Mpbf: A Four Letter Word For Borrowers

Bankers too recognise that the system has become static. Unique seasonal variations had always been there. In addition to this, over two decades of time, markets have changed and a number of new industries have come up. The structure of some of the industries has undergone major changes. The qualitative and quantitative funds needs of corporates have changed correspondingly, but the MPBF regime has remained unchanged right through this period, says a senior banker.

The MPBF system in vogue today is Method 2 (the choice was originally between three methods), which permits working capital credit to the extent of 75 per cent of assets. A major weakness of the existing system is that it stresses the security aspect: the security offered by the borrower in terms of current assets. Corporates point out that while it is logical on the part of banks to insist on this collateral as a safeguard against non performing assets (NPAs), the problem arises because their definition of current assets differs from what finance managers would define them.

 

For example, unlike corporates, banks take into account only inventory and trade receivables while calculating current assets. Loans and advances, receivables due for more than six months, and some types of deposits are excluded. When this is coupled with the margin money set aside from bankers definition of current assets, it results in a drawing power limit that is considerably lower than that arrived at by industry.