CAIIB · ABM

Working Capital Finance

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What is the primary purpose of working capital finance provided by banks?

Working capital finance helps businesses fund their day-to-day operational needs, including the purchase of raw materials, payment of wages, and maintenance of inventory and receivables.

What is the Permissible Bank Finance (PBF) under the second method of lending recommended by Tandon Committee?

75% of Working Capital Gap after borrower contributes 25% margin.

What is the Operating Cycle in the context of working capital assessment?

The operating cycle is the time taken to convert raw materials into cash through the production and sales process, covering raw material holding, work-in-progress, finished goods, and debtor collection periods.

What is the concept of Maximum Permissible Bank Finance (MPBF) in working capital lending?

The maximum credit a bank can extend for working capital purposes.

How is the Net Working Capital (NWC) defined?

Net Working Capital is the difference between current assets and current liabilities, representing the portion of current assets financed by long-term funds.

What is the minimum Current Ratio stipulated by RBI for working capital borrowers under the Tandon Committee norms?

1.33:1 under the second method of lending.

What method did the Tandon Committee recommend for computing Maximum Permissible Bank Finance (MPBF)?

The Tandon Committee recommended three methods for MPBF; the most commonly used (Method II) states that MPBF = 75% of (Current Assets minus Current Liabilities other than bank borrowings).

What is the Gross Working Capital of a business?

Total current assets of the business.

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