Working Capital
Assessment
Engineering borrower liquidity: Mastering MPBF calculations, Tandon/Nayak norms, and 2026-compliant limit quantification.
1. The Logic of Limit Setting
Working capital assessment is the bridge between a borrower's operational needs and a bank's risk appetite. It is not just about the numbers; it’s about understanding the **Merchandising Cycle** and ensuring the bank funds the core gap without over-leveraging the borrower.
The Golden Rule
"Banks fund the gap, not the asset itself. The gap exists because assets move faster or slower than the corresponding liabilities."
2. Primary Assessment Frameworks
Nayak Committee
A simplified turnover-based method (20% of projected turnover) designed for SMEs and small limits.
Tandon / MPBF II
Maximum Permissible Bank Finance. Focuses on 'Working Capital Gap' and mandatory 25% margin from Net Working Capital (NWC).
Cash Budget
Focuses on absolute monthly cash flows. Mandatory for seasonal units (sugar, tea) and large corporate exposures.
3. The MPBF Anatomy
Understanding the transition from Gross Assets to Net Financed Limit:
Total Current Assets minus (Other Current Liabilities + Margin from Borrower)
Other Current Liabilities (OCL)
Trade creditors, advance from customers, and statutory dues that fund current assets for free.
Safety Margin (NWC)
Borrower's contribution to current assets (usually 25% of the WC Gap under Method II).
Interactive Logic: The Project Challenge
Assess the fund gap for XY2 Ltd. Total CA is 100 Cr, OCL is 20 Cr. NWC required is 25% of Gap.
Calculate the Maximum Permissible Bank Finance:
MPBF = Gap (80) - Margin (20) = 60 Cr.
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