MPBF has a full form of its own - maximum permissible banking finance. It is calculated to find the necessary working capital requirements of the businesses. Here corporates are advised not to put the current assets and increase the level of inventory and stock level so that the required working capital needs can be reduced.
There are two ways to assess the MPBF limit -
- If the working capital limit of the business is less than 10 lakh, then it is easy to find the total needed working capital. In this case, the total working capital would be the difference of the current assets and current liabilities.
- If the working capital limit of the business is more than 10 lakh, then it is a bit complicated to find the total working capital need. In this case, the borrower has to finance 25% of the total capital assets out of total long term funds.
In both of these methods, banks cannot lend more than 75% of the working capital requirements. The formula is defined by the tandon committee for calculating MPBF is -
MPBF Calculation : (Total Current Assets - Other Current Liabilities) - 25/100*(Total Current Assets - Other Current Liabilities)
MPBF is a required element of calculating of CMA ( credit monetary analysis ) report.
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