The single most important ratio a bank uses to decide whether a business can repay a term loan. This guide covers the formula, calculation, ideal benchmarks for bank & MSME loans, a free DSCR calculator with graph, and its role in project finance.
Debt Service Coverage Ratio (DSCR) measures how comfortably a borrower's cash flow can cover its total debt obligations โ both interest and principal repayment โ during a given period. In simple terms, it answers one question a lender always asks: "For every rupee of loan repayment due, how many rupees of cash does the business actually generate?"
A DSCR of 1.0 means the business generates exactly enough cash to meet its debt obligations โ with zero cushion. A DSCR above 1 shows surplus cash (a safety margin), while a DSCR below 1 signals that internal cash flows are not sufficient to service the debt, forcing the borrower to dip into reserves or raise fresh funds.
DSCR is the backbone of term-loan appraisal in Indian banking. It is used by credit officers, rating agencies, and project lenders to judge repayment capacity, and it forms part of the JAIIB/CAIIB and IIBF credit-analysis syllabus.
At its simplest, DSCR is the ratio of cash available to the debt that must be serviced:
In Indian bank credit appraisal, the numerator (Cash Available for Debt Service, or CADS) is built up from the profit & loss projections. The expanded, exam-standard formula is:
Gross vs Net DSCR: The formula above is the Gross DSCR (interest sits in both numerator and denominator). Some appraisals also compute a Net DSCR = (PAT + Depreciation) รท Principal Repayment, which excludes interest from both sides. Gross DSCR is the more commonly quoted figure.
Follow these steps for each year of the loan tenure:
When sanctioning a term loan, banks look at both the average DSCR over the loan life and the minimum DSCR in any single year. A strong average can still hide a weak year, so both are assessed. Typical benchmarks:
| DSCR Range | What it means | Typical lending view |
|---|---|---|
| Below 1.00 | Cash flow cannot cover debt obligations | Usually rejected |
| 1.00 โ 1.24 | Breaks even, no cushion | Weak โ needs mitigants |
| 1.25 โ 1.49 | Adequate cushion | Generally acceptable |
| 1.50 โ 1.99 | Comfortable repayment capacity | Preferred / healthy |
| 2.00 & above | Strong surplus cash | Very strong |
As a rule of thumb, most banks want an average DSCR of about 1.5โ2.0 and a minimum DSCR not below 1.20โ1.25 in any year. DSCR is never read in isolation โ it is combined with the Current Ratio, Debt-Equity Ratio, promoter contribution, and security cover to form the overall credit decision.
For Micro, Small & Medium Enterprise (MSME) term loans, lenders generally apply a slightly more flexible but still prudent benchmark:
Both ratios test debt-servicing ability, but they are not the same. The Interest Coverage Ratio (ICR) looks only at interest, while DSCR captures the full obligation including principal repayment โ making DSCR the stricter, more complete test.
| Basis | DSCR | Interest Coverage Ratio (ICR) |
|---|---|---|
| Formula | CADS รท (Interest + Principal) | EBIT รท Interest |
| Covers | Interest and principal | Interest only |
| Purpose | Total debt-servicing capacity | Ability to pay interest |
| Scope | More comprehensive / stricter | Narrower |
| Typical benchmark | 1.5 โ 2.0+ | 2.0 โ 3.0+ (higher is safer) |
| Best used for | Term-loan repayment assessment | Judging interest burden / solvency |
A company can have a healthy ICR (it easily pays interest) yet a weak DSCR if principal repayments are heavy โ which is why lenders rely on DSCR for loans that amortise over time.
Enter your projected figures for one financial year. The calculator computes CADS, total debt service and DSCR instantly, and plots them on the chart below.
CADS = PAT + Depreciation + Interest. Debt Service = Interest + Principal.
For guidance only. Banks assess DSCR across the full loan tenure, not a single year.
How available cash compares with the debt obligation, and where your DSCR sits on the lending scale.
Suppose a manufacturing unit projects the following for a financial year (โน in lakh):
A DSCR of 1.50 means the business generates โน1.50 of cash for every โน1 of debt repayment due โ a comfortable 50% cushion.
Lenders rarely stop at one year. Here is the same loan assessed across its tenure:
| Year | CADS (โน L) | Debt Service (โน L) | DSCR |
|---|---|---|---|
| 1 | 60 | 50 | 1.20 |
| 2 | 70 | 50 | 1.40 |
| 3 | 80 | 50 | 1.60 |
| 4 | 90 | 50 | 1.80 |
| 5 | 100 | 50 | 2.00 |
| Total | 400 | 250 | Avg 1.60 |
Average DSCR = 400 รท 250 = 1.60 and minimum DSCR = 1.20 (Year 1). Both clear typical bank thresholds, so the loan looks bankable โ provided Year 1's thinner cushion is supported by adequate liquidity.
In practice, banks compute DSCR from the borrower's projected financials submitted in the CMA data (Credit Monitoring Arrangement) and the project report. The process:
In large project finance (infrastructure, power, roads, manufacturing), DSCR is the central sizing and covenant tool. Lenders rely on the project's own cash flows for repayment, so the ratio is tracked over the entire loan life. Key concepts:
Infrastructure lenders typically target an average DSCR of about 1.3โ1.6 (sector dependent), with a minimum of ~1.10โ1.20 in any period.
Repayments are often "sculpted" to a target DSCR so each period's instalment matches the cash the project can generate that period.
Loan Life Coverage Ratio and Project Life Coverage Ratio extend DSCR โ comparing the present value of future cash flows to outstanding debt over the loan/project life.
A Debt Service Reserve Account (often 1โ2 quarters of debt service) cushions shortfalls. Loan agreements carry DSCR covenants that restrict dividends if the ratio dips.
Because a project's revenue can be volatile in early years, the DSCR profile โ not just a single number โ determines the repayment structure, moratorium period, and reserve requirements.
Use our EMI, FD & SIP calculators, browse the JAIIB / CAIIB library, or read the latest RBI circulars Current Ratio on AskBanker.in.