MPBF or Maximum Possible Bank Finance - Tandon Committee

Example :

Let total Current Assets of a company is Rs. 560 lakhs and total Current

Liability is also Rs. 560 lakh. The current liability includes short term bank borrowings of Rs. 360 lakhs. 1) Calculate MPBF using Tandon Committee recommendations Method-I 2) Calculate MPBF using Tandon Committee recommendations Method-II Solution: Current assets, CA = 560 Current Liability, CL = 560 Current Liability excluding bank finance = 560 360 = 200 So Working capital Gap (WCG) = 560 - 200 = 360 .. (a) (1) Method I Margin = 25 % of WCG = 25% of 360 = 90 MPBF = WCG Margin = 360 90 = 270 Existing bank borrowing = 360 Hence excess bank finance = 360 270 =90 (2) Method-II Margin = 25% CA = 25% of 560 = 140 Working capital Gap(WCG) = 360 MPBF = WCG Margin = 360 140 = 220 Existing bank borrowing = 360 Hence excess finance = 360 220 = 140 If bank borrowing is reduced from 360 to 220, current liability will be reduced from 560 to 560-140 = 420 (CL) Current ratio after this change = CA/CL = 560/420 = 4/3 = 1.33:1