Here is a pattern that turns up again and again in working capital files. The CMA report is clean. Current ratio above 1.33, DSCR comfortably above 1.5, a neat MPBF sheet.
The bank still sanctions a noticeably smaller limit than the one asked for.
The reason usually has nothing to do with the CMA itself. Projected sales are well above what the GSTR-3B returns showed for the previous year, and nothing in the file explains the jump. The credit officer does what credit officers do: believes the returns, not the projection.
This article is about both halves of that file — the numbers banks compute, and the things they check to decide whether to believe them.
# What CMA data actually is
CMA stands for Credit Monitoring Arrangement. It is the standard format in which banks collect financial information for working capital limits — cash credit, overdraft, and sometimes term loans alongside them. The structure is broadly common across banks, though each bank uses its own template. The core is six forms:
| Form | What it contains |
|---|---|
| I | Particulars of existing and proposed limits — fund and non-fund based, with their usage |
| II | Operating statement — sales, costs, profit before and after tax, for past, current and projected years |
| III | Analysis of balance sheet — current and non-current assets and liabilities |
| IV | Comparative statement of current assets and current liabilities — inventory days, receivable days, creditor days |
| V | Computation of maximum permissible bank finance (MPBF) |
| VI | Fund flow statement — long-term sources and uses, and how the working capital gap is being funded |
Most banks also expect a ratio analysis sheet. The typical span is two or three years of audited figures, the current year's estimate, and one or two years of projections.
Everything in Forms II and III for past years must tie exactly to your audited financials and your income-tax returns. If it does not, the rest of the report is suspect before anyone reads Form V.
# How much the bank can lend: the MPBF logic
# Historical context, briefly
The Tandon Committee framework, set up by RBI in 1974, gave banks a formula for working capital lending. RBI withdrew the prescriptive MPBF framework in April 1997, and banks now assess working capital under their own board-approved policies. But the Tandon approach survives as a convention, because it forces the borrower to fund part of current assets from long-term money.
The starting point is the working capital gap:
Working capital gap = Current assets − Current liabilities other than bank borrowings
Two methods are still referred to:
- First method: bank finance up to 75% of the working capital gap; the borrower funds 25% from long-term sources.
- Second method: the borrower funds 25% of total current assets from long-term sources. Bank finance is the working capital gap minus that amount. This is the method that produced the familiar 1.33 current ratio.
# The turnover method for smaller borrowers
For MSE borrowers, RBI's MSME FAQs say working capital limits are computed on the basis of a minimum of 20% of projected annual turnover, for credit limits up to ₹5 crore. This comes from the Nayak Committee: the working capital requirement is taken as 25% of turnover, of which the borrower brings 5% as margin and the bank finances 20%. Where the borrower's own net working capital is less than 5%, the bank finance is reduced accordingly.
# A worked example
Assume a manufacturer projects the following for next year. All figures are illustrative.
| Item | ₹ lakh |
|---|---|
| Projected sales | 400 |
| Inventory | 70 |
| Receivables | 60 |
| Other current assets | 10 |
| Total current assets | 140 |
| Trade creditors | 35 |
| Other current liabilities | 5 |
| Current liabilities other than bank | 40 |
| Working capital gap | 100 |
| Net working capital available (long-term funds in current assets) | 30 |
The same file gives three different answers:
| Method | Computation | Bank finance (₹ lakh) |
|---|---|---|
| Tandon first method | 75% × 100 | 75 |
| Tandon second method | 100 − (25% × 140) = 100 − 35 | 65 |
| Turnover method | Lower of 20% × 400 = 80, and 25% × 400 − 30 = 70 | 70 |
Under the second method the borrower is expected to have ₹35 lakh of net working capital, but has only ₹30 lakh. That ₹5 lakh shortfall is the first thing the credit officer will raise — either you bring in long-term funds, or the limit comes down. At ₹65 lakh of bank finance, current liabilities total ₹105 lakh and the current ratio works out to exactly 1.33. If the bank sanctioned ₹70 lakh instead, the current ratio would be about 1.27.
This is why the CMA is not just arithmetic. The method your bank uses, and how it treats your net working capital, changes the answer by ₹10 lakh on the same set of numbers.
# The ratios they look at
These are commonly used benchmarks, not rules. Each bank sets its own thresholds, and they vary by sector and loan type.
| Ratio | How it is computed | Commonly cited benchmark |
|---|---|---|
| Current ratio | Current assets ÷ current liabilities (including bank borrowing) | Around 1.33 |
| DSCR | (PAT + depreciation + interest on term loan) ÷ (term loan interest + principal repayment) | Around 1.25 or higher, often looked at as an average over the loan tenure |
| TOL/TNW | Total outside liabilities ÷ tangible net worth | Lower is better; many banks get uncomfortable above 3 to 4 |
| Interest coverage | EBIT ÷ interest | Comfortably above 1; banks prefer a margin of safety |
In the example above, assume a tangible net worth of ₹90 lakh and a term loan of ₹60 lakh. Total outside liabilities are ₹40 + ₹65 + ₹60 = ₹165 lakh, so TOL/TNW is about 1.83. If projected PAT is ₹18 lakh, depreciation ₹6 lakh, term loan interest ₹5 lakh and principal repayment ₹12 lakh, DSCR is (18 + 6 + 5) ÷ (5 + 12) = about 1.71.
A 1.71 DSCR does not rescue a file where the ₹18 lakh profit looks implausible. That is where the second half of the underwriting starts.
