What is the current ratio? (Working capital ratio)

The current ratio compares a business's short-term assets with its short-term debts due within a year.

Written 12 September 2026. For bankers in India.

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In one line

The current ratio is current assets divided by current liabilities. A ratio above 1 means assets exceed short-term debts.

Why it matters to you

• It tests short-term safety. A low current ratio can mean a business may struggle to pay near-term bills.
• Lenders check it early. Credit managers look at it on almost every business loan file.
• It moves with the season. A festival-week shop can look stronger than the same shop a month later.
• It is not the same as cash. A good ratio does not prove cash is on hand today.
• A number alone can mislead. Old stock or doubtful debtors can inflate current assets without adding real strength.

How it works

BANKPULSE VIEW: the current ratio is one number divided by another.

Current ratio = current assets ÷ current liabilities.

Define the two words first.

• Current assets: cash, bank balance, stock, debtors, and other assets a business expects to turn into cash within a year.
• Current liabilities: creditors, short-term loans, and the cash credit or overdraft limit in use.

BANK PRACTICE: lenders do not all fill in the two numbers the same way. CRISIL Ratings, for one rating agency's own method, counts marketable securities inside current assets. It also counts this year's instalment on a long-term loan inside current liabilities. A bank's own policy may define the two numbers a little differently. Ask which definition your lender's policy uses, before you compare two current ratio figures.

BANK PRACTICE, a historical method seen in some old credit notes: the Tandon Committee once fixed a minimum current ratio. It set this figure for bank finance. It was an RBI-appointed group, formed in 1975. Its Method I asked for a minimum of 1.25:1. Its Method II asked for a minimum of 1.33:1. RBI withdrew this compulsory method in 1997. See "What the rule says" below for the current position.

Worked examples

Both examples are computed by machine below.

Example 1: a trading firm in Nagpur

• Stock: Rs 25,00,000. Debtors: Rs 12,00,000. Cash and bank balance: Rs 3,00,000.
• Total current assets: Rs 25,00,000 + Rs 12,00,000 + Rs 3,00,000 = Rs 40,00,000.
• Sundry creditors: Rs 16,00,000. Other current liabilities: Rs 5,00,000. Cash credit limit in use: Rs 8,00,000.
• Total current liabilities: Rs 16,00,000 + Rs 5,00,000 + Rs 8,00,000 = Rs 29,00,000.
• Current ratio: Rs 40,00,000 ÷ Rs 29,00,000 = 1.38.
• This firm holds Rs 1.38 in current assets for every Rs 1 of short-term debt.

Example 2: a manufacturing firm, old Method I against old Method II

• Total current assets: Rs 90,00,000. Current liabilities other than bank finance: Rs 20,00,000.
• Working capital gap: Rs 90,00,000 − Rs 20,00,000 = Rs 70,00,000.
• Old Method I gave bank finance as 75 per cent of the working capital gap.
• That is Rs 52,50,000. The borrower's own share was the rest, Rs 17,50,000.
• Total current liabilities under Method I: Rs 20,00,000 + Rs 52,50,000 = Rs 72,50,000.
• Current ratio under Method I: Rs 90,00,000 ÷ Rs 72,50,000 = 1.24.
• Old Method II gave bank finance as 75 per cent of total current assets, minus Rs 20,00,000.
• That is Rs 47,50,000. Total current liabilities under Method II: Rs 20,00,000 + Rs 47,50,000 = Rs 67,50,000.
• Current ratio under Method II: Rs 90,00,000 ÷ Rs 67,50,000 = 1.33.
• Method II gave the bank less room to lend, for the same firm.
• This is why larger borrowers were later pushed towards Method II, by a later panel, the Chore Committee.
• Both methods are history. They explain the 1.24 and 1.33 figures still seen in old training material.
• Neither method is a live RBI rule today.

What the rule says

NO RBI NUMBER (standing rule): the Reserve Bank of India fixes no minimum current ratio for a fresh business loan. RBI withdrew its own Maximum Permissible Bank Finance formula, and the 1.33:1 current ratio inside it, from 1997. We checked the Master Circular on Management of Advances, updated to 30 June 2004.

It says the earlier prescription, based on a minimum current ratio of 1.33:1, has been withdrawn. It says banks are now free to decide their own minimum current ratio. It says banks must set transparent policies through their own boards.

A bank may set its own minimum current ratio for a fresh loan. Or it may use no fixed minimum at all. Your bank's policy decides. Ask what figure it uses. Ask if that figure is a strict cut-off, or only one input among several.

HISTORICAL RBI RULE (closed scheme, does not apply today): RBI issued a Resolution Framework for COVID-19-related Stress on 7 September 2020. It allowed a one-time restructuring for pandemic-hit businesses. For an account using that scheme, the framework said the current ratio in all cases shall be 1.0 and above.

This word is "shall", a firm requirement, not "may". Lenders had to reach it by 31 March 2022, and keep it after. That deadline has passed. The scheme is closed to new cases. It sets no current ratio floor for a loan taken today.

BANK PRACTICE: the market sources we checked read 1.33 or above as comfortable, echoing the old Method II figure. This is now each lender's own choice, not an RBI rule. A ratio below 1 is generally read as a warning sign.

Common mistakes

• Calling the old 1.33:1 figure an RBI rule today. It was withdrawn in 1997.
• Treating window dressing as real strength. A late-payment trick near year-end can flatter the ratio.
• Counting old, unsold stock at full value. Stock that will not sell adds a number, not real safety.
• Forgetting the current portion of a term loan. This year's instalment counts as a current liability.
• Comparing two ratios built on different definitions. Check what each side counted as an asset or a liability, first.

How to use it at your desk

1. Take the latest audited or provisional balance sheet.
2. List every current asset: cash, bank balance, stock, debtors, and other short-term items.
3. List every current liability: creditors, short-term loans, the cash credit limit in use, and this year's loan instalment.
4. Divide total current assets by total current liabilities.
5. Ask your bank's policy for its own minimum figure, if any, and compare.
6. Check stock and debtors for old or doubtful items, before you trust the number.
7. Ask if any payment was delayed only to flatter the ratio near the reporting date.

Related terms

• DSCR — DSCR checks a business's yearly cash cover for its loan.
• Debt-equity ratio — Debt-equity ratio tests how the same business's assets are funded, by debt or by owners.
• Working capital cycle — This cycle explains why current assets and current liabilities move the way they do.
• Product pages: Working capital rules, MSME loan rules.

Quick check

Does RBI fix one minimum current ratio for every fresh business loan today?

Answer: No. Banks set their own minimum, or none, through their own board policy.

A firm has current assets of Rs 50,00,000 and current liabilities of Rs 40,00,000. What is its current ratio?

Answer: Rs 50,00,000 ÷ Rs 40,00,000 = 1.25.

Is the old Tandon Committee figure of 1.33:1 a live RBI rule today?

Answer: No. RBI withdrew it in 1997. Some lenders still use it only as their own internal benchmark.

Sources

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