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Regulation of Bank Finance^381

Maximum Permissible Bank Finance

The Tandon Committee had suggested three methods for determining the maximum
per≠missible bank finance (MPBF). To describe these methods, the following notation
is used:

CA = current assets as per the norms laid down
CL = non-bank current liabilities like trade credit and provisions
CCA = core current assetsóthis represents the permanent component of
working capital

The methods for determining the MPBF are described below:

Method 1 MPBF = 0.75 (CA - CL)

Method 2 MPBF = 0.75 (CA) - CL

Method 3 MPBF = 0.75 (CA - CCA) - CL

To illustrate the calculation of the MPBF under the three methods, consider the data for
Ambex Company:

Current Assets1 Rs (in millions)

Raw material 18

Work-in-process 5

Finished goods 10

Receivables (including bills discounted) 15

Other current assets 2

Total 50

Current Liabilities

Trade creditors 12

Other current liabilities 3

Bank borrowings (including bills discounted) 25

Total 40

The MPBF for Ambex Company as per the three methods is as follows:

Method 1 0.75 (CA - CL) = 0.75 (50 -15)

= Rs 26.25 million

Method 2 0.75 (CA) ñCL = 0.75 (50) - 15

= Rs 22.5 million

Method 3 0.75 (CA - CCA) ñCL = 0.75 (50 - 20^2 ) - 15

= Rs 7.5 million

The second method has been adopted. Note that under this method the minimum current
ratio works, out to be 1.33. An example will illustrate this point. Suppose the current
assets and current liabilities (excluding bank finance) for a firm are 100 and 50
respectively. The MPBF will be: