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As per the recommendations of Tandon Committee, the corporate are discouraged from accumulating too much of stocks of current assets and are recommended to move towards very lean inventories and receivable levels.
Depending on the size of credit required, two methods are in practice to fund the working capital needs of the corporate.
Method I: For corporate whose credit requirement is less than Rs.10 lakhs, banks can find the working capital required. Working capital is calculated as difference of total current assets and current liabilities other than bank borrowings (called Maximum Permissible Bank Finance or MPBF). Banks can finance a maximum of75 per cent of the required amount and the rest of the balance has to come out of long-term funds.
Method II: For corporate with credit requirement of more than Rs.10 lakhs this method is used. In this method, the borrower finances minimum of25% of its total current assets out of long term funds. The rest will be provided by the bank through MPBF. Thus, total current liabilities inclusive of bank borrowings could not exceed75% of current assets.
AGree with answer by Mr. Jetley
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Endorse Mr.Jetley's answer
mpbs that is described in different ways and need not be followed with the same principles and procedures all over.
