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Definition: Maximum Permissible Banking Finance(MPBF)
MPBF stands for Maximum Permissible Banking Finance in Indian Banking Sector. MPBF is mainly a method of working capital assessment. As per the recommendations of Tandon Committee, the corporate are discouraged from accumulating too much of stocks of current assets and are recommended to move towards very lean inventories and receivable levels. This is where MPBF comes into picture. There are 2 methods for MPBF calculation. Let us see the first one:
MPBF Calculation : (Total Current Assets - Other Current Liabilities) - 25/100*(Total Current Assets - Other Current Liabilities)
Or MPBF = 75/100*Working Capital Gap
Depending on the size of credit required, two methods of maximum permissible banking finance are in practice to fund the working capital needs of the corporate.
MPBF Method I: For corporate whose credit requirement is less than Rs.10 lakhs, banks can find the working capital required. Working capital is calculated as difference of total current assets and current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF). Banks can finance a maximum of 75 per cent of the required amount and the rest of the balance has to come out of long-term funds.
MPBF Method II: For corporate with credit requirement of more than Rs.10 lakhs this method is used. In this method, the borrower finances minimum of 25% of its total current assets out of long term funds. The rest will be provided by the bank through MPBF. Thus, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets.