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-I2) Calculate MPBF using Tandon Committee recommendations Method-II

Solution:Current assets, CA = 560 Current Liability, CL = 560Current Liability excluding bank finance = 560 – 360 = 200So Working capital Gap (WCG) = 560 - 200 = 360 ……….. (a)

(1) Method – IMargin = 25 % of WCG = 25% of 360 = 90MPBF = WCG – Margin = 360 – 90 = 270Existing bank borrowing = 360Hence excess bank finance = 360 – 270 =90(2) Method-II

Margin = 25% CA = 25% of 560 = 140Working capital Gap(WCG) = 360 MPBF = WCG – Margin = 360 – 140 = 220Existing bank borrowing = 360Hence excess finance = 360 – 220 = 140If bank borrowing is reduced from 360 to 220, current liability will be reducedfrom 560 to 560-140 = 420 (CL)Current ratio after this change = CA/CL = 560/420 = 4/3 = 1.33:1