# What banks check beyond the numbers
# 1. GST returns against the projection
The credit officer will pull your GSTR-3B turnover and compare it with sales in Form II. If the projection is ₹400 lakh and last year's 3B shows ₹260 lakh, you are projecting growth of about 54%.
That can be perfectly genuine. But it needs evidence — a new customer contract, purchase orders, added capacity, a new product line. Attach it. Also make sure the audited sales figure reconciles to GSTR-3B and GSTR-1 for the same year, with any differences explained. Our GSTR-3B reconciliation guide covers the usual mismatches.
# 2. Conduct of your bank accounts
Twelve months of statements tell a banker more than a CMA can:
- Cheque returns, especially for insufficient funds, and especially inward EMI or supplier payments.
- Large cash deposits that do not match a cash-heavy business model.
- Round-tripping — money going out and coming back from the same parties around month-end.
- Utilisation pattern of any existing limit — a limit that sits fully drawn every day of the year suggests the business needs more than it has, or is diverting funds.
- Credits in the account vs declared turnover. If the business routes most receipts through another bank, say so and provide those statements too.
# 3. CIBIL reports — of the business and the promoters
For the business, TransUnion CIBIL's CIBIL MSME Rank runs from CMR-1 to CMR-10, with CMR-1 denoting the lowest credit risk, and covers businesses with aggregate commercial borrowings up to ₹50 crore. Banks also pull the personal reports of promoters and guarantors. A forgotten overdue on one promoter's credit card is enough to hold up a sanction for the business. Check both reports before you apply and fix errors first.
# 4. ITR consistency
Your ITRs, audited accounts, CMA past-year columns and GST returns must tell one story. A firm that shows healthy profits in the CMA but low income in its ITR has a credibility problem that no ratio can fix.
# 5. Related-party flows
Advances to group concerns, loans to directors' relatives, purchases from a sister firm at unusual margins — banks read the related-party note in the audited accounts. Funds moving out of the business to related parties look like diversion from the lender's side of the table, even when there is a commercial reason. Document the reason.
# 6. Promoter track record
Years in the business, earlier loans and how they were repaid, other businesses and their health, and whether the promoter can bring in money if the projection misses. A first-generation entrepreneur is not penalised for that, but a thin file gets more questions.
# Collateral and guarantee cover
Two rule changes matter for smaller borrowers.
Collateral-free limit for MSEs. Under an RBI circular dated 9 February 2026, banks must not accept collateral for loans up to ₹20 lakh to micro and small enterprises, for loans sanctioned or renewed on or after 1 April 2026. Banks may extend this to ₹25 lakh for units with a good track record under their own policy. A voluntary pledge of gold or silver by the borrower is not treated as a breach.
CGTMSE. RBI's MSME FAQs state that CGTMSE provides cover for credit facilities of up to ₹10 crore extended without collateral. The guarantee covers a percentage of the amount in default and carries a fee that depends on the loan size. The bank decides whether to take cover; you cannot insist on it, but you can ask.
If you are not yet registered on Udyam, do that first — our Udyam registration guide explains why priority-sector treatment and these schemes depend on it. For smaller requirements, the MUDRA loan guide covers a separate route.
# Before you submit: a short self-review
- Do Forms II and III tie to the audited accounts and ITRs, rupee for rupee?
- Does projected sales growth over the last GSTR-3B figure have written evidence behind it?
- Is your net working capital enough for the method your bank uses — and if not, where will the shortfall come from?
- Have you checked the business's CMR and every promoter's CIBIL report in the last 30 days?
- Can you explain every large cash deposit, cheque return and related-party transfer in the last twelve months?
- Does your break-even point sit comfortably below projected sales? The MSME break-even calculator is a quick way to check this before the banker does.
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# Related reading
- MSME Udyam registration 2026 — benefits and process
- MUDRA loan — Shishu, Kishore, Tarun and Tarun Plus
- GSTR-3B filing and ITC reconciliation
- Proprietorship vs private limited company
# References (verified 23 September 2026)
- Reserve Bank of India — FAQs on Micro, Small and Medium Enterprises (updated 29 July 2025): https://www.rbi.org.in/commonman/Upload/English/FAQs/PDFs/MICRO30072025E.pdf
- Taxmann — RBI circular RBI/2025-26/206 dated 9 February 2026 on collateral-free MSE loans up to ₹20 lakh: https://www.taxmann.com/post/blog/rbi-bans-collateral-for-mse-loans-up-to-20-lakh
- TransUnion CIBIL — Enhanced CIBIL MSME Rank launch: https://newsroom.transunioncibil.com/enhanced-cibil-msme-rank-launched-by-transunion-cibil-to-cover-smaller-businesses/
- ClearTax — Credit Monitoring Arrangement overview: https://cleartax.in/s/credit-monitoring-arrangement-cma
- Banking School — Working capital limits under the turnover method (Nayak Committee): https://bankingschool.co.in/financial-analysis/computation-of-working-capital-limits-underturn-over-method-nayak-committee-norms/
- Bankkeeping — MPBF and RBI's 1997 withdrawal: https://bankkeeping.com/post/maximum-permissible-bank-finance-mpbf-and-its-persistent-role-in-indias-working-capital-finance
Disclaimer: This article is educational and general in nature. VittSphere ONE is not a lender, a loan distributor or a credit bureau, and does not arrange or guarantee any loan. Benchmarks for ratios are commonly cited conventions and each bank applies its own credit policy; the worked example is illustrative and does not represent any client's data. Confirm current RBI and CGTMSE terms with your bank before applying. Data verified 23 September 2026.
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