BANK PROMOTION CLASS: WORKING CAPITAL : MPBF METHOD

Summary

The video covers a detailed explanation of the Maximum Permissible Bank Finance (MPBF) method, a key concept in calculating working capital for businesses. The speaker explains how the MPBF method helps determine the required working capital by subtracting current liabilities from current assets, excluding bank borrowings. The video references the Tandon Committee's role in establishing this method and emphasizes the importance of maintaining a margin, where businesses must bring in 25% of the working capital themselves. Various working capital examples and formulas are discussed to clarify the process.

Takeaways

• 📊 The video discusses the MPBF (Maximum Permissible Bank Finance) method used to calculate working capital.
• 💰 MPBF helps determine how much working capital a business can get from a bank.
• 📈 The method requires businesses to maintain a certain current ratio based on market conditions.
• 🏦 Banks require businesses to bring in a portion of working capital themselves, known as margin money.
• 💼 The margin money is typically 25% of the working capital gap, and businesses need to manage this amount on their own.
• 📉 The working capital gap is calculated as current assets minus current liabilities (excluding borrowings).
• 💡 The Tandon Committee recommended this method to control how businesses manage their working capital.
• 🔢 First method: Businesses must maintain a margin of 25% on their working capital.
• 🏢 Example: A company with current assets of 500 crore and liabilities of 150 crore would have to bring in 25% margin money.
• 📋 This method is still popular and widely used by banks to determine permissible finance for enterprises.

Q & A

What is the MPBF method in banking?

The MPBF method stands for Maximum Permissible Bank Finance method. It is used to calculate the working capital a business requires by analyzing its current assets and liabilities.

How does MPBF help in determining working capital?

The MPBF method helps calculate the working capital by determining the gap between current assets and current liabilities. Banks then finance a portion of this gap, while the company brings in a margin.

What is working capital according to the script?

Working capital is the difference between a company's current assets and current liabilities, excluding bank borrowings.

What is the significance of the 25% margin mentioned in the MPBF method?

The 25% margin refers to the portion of the working capital gap that the business owner must bring in themselves. The remaining 75% can be financed by the bank.

What is the role of the Tandon Committee in the MPBF method?

The Tandon Committee recommended the MPBF method, establishing guidelines for working capital finance and the necessary margin a company should bring in.

What happens if a company cannot bring the required margin in the MPBF method?

If a company cannot bring the required 25% margin, the Tandon Committee suggested that banks could still provide working capital loans to cover the gap.

What is the first method of lending according to the script?

The first method of lending under MPBF ensures that 25% of the working capital requirement is met by the enterprise, while the rest can be financed by the bank.

What does the term 'working capital gap' mean?

The working capital gap refers to the difference between current assets and current liabilities after excluding bank borrowings.

How does a company calculate the current ratio under the MPBF method?

The current ratio is calculated by dividing current assets by current liabilities. Banks may require businesses to maintain certain ratios like 1.17 or 1.33 depending on the method.

What is the role of creditors in calculating working capital?

Creditors represent the current liabilities of a company. The amount owed to creditors is included in the calculation of working capital to determine how much is available for operational use.