Of all the numbers in a loan file, DSCR is the one a banker looks at first. It answers a single question: can this business comfortably pay its loan instalments? Here's how it works.
DSCR compares the cash available to service debt against the debt obligations due in a period. Put simply, a DSCR of 1.0 means the business generates exactly enough to pay its instalments — no cushion. Above 1.0 means surplus; below 1.0 means a shortfall. Banks want a comfortable cushion, not a knife-edge.
The common formula is:
The numerator is the cash available to service debt; the denominator is the debt service due. It's calculated year by year across the loan tenure and as an average. Depreciation is added back because it's a non-cash expense — the cash is still in the business.
As a rule of thumb, lenders look for an average DSCR of about 1.5 to 2 over the loan tenure, and prefer it not to fall below roughly 1.25 in any single year. A DSCR that dips below 1 in a year signals the business can't meet that year's instalments from its own cash — a red flag. The exact comfort level is set by each bank's credit policy, so treat these as indicative benchmarks.
If projected DSCR looks tight, the honest levers are: a sensible moratorium so repayment starts after the unit stabilises; a longer tenure to reduce annual principal; a higher promoter contribution to lower the loan; and, crucially, building eligible interest subsidy and other benefits into the cash flows. What you should not do is inflate revenue to force the ratio — banks discount unrealistic projections, and a padded DSCR unravels at appraisal.
Lenders typically look for an average DSCR of about 1.5 to 2 over the tenure, and prefer it to stay at or above roughly 1.25 in every year. Below 1 means the business can't cover that year's instalments.
Commonly: (net profit + depreciation + interest on term loan) divided by (interest + principal repayment). Depreciation is added back because it is a non-cash expense.
It is the core test of repayment capacity. A comfortable DSCR is often what gets a term loan sanctioned; a weak one gets it questioned or declined.
Through a sensible moratorium, a longer tenure, higher promoter contribution, and building eligible subsidies into the cash flows — not by inflating revenue, which banks discount.
We'll model realistic projections, structure the repayment, and build in every eligible subsidy so your DSCR holds up — without inflating a single number. The first assessment is free.
Related reading: How to Prepare a DPR for a Bank Loan · Debt-Equity Ratio Explained · Term Loan vs Working Capital · RIPS 2024 Interest Subsidy · EMI Calculator
CA Nikhil Gupta builds projections with a DSCR that clears bank norms — realistic, and with every eligible subsidy factored in. Free assessment, no upfront fee.
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