Tandon Committee Method 1 & Method 2: The Complete MPBF Guide for JAIIB PPB 2026

If one topic quietly decides marks in JAIIB Principles &. Practices of Banking. It is this one.

The Tandon Committee Method 1. Method 2 tell us how much working capital a bank can safely lend to a business. Examiners love it because it mixes theory with a quick calculation.

Many students panic when they see the formulas. They should not. Once you understand the logic behind Maximum Permissible Bank Finance (MPBF). Both methods become a 60-second scoring opportunity in the exam hall.

This 2026 guide rebuilds the topic from scratch. You get plain-English meaning, both formulas, multiple solved examples, a clean comparison table, common mistakes and a focused FAQ. Read it once, bookmark it, and revise it before your mock tests.

Why the Tandon Committee Matters for Bankers

Working capital is the lifeblood of any trading or manufacturing business. Banks fund a big slice of it. But how much is too much? Before 1974, lending was loose and unscientific.

The Reserve Bank of India wanted discipline. So a study group was formed to design a logical lending framework. That framework still shapes how credit officers think today. Which is exactly why JAIIB tests it.

Understanding the Tandon Committee Method 1 and Method 2 is not just exam theory. It is the foundation of real-world credit appraisal that every promoted banker uses on the job.

First, Two Terms You Must Know

Before the formulas, lock in two definitions. Examiners often ask these directly as one-mark questions.

1. Working Capital: The sum of funds invested in the various current assets used in the operating cycle by industrial. Trading firms.
2. Operating Cycle: The length of time needed to convert non-cash current assets into cash. Examples include raw materials, work-in-process, finished goods and bills receivable.

Who Was the Tandon Committee?

A study group headed by Shri P. L. Tandon framed guidelines for working-capital lending in July 1974. These are popularly called the Tandon Committee recommendations.

Their goal was simple but powerful. They wanted a clear way to work out the maximum amount a borrowing unit could expect from a bank. That figure is the Maximum Permissible Bank Finance (MPBF).

The committee proposed three methods in total. For working-capital appraisal. Two were widely accepted: Method I (the first method). Method II (the second method). Both are explained in detail below.

The Core Logic: What Is MPBF?

Think of MPBF as a ceiling. It is the highest amount of working-capital finance a bank is willing to extend. The borrower must bring in the rest from their own funds. Called the margin.

The two methods differ only in how big that margin must be. A bigger margin means the borrower has more skin in the game. It also means a healthier current ratio. Which is liquidity (current assets divided by current liabilities).

Here is the one-line difference to memorise. Method 1 takes the margin on the gap. Method 2 takes the margin on total current assets.

Tandon Committee Method 1 (First Method)

Under Method I. The borrower must arrange 25% of the Working Capital Gap (WCG) as margin. The bank funds the remaining 75% of that gap.

The Working Capital Gap (WCG) = Current Assets &minus. Current Liabilities (excluding bank borrowings). The minimum current ratio achieved under this method works out to 1:1.

Solved Example: Method 1

A company has Total Current Assets (TCA) of Rs. 4,000 and Other Current Liabilities (OCL) of Rs. 800 (excluding bank working-capital facilities). Let us find the MPBF.

• WCG = TCA − OCL = 4,000 − 800 = 3,200  …(A)
• 25% of WCG = 25/100 × 3,200 = 640  …(B)
• MPBF = A − B = 3,200 − 640 = Rs. 2,560

So. Under the first method, the bank can lend a maximum of Rs. 2,560 when total current assets are Rs. 4,000.

Tandon Committee Method 2 (Second Method)

Under Method II, the borrower must arrange a bigger margin. Here the margin is 25% of Total Current Assets (TCA). Not just the gap. This is the stricter and more popular method.

Because the margin is larger, liquidity improves. The minimum current ratio under this method works out to 1.33:1. The benchmark RBI has long preferred.

Solved Example: Method 2

Take the same figures: Total Current Assets of Rs. 4,000 and Other Current Liabilities of Rs. 800.

• WCG = CA − CL = 4,000 − 800 = 3,200  …(A)
• 25% of TCA = 25/100 × 4,000 = 1,000  …(B)
• MPBF = A − B = 3,200 − 1,000 = Rs. 2,200

So. Under the second method, the bank can lend a maximum of Rs. 2,200. Notice how the higher margin shrinks the bank's exposure.

Current ratio check: Total Current Assets = Rs. 4,000 and Total Current Liabilities (after bank finance) = Rs. 3,000, giving a current ratio of 1.33:1.

