Question
Which of the following represents the second method of
calculating Maximum Permissible Bank Finance (MPBF) as recommended by the Tandon Committee?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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