable. Banks also use a simpler turnover method (20–25% of projected annual sales) as an alternative to Tandon MPBF for very small accounts.