Method 1 vs Method 2: Side-by-Side Comparison

This table is your exam-day cheat sheet. If you remember nothing else, remember this.

The Chore Committee Link You Must Not Skip

Examiners often pair the Tandon Committee with the Chore Committee. The Chore Committee was appointed in April 1979 to review working-capital finance further.

It recommended that all borrowers (other than sick units) enjoying working-capital limits of Rs. 50 lakh. Above from the banking system should be placed under Method II. That shift locks in the healthier 1.33:1 current ratio.

As per RBI guidelines. The lower cut-off limit for Method II has been revised from time to time. The benchmark current ratio of 1.33:1, however, has stayed the reference point. For the exact current threshold. Always confirm on the latest official IIBF notification.

How to Solve MPBF Questions in the Exam (Step-by-Step)

Speed wins JAIIB. Follow this fixed sequence and you will rarely make an error.

1. Separate Current Liabilities into bank borrowings and non-bank items.
2. For the formula, CL means current liabilities excluding bank borrowings.
3. Total up all Current Assets (CA).
4. For Method 1, apply MPBF = 0.75 (CA − CL).
5. For Method 2, apply MPBF = (0.75 × CA) − CL.
6. Double-check the current ratio if the question asks for it.

Master Example: Pendu Company Limited

Here is a full balance-sheet style question, the kind JAIIB loves. Study the data, then solve it both ways.

Note: CL for the formula = Total Current Liabilities &minus. Bank Borrowings = 400 − 250 = Rs. 150 lacs.

Method 1 Solution:

• MPBF = 0.75 (CA − CL) = 0.75 (500 − 150)
• MPBF = 0.75 × 350 = Rs. 262.50 lacs

Method 2 Solution:

• MPBF = (0.75 × CA) − CL = (0.75 × 500) − 150
• MPBF = 375 − 150 = Rs. 225.00 lacs

So the bank cannot extend working-capital credit to Pendu Company Limited beyond these calculated amounts. Method 2 again gives the smaller, safer figure.

Common Mistakes Students Make

Most lost marks come from small slips, not hard concepts. Avoid these traps.

• Including bank borrowings in CL. Always exclude existing bank borrowings from current liabilities in the formula.
• Mixing the two formulas. Method 1 multiplies the gap; Method 2 multiplies only current assets.
• Forgetting the margin base. 25% of the gap (Method 1) is not the same as 25% of total current assets (Method 2).
• Wrong current ratio. Remember 1:1 for Method 1 and 1.33:1 for Method 2.
• Ignoring units. If figures are in lacs, your answer must also be in lacs.

Frequently Asked Questions (FAQ)

What is the full form of MPBF?

MPBF stands for Maximum Permissible Bank Finance. It is the highest amount of working-capital credit a bank may sanction to a borrower under the Tandon Committee framework.

What is the difference between Tandon Committee Method 1 and Method 2?

In Method 1. The borrower funds 25% of the Working Capital Gap, giving a 1:1 current ratio. In Method 2. The borrower funds 25% of total current assets, giving a stronger 1.33:1 current ratio.

When was the Tandon Committee formed?

The study group headed by Shri P. L. Tandon framed its working-capital lending guidelines in July 1974. These are the well-known Tandon Committee recommendations.

What did the Chore Committee recommend?

The Chore Committee (April 1979) recommended that borrowers (other than sick units) with working-capital limits of Rs. 50 lakh and above be placed under Method II, ensuring a 1.33:1 current ratio. Confirm current limits on the latest official IIBF notification.

Which method gives a higher MPBF?

Method 1 always gives a higher MPBF because the borrower's margin is smaller. Method 2 gives a lower, safer figure for the bank.

Final Word: Turn This Topic Into Easy Marks

The Tandon Committee Method 1 and Method 2 looks technical. But it rewards clarity, not memorisation. Learn the two formulas. Practise three or four sums. And this becomes a guaranteed-scoring area in PPB.

Banking concepts stick best through repetition. Solve as many numerical questions as you can, then test yourself with timed mock tests and brush up theory with our free guides. Consistency, not cramming, clears JAIIB on the first attempt.

Keep going. Every solved sum brings you one step closer to that designation. You have got this.

Related Guides

Use the in-built timer on every mock test. Aim to finish well before the bell so you have time to mark for review. Once that timing is automatic, accuracy climbs on its own.

Use the in-built timer on every mock test on iibf.store to build real exam speed.

Short, daily revision sessions beat last-minute cramming — consistency compounds fast.