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MPBF stands for Maximum Permissible Banking Finance in Indian Banking Sector. MPBF guidelines were suggested in Tandon commettee which were being followed by Indian Banks with lot of stringency. Corporates faced lot of problem in getting Finance from banks on account of stringency of the norms and they had to resort to other sources of finance at a higher cost these norms were dissolved. Consequently SBI, India's largest bank came out with its own guidelines which were on the similar lines but with relaxed norms which are being followed by all banks with slight personalisation and referred to as modified MPBF System in Indian context.
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How the mpbf be calculated?
.75(CA-CL) (.75 of CA)-CL .75(CA-CCA)-CL
Method of calculating MPBF?
MPFB METHOD—Used for AboveRs. 5 crores of WC finance.—Working Capital Gap is computed=Current Assets less Other Current Liabilities.(Other Current Liabilities does not include working capital loans from other banks )Less 25% of the Current assets is the margin that borrower has to bringORActual margin in the borrower's balance sheet(Whichever is more of the two)
Maximum permissible bank finance?
As per the recommendations of Tandon Committee, the corporates should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporates could be met by one of the following methods: · First Method of Lending:Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs · Second Method of Lending:Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method. The committee suggested norms, i.e., ceilings for inventory and receivables, which could be considered for bank finance. The 15 industries included cotton and synthetic textiles, paper, cement, pharmaceuticals and engineering. Thus, for instance, the norms proposed for the pharmaceutical industry were :Raw materials : 2.75 months' consumptionStocks in process : ½ month's cost of productionFinished goods : 2 months' cost of salesReceivables : 1.25 months' salesFor determining the maximum permissible bank finance (MPBF), the methods suggested were :Method I : 0.75 (CA - CL)Method II : 0.75 CA - CLMethod III : 0.75 (CA - CCA) - CLHere CA stands for CURRENT ASSETS corresponding to the suggested norms or past levels if lower, CL represents CURRENT LIABILITIES excluding bank lending and CCA stands for the 'Core Current Assets', i.e., permanent current assets. Method I and, following the CHORE COMMITTEE recommendations, Method II have been used by banks in assessing working capital needs of businesses, for the last several years. In October 1993, the RBI infused operational autonomy by permitting banks to determine appropriate levels of inventory and receivables, based on production, processing cycle, etc. These lending norms were made applicable to all borrowers enjoying an aggregate (FUND-BASED) working capital limit of Rs.1 crore and above from the banking system. However, the requirement of the CURRENT RATIO at 1.33 was retained.
How the mpbf be calculated?
.75(CA-CL) (.75 of CA)-CL .75(CA-CCA)-CL
What is the definition of MPBF?
The acronym MPBF stands for Maximum Permissible Banking Finance. It is an organization where corporate is advised not to gain too much of a current stock or asset. Instead it is suggested that they go for receivable levels and inventories using two different methods to fund corporate's capital needs.
What is the role of tandon committee on working capital?
•RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.••Concept of working capital finance is introduced by the committee. WCG should be met partly from the borrower's long term sources (margin money) and the balance by bank finance•• Concept of MPBF was introduced . This committee has given three different methods for calculation of MPBF•Core current assets defined in third method is the minimum stock levels which a company carries through all the year••In 1997 RBI withdrew the instructions regarding following of Tandon committee recommendations to assess the MPBF and permitted all banks to follow their own methods with in prudential guidelines .MPBF•Tandoncommittee suggested the following threealternatives for calculating MPBF•First Method:MPBF = 0.75 (CA - other current liabilities)This method ensures the minimum current ratio of 1.17:1•Second Method:MPBF = (0.75 X CA) - other CLThis method ensures the minimum current ratio of 1.33:1•Third Method:MPBF = 0.75(CA-CCA) - CLCCA means core current asset= CURRENT ASSET -OTHER SHORT TERM LIABILITIES
Method of calculating MPBF?
MPFB METHOD—Used for AboveRs. 5 crores of WC finance.—Working Capital Gap is computed=Current Assets less Other Current Liabilities.(Other Current Liabilities does not include working capital loans from other banks )Less 25% of the Current assets is the margin that borrower has to bringORActual margin in the borrower's balance sheet(Whichever is more of the two)
Maximum permissible bank finance?
