Module: General Practice
Q120: Regarding the calculation of Maximum Permissible Bank Finance (MPBF) under the Tandon Committee recommendations: Method I: The bank lends 75% of the "Working Capital Gap" (Current Assets minus Current Liabilities). Method II: The bank lends 75% of "Total Current Assets" minus Current Liabilities. Method II is more liberal (gives a higher loan amount) than Method
I. Which of the statements given above are correct?
✅ Correct Answer: A
Statement 1 (Method I) is Correct: MPBF = 0.75 * (Current Assets - Current Liabilities). Here, the borrower finances 25% of the gap between assets and liabilities.
Statement 2 (Method II) is Correct: MPBF = (0.75 * Current Assets) - Current Liabilities.
Here, the borrower must finance 25% of the Total Current Assets from long-term sources.
Statement 3 is Incorrect: Method II is more conservative (gives a lower loan amount) than Method I because it requires a higher contribution from the borrower.
It ensures a Current Ratio of 1.33:1, whereas Method I only ensures a Current Ratio of 1:1.
Statement 2 (Method II) is Correct: MPBF = (0.75 * Current Assets) - Current Liabilities.
Here, the borrower must finance 25% of the Total Current Assets from long-term sources.
Statement 3 is Incorrect: Method II is more conservative (gives a lower loan amount) than Method I because it requires a higher contribution from the borrower.
It ensures a Current Ratio of 1.33:1, whereas Method I only ensures a Current Ratio of 1:1.