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Unit 4: The Financing Mix

7. MPBF is the acronym for ........................ Notes
8. ........................ committee was set to review the working of Credit Authorisation Scheme
(CAS) and suggest measures for giving meaningful directions to the credit management
function of the Reserve Bank.
9. The RBI does not insist on a rigid formula of ........................ for lending by commercial
banks to industries for working capital purposes.
10. A ........................ is an undertaking by a bank to honour the obligations of its customer up
to a specified amount.

4.3 MPBF Norms

MPBF is the acronym for Maximum Permissible Bank Finance. As already discussed above, the
Tandon Committee Report, basically identified the function of bank finance as supplementing
the borrower’s resources to carry on acceptable level of current assets.
The implications of this were twofold;
1. The level of current assets must be reasonable and based on certain norms.
2. A part of the funds required for carrying current assets must be found from long-term
funds, comprising owned funds and term borrowings including other non-current
liabilities.
The major recommendations made by the Group, covered the undernoted aspects of bank lending:
1. Norms for inventory & receivables
2. Approach to lending
3. Follow-up, supervision and control

In the context of its approach to the role of Bank Finance, the Committee suggested three
alternatives (more popularly known as methods of lending) for working out the maximum
permissible level of bank borrowings:

First Method of Lending

Banks can work out the working capital gap, i.e. total current assets less current liabilities other
than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a
maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds
and term borrowings. This approach was considered suitable only for very small borrowers i.e.
where the requirements of credit were less than ` 10 lacs.

Second Method of Lending

Under this method, it was thought that the borrower should provide for a minimum of 25% of
total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain
level of credit for purchases and other current liabilities will be available to fund the build up of
current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities
inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the
working capital needs of all borrowers enjoying fund based credit facilities of more than ` 10
lacs should be appraised (calculated) under this method.

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