As per the recommendations of Tandon Committee, the corporates should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporates could be met by one of the following methods: · First Method of Lending:Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs · Second Method of Lending:Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method. The committee suggested norms, i.e., ceilings for inventory and receivables, which could be considered for bank finance. The 15 industries included cotton and synthetic textiles, paper, cement, pharmaceuticals and engineering. Thus, for instance, the norms proposed for the pharmaceutical industry were :Raw materials : 2.75 months' consumptionStocks in process : ½ month's cost of productionFinished goods : 2 months' cost of salesReceivables : 1.25 months' salesFor determining the maximum permissible bank finance (MPBF), the methods suggested were :Method I : 0.75 (CA - CL)Method II : 0.75 CA - CLMethod III : 0.75 (CA - CCA) - CLHere CA stands for CURRENT ASSETS corresponding to the suggested norms or past levels if lower, CL represents CURRENT LIABILITIES excluding bank lending and CCA stands for the 'Core Current Assets', i.e., permanent current assets. Method I and, following the CHORE COMMITTEE recommendations, Method II have been used by banks in assessing working capital needs of businesses, for the last several years. In October 1993, the RBI infused operational autonomy by permitting banks to determine appropriate levels of inventory and receivables, based on production, processing cycle, etc. These lending norms were made applicable to all borrowers enjoying an aggregate (FUND-BASED) working capital limit of Rs.1 crore and above from the banking system. However, the requirement of the CURRENT RATIO at 1.33 was retained.
Explain the tandon committee norms and chore committee recommendations on inventory norms?
Methods of lendingLike many other activities of the banks, method and quantum of short-term finance that can be granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was exercised on the lines suggested by the recommendations of a study group headed by Shri Prakash Tandon.The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section of the Industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilisation of Bank credit. This was the first elaborate attempt by the central bank to organise the Bank credit. The report of this group is widely known as Tandon Committee report. Most banks in India even today continue to look at the needs of the corporates in the light of methodology recommended by the Group.As per the recommendations of Tandon Committee, the corporates should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporates could be met by one of the following methods:· First Method of Lending: Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs· Second Method of Lending: Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method.· Third Method of Lending: Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings.(This method was not accepted for implementation and hence is of only academic interest).
How working capital is calculated and how drawing power is arrived at?
Nilesh Barad (Project Finance Consultant, 9375656548)Working Capital Calculation Like many other activities of the banks, method and quantum of short-term finance that can be granted to a corporate was mandated by the Reserve Bank of India till 1994. This control was exercised on the lines suggested by the recommendations of a study group headed by Shri Prakash Tandon. The study group headed by Shri Prakash Tandon, the then Chairman of Punjab National Bank, was constituted by the RBI in July 1974 with eminent personalities drawn from leading banks, financial institutions and a wide cross-section of the Industry with a view to study the entire gamut of Bank's finance for working capital and suggest ways for optimum utilisation of Bank credit. This was the first elaborate attempt by the central bank to organise the Bank credit. The report of this group is widely known as Tandon Committee report. Most banks in India even today continue to look at the needs of the corporates in the light of methodology recommended by the Group. As per the recommendations of Tandon Committee, the corporates should be discouraged from accumulating too much of stocks of current assets and should move towards very lean inventories and receivable levels. The committee even suggested the maximum levels of Raw Material, Stock-in-process and Finished Goods which a corporate operating in an industry should be allowed to accumulate These levels were termed as inventory and receivable norms. Depending on the size of credit required, the funding of these current assets (working capital needs) of the corporates could be met by one of the following methods: · First Method of Lending:Banks can work out the working capital gap, i.e. total current assets less current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned funds and term borrowings. This approach was considered suitable only for very small borrowers i.e. where the requirements of credit were less than Rs.10 lacs · Second Method of Lending:Under this method, it was thought that the borrower should provide for a minimum of 25% of total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain level of credit for purchases and other current liabilities will be available to fund the build up of current assets and the bank will provide the balance (MPBF). Consequently, total current liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated that the working capital needs of all borrowers enjoying fund based credit facilities of more than Rs. 10 lacs should be appraised (calculated) under this method. · Third Method of Lending: Under this method, the borrower's contribution from long term funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by the Study Group as representing the absolute minimum level of raw materials, process stock, finished goods and stores which are in the pipeline to ensure continuity of production and a minimum of 25% of the balance current assets should be financed out of the long term funds plus term borrowings.(This method was not accepted for implementation and hence is of only academic interest). DP CalculationLoan or Limits are being fixed against HYPOTHECAION of particular stock. The borrower use to submit his stock statement on regular basis say monthly, fortnightly and quarterly as decided by the bank and the borrower. Bank and borrower both are agree vide an arrangement letter regarding % of the margin on the stock. so after reducing the margin the bank allow a borrower to draw amount against the stock and fixed the Drawing power subject to the maximum of his loan.
