Executive Summary
- Method II requires 25% of current assets funded from owned working capital
- The 1975 Tandon Committee recommendations remain the basis for most PSU bank MPBF calculation
- Accurate, defensible current asset projections directly improve your eligible limit
- Some banks apply Method I instead, with a different, generally lower eligible limit
The Tandon Committee, Briefly
The Prakash Tandon Committee, appointed by RBI in 1974, recommended a structured approach to working capital lending that replaced the earlier, more discretionary "first method of lending" practice across Indian banks. Its core principle — that a portion of working capital should always come from the borrower's own funds, not entirely from bank credit — remains embedded in MPBF calculation today.
Method II Mechanics in Full
Under Method II, total current assets minus other current liabilities yields the Working Capital Gap. Of this gap, the borrower must fund 25% from Net Working Capital (owned funds), and the bank finances the remaining 75% — this 75% figure is your MPBF. Method II is stricter than the now-largely-retired Method I, which required only 20% owned contribution on total current assets directly rather than on the working capital gap.
A Karnataka-Specific Worked Example
Consider a Peenya-based engineering unit with ₹150 Lakh total current assets and ₹25 Lakh other current liabilities. The Working Capital Gap is ₹125 Lakh. Required owned contribution at 25% is ₹31.25 Lakh, leaving an MPBF — eligible bank finance — of ₹93.75 Lakh. This figure, not an arbitrarily negotiated number, becomes the basis for the sanctioned Cash Credit limit.
Method I vs Method II — Why It Matters Which Your Bank Uses
While Method II is now standard at most PSU banks for MSME lending, some institutions or specific loan categories still apply Method I, which generally produces a different — often lower — eligible limit for the same underlying current asset base. Confirming which method your specific bank applies, rather than assuming Method II universally, avoids a mismatched expectation about your eligible limit.
Frequently Asked Questions
What is MPBF and how does it determine my CC limit?
MPBF (Maximum Permissible Bank Finance) is the maximum working capital your bank will finance, calculated using the Tandon Committee Method II formula: 75% of (Total Current Assets minus Other Current Liabilities). The remaining 25% must come from your own Net Working Capital. Your sanctioned Cash Credit limit at SBI, Canara Bank, or any other PSU bank in Karnataka is directly derived from this calculation — it is not a negotiated number but a mathematical output of your CMA Form 4 data.
Can I increase my CC limit beyond the MPBF calculation?
Not easily. MPBF is a formula-based limit and banks are not permitted to sanction working capital above it under standard RBI lending norms. The correct way to improve your eligible CC limit is to accurately project higher current assets based on genuine operating cycle growth — more inventory, higher receivables — rather than inflating the figures. An MSME loan consultant in Bengaluru can review whether your current MPBF calculation fully reflects your genuine operating cycle or is being understated.
Does MPBF calculation differ between SBI and Canara Bank?
The Tandon Committee Method II formula is standardised across all PSU banks — the underlying calculation is identical at SBI, Canara Bank, and other PSU lenders in Karnataka. Differences arise in how banks apply margin percentages to specific current asset categories (raw material, WIP, finished goods, receivables) and in the benchmarks they use to check whether your projected current assets are realistic for your sector.