Maximum Permissible Bank Finance is the ceiling a bank calculates for your working capital limit. Here is the arithmetic, the margin you will be asked to bring, and the reason your drawing power is usually well below the limit on your sanction letter.

What MPBF actually is

Maximum Permissible Bank Finance is the ceiling a bank calculates for how much working capital finance your business is eligible for. It is derived from three numbers on your projected balance sheet, and the arithmetic is simple enough that you can run it yourself before you walk into the meeting.

The framework traces to the Tandon Committee report of 1974. The Reserve Bank withdrew its mandatory prescription in 1997, leaving banks free to set their own assessment method. In practice most retained the logic, either formally in the credit note or as an internal sanity check, which is why understanding it still tells you what a lender is likely to offer.

The three inputs

  • Total current assets. Inventory, receivables and other current assets needed to run operations, taken from your projections rather than your last audited balance sheet.
  • Other current liabilities. Trade creditors, statutory dues and other short-term liabilities, specifically excluding the bank facility you are asking for, since that is the output, not an input.
  • Working capital gap. The first less the second. This is what your operating cycle costs you to fund.

The two methods

Method I

MPBF is 75% of the working capital gap. The remaining 25% must come from your own long-term funds, equity, reserves or long-term borrowing. That contribution is the margin.

Method II

MPBF is 75% of total current assets, less other current liabilities. This requires a larger contribution of long-term funds towards current assets.

Why Method II is always tighter

This is worth working out once, because it removes any guesswork. Write the two methods out:

  • Method I = 0.75 × (current assets − other current liabilities) = 0.75CA − 0.75OCL
  • Method II = 0.75CA − OCL

Subtract one from the other and the current assets term cancels, leaving a difference of exactly 0.25 × other current liabilities. Method II is therefore always lower than Method I, by a quarter of your non-bank current liabilities, never higher, regardless of the numbers.

That difference has a purpose. Method II is calibrated so that the borrower ends at a current ratio of 1.33. Method I typically leaves you nearer 1.21. If you want to check this, take current assets of ₹10 crore and other current liabilities of ₹3 crore: Method I gives ₹5.25 crore and a current ratio of 1.21; Method II gives ₹4.50 crore and a current ratio of exactly 1.33.

What this means for your margin

The number most borrowers miss is not the limit but the margin. On a ₹7 crore working capital gap, Method II sanctions ₹4.5 crore, which means ₹2.5 crore has to come from your own long-term funds and be visibly sitting in current assets. If it is not there, the proposal gets cut back to whatever your actual net working capital supports, however good the rest of the case is.

This is the single most common reason a working capital proposal is reduced at credit committee, and it is entirely predictable before submission.

Limit is not the same as drawing power

Your sanctioned limit is a ceiling. What you can draw on any given day is drawing power, computed monthly from the stock and book-debt statement you submit: eligible inventory and receivables, less creditors, less the applicable margin on each, and excluding receivables older than the permitted ageing, commonly 90 days.

It is entirely normal for a business with a ₹10 crore limit to have drawing power of ₹6 crore because receivables have aged out. Tightening collections often releases more usable finance than negotiating a higher limit does.

If your limits reach ₹150 crore

Above an aggregate fund-based working capital limit of ₹150 crore from the banking system, RBI's guidelines on the loan system for delivery of bank credit, issued on 5 December 2018, require a minimum portion of the limit to be carved out as a working capital demand loan rather than running as revolving cash credit. The minimum loan component was 40% with effect from 1 April 2019, raised to 60% from 1 July 2019.

The practical consequence is treasury discipline: a WCDL has a fixed tenor and must be rolled deliberately, rather than drawn and repaid at will. Undrawn cash credit also attracts a credit conversion factor for the bank's capital purposes, which feeds through into how the facility is priced.

Three things worth doing before you apply

  • Build the projection from the operating cycle, not from a turnover percentage. A credit officer will test inventory days and receivable days against your own history, and a projection that assumes a sudden improvement without an explanation will be rewritten in front of you.
  • Arrange the margin first. Know where the 25% is coming from before the proposal goes in.
  • Model both methods. Knowing Method II is the tighter figure, and by exactly how much, changes the shape of the conversation.

Run your own numbers

Our working capital estimator computes both methods, the margin required under each, and the resulting current ratio. It runs entirely in your browser, nothing you enter is transmitted anywhere. For a fuller picture of what banks assess, see our page on working capital finance.

This article is general information, not lending, tax or legal advice. Statutory positions and lender practice change. See our terms of use, and talk to our team for advice on your own situation.