What is cash credit account?
There are many ways in which finance can be raised Cash Credit is one of the many ways of raising finance (i.e. it is a type of loan account).Meaning : Cash credit is an arrangement under which a customer of a bank or financial institution is allowed an advance up to certain limit against credit granted by bank. That means a loan may be granted say for Rs. 1 Lakh however the customer/borrower of the loan may take the amount of loan to the extent required by him but not exceeding the limit of Rs. 1 Lakhs.Purpose : The purpose for which loan is required is essential to ascertain, as for different purposes different types of loan can be taken. Eg. Incase the loan is required to purchase fixed assets like plant and machinery, term loan must be taken as plant and machinery are long term assets it will take time in repayment of the loan and repayment can be done in EMI's (Equated Monthly Installments). Where as a loan required for working capital needs a long term loan is not required as repayment does not require long period, hence cash credit may be availed.Explanation of Cash Credit loan facility : If for eg. a person is having a business. To carry on this business he needs to purchase raw material, and sell the goods. For this he needs working capital to run his daily business. Working capital means current assets minus current liabilities. Where current assets comprise of investment in stock, sundry debtors, cash, etc., current liabilities comprise of sundry creditors, suppliers of stock(incase of stock taken on credit), etc. The reason working capital is current asset minus current liabilities because money is required to purchase stock, this stock when still not sold will be of some value for which cash is invested in it and the part that is sold but on credit to customers(debtors) here also cash is not received and cash is invested. Hence in both the items money is put in. On the other hand incase of stock which is purchased on credit (creditors) here no money is put in, i.e. the stock purchased without investment. Hence total amount of money put in or invested in running the business is only to the extent of money invested in stock in hand(for which money is paid) and debtors(where again money is invested) less the amount of stock received on credit form creditors(here the amount is not invested for purchase of stock).This working capital that is required to run the business can be either funded by the businessman him self or if he does not have the money he can take a loan i.e. Cash credit.In Cash Credit facility an amount of loan is given to the borrower/businessman for his working capital needs. The entire amount of working capital required is not funded by the bank, some small amount will have to be funded by the businessman and the balance amount will be funded by a bank as a loan. This is as per RBI rules. The amount of loan to be given is decided on the basis of different types of methods like MPBF (Maximum Permissible Bank Finance) suggested by Tandoon Committee or other methods. These methods use formulae which take into consideration actual working capital required.The amount so worked out is given as loan and is called as "limit" this is because under this kind of loan the borrower may not take up the entire amount of loan as working capital requirement every day is not the same, i.e. on one day the amount of working capital required may for eg. may be Rs. 96,000 and on a another day it may be Rs. 92,000 as some debtor might have paid up some amount. Hence the businessman will require Rs.96,000 on one day and he will require Rs. 92,000 on the other day only. He on a particular day may require Rs. 1,07,300 but the loan amount that he can get is any amount which is not more than the "limit" of the loan given. If in the above eg. Limit is say Rs. 1 lakh then when he requires Rs. 1.07300 he will get loan upto Rs. 1 lakh only.The reason why he should borrow different amounts on different days as per the amount required by him on that day is that the interest calculated is on daily basis on the amount borrowed by him on different days. i.e. if amount required by him say on a particular day is say Rs.92,000 but he takes entire amount Rs. 1,00,000 he will have to pay interest on entire amount of Rs. 1 lakh. However if he would have only taken say Rs. 92,000 which he required he would have to pay interest on Rs. 92,000 only and not on Rs 1,00,000.Your second question as to by whom the account is maintained? The answer to that is the bank will maintain the account in its own books and will provide the cash credit account holder with a monthly statement of the account.As for as accounting in the books of account of the borrower the amount of balance reflected in the statement as on the last date of accounting i.e. say 31/03/2007 called as outstanding balance should be taken in the Balance sheet, liabilities side and the interest amount shown in the statement to be taken to Profit and Loss Account, debit side.
