MPBF stands for Maximum Permissible Bank Finance. If you need a working capital loan, then all Indian Banks will ask you to provide MPBF calculation. In this article, we will see what MPBF is, how to calculate the MPBF limit, and how to easily prepare an MPBF calculation for Bank Loan in just 15 minutes.
Any Business needs funds/capital to pay for its everyday expenses. This capital is called working capital. Often, this working capital is stuck in Inventory Stock, Debtors, etc., leaving no money for daily expenses. This is where a working capital loan comes in need. If you need a working capital loan, then you should know the following:
MPBF Explainer Video
1. Types of Working Capital Loan
The most common working capital loans provided by Bank are:
Cash Credit Loan
Overdraft Loan
Banks approve a specific amount in these loans, known as a loan limit. You can withdraw funds upto this limit. As and when you receive the money, you deposit it in this loan account, and again borrowing limit gets available to that extent of the amount deposited. This Loan acts like a spare bank balance to withdraw and repay during the year as needed.
Other types of working capital loans are:
Bills discounting
Short duration Term Loan
Bank Guarantee / Letter of Credit
2. Bank’s criteria to sanction a Working Capital Loan
The Central Bank (Reserve Bank of India) has allowed the Banks to decide their criteria. The most common criteria used by Banks are
● Maximum Permissible Bank Finance Method
and
● Percentage of Turnover Method
In some cases, Banks also use
● Cash Budget Method
● Operating Cycle Method
● Drawing Power Method
3. Maximum Permissible Banking Finance (MPBF) Method
In July 1974, the committee, headed by Shri. P.L.Tandon, framed guidelines for banks in giving working capital finance. This Tandon committee proposed two methods banks can use to determine how much working capital loan limit it can sanction. These two methods are called Maximum Permissible Banking Finance (MPBF) method.
With the help of an example, let’s see how to calculate the MPBF limit under the two methods:
Say you have:
| Current Assets like Stock, Debtors, Advance, Cash & Bank, etc. | Rs 10 lacs |
| Current Liabilities – Creditors, Outstanding expenses, etc. | Rs. 4 lacs |
So, there is a Working Capital Gap of 6 lacs (Current Assets – Current Liabilities). This is the Gap for which you need Loan. Now, as per the MPBF method, the maximum Loan that Bank can give you is calculated as below:
| Particulars | MPBF method 1 | MPBF method 2 |
| Working Capital Gap | 6 lacs | 6 lacs |
| Less: Working Capital Gap Amount to be funded by own funds – known a Margin | 25% of Gap
(6 lacs*25% = Rs 1.5 lacs) |
25% of Current Assets
(10 lacs*25% = Rs 2.5 lacs) |
| Working Capital Gap portion given as loan by Bank (MPBF) | 6 lacs – 1.5 lacs= 4.5 lacs | 6 lacs – 2.5 lacs = 3.5 lacs |
It can be seen that MPBF method 1 is comparatively liberal and is used by the banks when it has confidence in the business, the loan amount is less, or for new startups.
4. How to prepare MPBF calculation for your Loan.
If you are preparing a Loan Project report on your own, you first need to prepare a year-wise Projected Profit and Loss A/c and Balance Sheet for the Loan period. From these Projected Statements, work out MPBF values for each year under the methods discussed above.
If you don’t know how to make a Projected Profit and Loss or Balance Sheet, then you can use Fortrisk Consulting Project Report & CMA Software.
If you are starting a new business or doing a small business, then in Fortrisk Consulting Project Report Software, enter a few basic details such as:
1. The working capital loan amount that you need
2. Amount of business expenses that you are going to incur
Based on the details, the software will automatically prepare a detailed Loan Project Report with a year-wise projected Profit and Loss A/c, a Balance Sheet, and a separate MPBF working sheet.
The software will automatically calculate MPBF values as per
- MPBF method 1
- MPBF method 2, &
- Percentage turnover method
If your Loan amount meets the MPBF limits, you can submit this Project report for Loan Application.
For a detailed guide on How to Make a Project Report for a New or Small Business, Click Here.
If you need a working capital loan for ongoing business, then in Fortrisk Consulting CMA Report Software, enter:
- Past two year’s Profit & Loss and Balance Sheet Values
- The working capital loan amount that you need
The CMA software will automatically prepare a full CMA report as per Bank format with Projected Financials and an MPBF working sheet.
Check if your Loan amount meets the MPBF limits, and submit this CMA Report for Loan Application.
For a detailed guide on how to make a CMA Report click here
