How is MPBF calculated? Both Tandon methods and DSCR, with an example

The short answer

MPBF, the maximum permissible bank finance, is the working capital gap less the borrower's contribution. The gap is total current assets less current liabilities other than bank borrowings. The contribution is the higher of a 25 percent margin and the net working capital the borrower actually has. The Tandon Committee's first method takes that margin on the gap, the second on total current assets, so the second almost always asks for more of the borrower's own money. On the borrower worked below, with total current assets of ₹ 2,50,00,000, total current liabilities of ₹ 2,00,00,000 and ₹ 1,00,00,000 of bank finance asked for, the first method permits ₹ 1,00,00,000 and the second ₹ 87,50,000.

DSCR, the debt service coverage ratio, is the test for the term loan beside it: the cash a year throws off over the term debt service that falls due in it. On the three years worked below it runs 1.19, 1.39 and 1.67, and the first year sits under the 1.25 most lenders want cleared.

The rule in plain words

Start from the balance sheet on the banking system's classification, projected for the year the limit is for. Total current liabilities include the bank's own working capital lending, which comes out first with creditors against letters of credit: the bank has funded that purchase, whatever the ledger calls it. What remains is current liabilities other than bank borrowings.

Net working capital is total current assets less all current liabilities, the part funded from long term sources; it is reported negative, not floored at nil, where a borrower funds long term assets out of short term money. Both methods ask the borrower to fund 25 percent of a base from long term sources, the minimum net working capital; export receivables come off the base first, but only where the facility provides for it. The borrower's contribution is the higher of that minimum net working capital and the net working capital the borrower actually has, not the margin alone, and MPBF is the gap less the contribution.

That is how MPBF is read against the limit asked for. Where the projected balance sheet carries the bank finance asked for inside current liabilities, the working never permits more. Where actual net working capital sets the contribution, MPBF equals that finance exactly; where the margin sets it, MPBF falls short by the excess borrowing, the shortfall in the borrower's own funds.

The DSCR numerator is profit after tax, plus depreciation because it takes no cash out, plus interest on term loans. The denominator is the term loan principal repayable in the year plus that same interest, so term loan interest sits on both sides. Interest on working capital limits stays out of both: it is an operating cost, not term debt service.

None of this is a regulatory formula. The prescribed MPBF formula was withdrawn in April 1997 and banks have set their own working capital assessment since. The working remains the format most banks ask a proposal to be put in, so it is checked against the lending bank's own assessment norms and format.

One borrower under both methods

Every line for a projected balance sheet with total current assets of ₹ 2,50,00,000 and total current liabilities of ₹ 2,00,00,000, including short term bank borrowings of ₹ 75,00,000 and creditors against letters of credit of ₹ 25,00,000, nothing netted.

Actual net working capital of ₹ 50,00,000 is above the first method's margin, so it sets the contribution and the first method permits exactly the ₹ 1,00,00,000 asked for. Under the second the margin binds, and MPBF falls short of the finance asked for by the excess borrowing of ₹ 12,50,000.

The same borrower with export receivables netted

The borrower above with export receivables of ₹ 40,00,000 netted off each method's margin base, every other input unchanged.

Netting off more than the base itself drives the required margin below nil, which is arithmetic rather than a limit any bank would sanction.

DSCR across three years of a term loan

Three years of a term loan repaid at ₹ 16,00,000 of principal a year, interest falling from ₹ 11,00,000 to ₹ 7,80,000, depreciation of ₹ 12,00,000 a year and profit after tax rising from ₹ 9,00,000 to ₹ 20,00,000, with the last column running the three years' totals through the same ratio.

A DSCR of 1.25 is a widely used internal comfort level, not a statutory floor. It varies by lender, by facility and by tenor, and so does whether it is judged on the average or on the worst year.

Conditions and edge cases

The common shortcut is the gap less the margin, which under the first method with nothing netted is 75 percent of the gap. For this borrower it reports ₹ 1,12,50,000 under the first method, ₹ 12,50,000 more than the working permits. It agrees with the working only while actual net working capital sits at or below the margin, which here it does under the second method and not under the first.

Export receivables move the two methods differently. Netting ₹ 40,00,000 leaves the first method at ₹ 1,00,00,000, because actual net working capital still sets its contribution, and lifts the second to ₹ 97,50,000, because the margin was the binding figure there.

Where the margin is larger than the whole gap, no bank finance is permissible on that method, and the calculator prints the contribution in excess of the gap rather than a negative limit. With nothing netted, that happens under the second method once current liabilities other than bank borrowings fund more than 75 percent of total current assets.

Bank borrowings and creditors against letters of credit booked larger than total current liabilities push the gap past total current assets and turn the usual order round, so the second method can permit more than the first: check both liability figures before reading either column. A bank applies its own margin and its own definition of current assets. It may hold stock beyond a holding norm, or a deposit maturing next year, outside current assets, and the permissible figure moves with it.

On DSCR, a moratorium year with interest and no principal still yields a ratio. A year with neither instalment nor interest has nothing to service and is not applicable, not a ratio of zero. A loss larger than depreciation and interest together turns the ratio negative. The table and the calculator pass their verdict on the ratio as printed at two decimals, so a raw ratio a shade under 1.25 that prints as 1.25 reads as at the level.

Tax year 2026-27 under the 2025 Act

Nothing in either working carries a year: neither Tandon method nor DSCR moves with a Finance Act, which is why the calculator's basis names no financial year. From 1 April 2026 the Income-tax Act, 2025 replaces the previous year and the assessment year with the tax year, and tax year 2026-27 is its first. Tax reaches them only through the figures the CA enters, the tax charge inside profit after tax among them, and for 2026-27 that charge is worked under the 2025 Act.

What the calculator does

The calculator beside this guide works both Tandon methods on one balance sheet, numbering every line from total current assets to the permissible finance, and shows what the common 75 percent shortcut would report and by how much it overstates. It works DSCR for one year with both sides shown and flags a year under 1.25. It leaves to the CA the classification on the bank's own format, whether export receivables may be netted, the projections for each year, and the sanction, which is the bank's own affair.