Tax, GST and company law glossary

DSCR (Debt Service Coverage Ratio)

A ratio of cash available for repaying loans to the loan repayments due in a year.

In short

It is profit after tax plus depreciation and interest, divided by interest and principal due. Banks usually want 1.25 to 1.5 or more.

What it means

The Debt Service Coverage Ratio (DSCR) tells a bank whether your business earns enough cash to pay its loan instalments. It compares the cash available for repaying debt with the interest and principal that must be paid in a year. A DSCR of 1.5 means the business earns ₹1.50 for every ₹1 of loan repayment due.

How it works

The formula commonly used by Indian banks:

  • DSCR = (Profit after tax + Depreciation + Interest on term loans) divided by (Interest on term loans + Principal repayment due in the year)

  • Depreciation is added back because it is a non-cash expense.

  • Interest is added back in the numerator because it is part of the debt service being covered.

  • Banks usually look at the average DSCR over the loan period, along with the minimum DSCR in any single year.

How banks read it:

  • Below 1: the business cannot service its debt from its own earnings, which is a red flag

  • 1.25 to 1.5: generally acceptable

  • Above 1.5 or 2: comfortable, and may get better terms

Example

Patel Engineering Works has these projected figures for next year:

  • Profit after tax: ₹18,00,000

  • Depreciation: ₹6,00,000

  • Interest on term loans: ₹4,00,000

  • Principal repayment due: ₹12,00,000

Cash available = ₹18,00,000 + ₹6,00,000 + ₹4,00,000 = ₹28,00,000. Debt service = ₹4,00,000 + ₹12,00,000 = ₹16,00,000. DSCR = ₹28,00,000 / ₹16,00,000 = 1.75.

That is comfortable. Now suppose the firm wants a new machine loan that adds ₹6,00,000 of yearly instalments (₹1,00,000 interest and ₹5,00,000 principal), while profits stay the same. DSCR becomes (₹28,00,000 + ₹1,00,000) / ₹22,00,000 = 1.32, which is close to the bank’s lower limit.

Key points to remember

  • DSCR appears in every CMA report and project report. Banks check it both year by year and on average.

  • Unrealistic profit projections to show a high DSCR are easy for banks to spot when compared with past results.

  • Ways to improve it: a longer loan tenure, a moratorium in early years, more promoter equity, or prepaying costly loans.

  • Do not mix up DSCR with the interest coverage ratio, which looks only at interest, not principal.

  • Include all term loans, including vehicle loans and loans from NBFCs, in the debt service figure.

Accounting & Finance

Try the Loan Eligibility (DSCR) →All glossary terms

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