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    Question

    Which of the following represents the second method of

    calculating Maximum Permissible Bank Finance (MPBF) as recommended by the Tandon Committee?
    A (Current Assets – Other Current Liabilities) – 25% Correct Answer Incorrect Answer
    B (Current Assets – Other Current Liabilities) – 25% of Current Assets Correct Answer Incorrect Answer
    C (Current Assets – Other Current Liabilities) – 25% of (Current Assets – Other Current Liabilities – Existing Short-Term Borrowings) Correct Answer Incorrect Answer
    D (Current Assets – Other Current Liabilities) – 25% of Other Current Liabilities Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    The Tandon Committee (1975) prescribed three methods for assessing Maximum Permissible Bank Finance (MPBF): 1. First Method: MPBF = 75% of Working Capital Gap (i.e., Current Assets – Current Liabilities other than bank borrowings). → Borrower to bring in 25% of Working Capital Gap. 2. Second Method (more stringent): MPBF = (Current Assets – Current Liabilities other than bank borrowings) – 25% of Current Assets. → Borrower must finance at least 25% of Current Assets from long-term funds. 3. Third Method: MPBF = (Current Assets – Current Liabilities other than bank borrowings) – 25% of (Current Assets – Core Current Assets). → Even higher margin expected from borrower. Thus, the second method requires banks to ensure that borrowers finance 25% of Current Assets through long-term sources, and only the balance working capital is financed by banks.

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