Bank of Baroda (BoB) has decided to work out an alternative method to the maximum permissible bank finance (MPBF) system to assess the working capital requirements of its borrowers. BoB is planning to move towards a three-tier system whereby different methods will be followed to calculate the working capital finance limits depending on the size of the borrower.
According to the new system, small borrowers with a capital of Rs 2 lakh and below will be assessed on the basis of the turnover method which will depend on their sales and business cycles. The requirements of the medium size borrowers will be assessed according to the existing MPBF method.
Large corporates, who normally follow a system of cash budgeting, will be appraised on the basis of the cash flow method. This system is expected to help large borrowers to plan their requirements.
All borrowers will also be given the option of continuing with the existing MPBF method if they feel comfortable with it, sources said. The basis of the MPBF system is the inventory method which draws from the recommendations of the Tandon and Chore committees that spelt out norms on inventory receivable for various industries.
The credit policy for the first half of 1997-98 had decided to give full freedom to banks for assessing working capital requirements of borrowers. This followed the recommendation of a committee headed by K Kannan, chairman and managing director, BoB, that the system of MPBF should be scrapped.
The instructions with regard to MPBF had been withdrawn and instead, banks were given the liberty to evolve their own method of assessing requirements within the prudential guidelines and prescribed exposure norms. It had suggested that the turnover method be used as a tool of assessment of small borrowers and the cash budget system in respect of larger corporates. However, not many banks have taken the initiative to evolve their own system of assessment.