Ever wondered how banks decide how much loan to give a company for its day-to-day needs? Or why some businesses, despite earning well, struggle with cash flow? Welcome to the complex yet crucial world of Working Capital Assessment!
In this session, we’ll deep dive into one of the most important topics for the CCP (Certified Credit Professional) exam – Working Capital Assessment – Part 2. From understanding the MPBF methods laid down by the Tandon Committee to how banks evaluate a borrower’s financial contribution, we cover it all. You’ll also learn about ABF (Assessed Bank Finance), Cash Budget Method, working capital needs of the IT/software industry, and much more – explained in a mix of Hindi and English, just the way bankers like it.
Whether you’re a banking professional preparing for IIBF’s CCP certification, or someone who wants to strengthen their fundamentals in credit appraisal, this content is tailor-made for you.
👉 Watch the video till the end, and don’t forget to drop your thoughts, doubts, or feedback in the comments – we’d love to hear from you!
👉 Before we dive in, watch this video for a complete breakdown:
What is MPBF – Maximum Permissible Bank Finance?
The Tandon Committee (1974) introduced MPBF to improve industrial credit delivery. Instead of relying solely on security, banks assess the borrower’s performance and encourage businesses to utilize internal funds first.
Key Features:
- Limits on excess inventory & receivables
- Promotes lean working capital management
- Encourages funding through long-term sources
MPBF considers components like:
- Raw Material Holding
- WIP (Work-in-Process)
- Finished Goods
- Receivables
Lending Methods: 1st, 2nd & 3rd Methods Explained
1st Method of Lending
- Borrower contributes 25% of Working Capital Gap
- Bank finances the remaining 75%
- Applicable when Current Ratio is 1.17:1
- Used for Sick or Weak Units
2nd Method of Lending
- 25% of Total Current Assets funded by borrower
- Minimum Current Ratio: 1.33:1
- More conservative approach
3rd Method of Lending
- 100% of Core Current Assets + 25% of other current assets
- Rarely used due to restrictive nature
ABF Method – Assessed Bank Finance
Replaced MPBF in 1997. Offers more flexibility and no mandatory liquidity ratios. Assessment is done based on:
- Projected Balance Sheets
- Cash Flows
- Operating cycle, profitability, liquidity
Cash Budget Method – For Seasonal & Fluctuating Cash Flow Industries
Used for:
- Seasonal businesses (agriculture, school uniforms, crackers)
- Construction & software development projects
Steps:
- Identify inflows: operations, financing, investing
- Identify outflows: wages, loan repayment, purchases
- Net Cash Flow = Inflows – Outflows
- Calculate closing cash by adjusting with opening balance
Comparison of All Working Capital Assessment Methods
| Method | Basis | Applicability | Borrower Contribution | Bank Contribution |
|---|---|---|---|---|
| Operating Cycle | Expense cycles | Small loans | NA | Based on cycles |
| Traditional | Inventory & receivable holding | < 5 Cr | Calculated | Balance after margin |
| PAT (Turnover) | 20% of turnover | Up to 5 Cr | 5% margin | 95% |
| MPBF | Current asset-based | > 5 Cr | 25% | As per method |
| ABF | Projected financials | > 5 Cr | Flexible | Flexible |
| Cash Budget | Cash flow gaps | Seasonal/IT | Adjusted in inflow | Loan = deficit |
Working Capital Finance for IT & Software Industry
As per RBI guidelines, banks evaluate:
- Promoter track record
- Projected turnover for small borrowers
- MPBF/ABF for large borrowers
- Monthly cash budget
- Charge on current assets (security)
[FREE EPDF] IIBF Certification | CCP Chapter 13 | Part 1 | Module C
Impact of Inadequate & Excess Working Capital
If Working Capital is Too Low:
- Under-utilization of capacity
- Missed discounts & opportunities
- Credit sale dependency
- High borrowing cost
- Operational inefficiencies
If Working Capital is Too High:
- Idle inventory & poor management
- Relaxed receivables policy = bad debts
- Speculative investments
- Business stagnation
- Weak cost control
Drawing Power (DP) in Working Capital Accounts
DP = Current Assets – Adjusted Liabilities. Calculated monthly from stock statements (not older than 3 months).
In consortium lending, DP is shared on a pro-rata basis.
Loan System for Delivery of Bank Credit
- Min 60% of working capital as loan, rest as cash credit
- Applies to limits > ₹150 Cr
- Minimum loan tenure: 7 days
- Repayment: Installment or Bullet
Conclusion
Working Capital Assessment is the heart of corporate credit appraisal. Whether you’re aiming to clear the CCP exam or improve your practical banking knowledge, understanding MPBF, ABF, and Cash Budgeting methods is essential.
“Right assessment leads to right lending.”
So go ahead – watch the full video, revise the concepts using the table above, and start applying them in real-world cases or practice questions. If you found this helpful, drop a comment, share with your friends, and don’t forget to subscribe to stay updated with our next banking sessions!
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