If a single number decides whether a term loan or project gets sanctioned, it is the DSCR. Lenders can forgive a lot, but they cannot lend to a business whose cash flows will not cover its loan repayments. Understanding DSCR — what it is, what’s “bankable,” and how to fix a thin one — is the most useful thing a promoter can do before raising term debt.
What DSCR is
The Debt Service Coverage Ratio measures how comfortably a business’s cash flow covers its debt obligations — both principal and interest.
DSCR = Cash available for debt service ÷ (Principal + Interest due)
A DSCR of 1.0 means cash flow exactly equals the repayment — no cushion. 1.5 means the business generates one-and-a-half times what it owes that year. Below 1.0 means it cannot service the debt from operations at all.
“Cash available for debt service” is typically profit after tax plus depreciation plus interest on the loan (since interest is part of what’s being serviced), with adjustments for the specific structure.
What banks expect
Lenders look at DSCR two ways, and both must pass:
| Measure | What it is | Comfortable level |
|---|---|---|
| Average DSCR | Across the full loan tenor | 1.5 – 2.0x |
| Minimum DSCR | The weakest single year | Above ~1.2 – 1.25x |
The minimum matters as much as the average. A project averaging 1.8x looks healthy, but if its DSCR dips to 1.05x in year two — when repayments start and the business is still ramping — that year is where it will actually default. Credit committees scrutinise the trough, not the headline.
A quick example
A business projects, for a given year:
- Profit after tax = ₹40 lakh
- Depreciation = ₹25 lakh
- Interest on term loan = ₹20 lakh
- Cash available for debt service = 40 + 25 + 20 = ₹85 lakh
- Principal due = ₹45 lakh; Interest = ₹20 lakh; Total debt service = ₹65 lakh
DSCR = 85 ÷ 65 = 1.31x
Bankable, but not generous — the bank would want to see the early years above this, not below.
How to improve a weak DSCR
If projected DSCR is thin, you usually have levers before redrawing the whole plan:
- Lengthen the tenor or moratorium — spreading principal over more years lifts annual DSCR (the most common fix for greenfield projects)
- Increase promoter contribution — less debt means lower servicing, raising DSCR directly
- Structure step-up repayment — smaller instalments early, when cash flow is weakest
- Strengthen the cash flow — sharper working-capital cycle and realistic, defensible revenue assumptions
A bankable DSCR is not the highest average — it is the one whose worst year still clears 1.2x. Fix the trough and the file holds.
DSCR sits alongside the other ratios lenders check in credit appraisal. Our corporate finance team structures tenor, moratorium and repayment so DSCR holds through every year of the projection — not just on average.
FAQ
What is DSCR?
DSCR, or Debt Service Coverage Ratio, measures how comfortably a business’s cash flow covers its debt repayments. It is cash available for debt service divided by principal plus interest due. A DSCR above 1.0 means cash flow exceeds the repayment; below 1.0 means it does not.
How is DSCR calculated?
DSCR equals cash available for debt service (typically profit after tax plus depreciation plus loan interest) divided by total debt service (principal plus interest) for the period. It is assessed both as an average across the loan tenor and as the minimum in any single year.
What is a good DSCR for a bank loan?
Lenders generally look for an average DSCR of 1.5–2.0x over the loan tenor and a minimum annual DSCR above about 1.2–1.25x. The minimum-year figure is critical — a project that dips near 1.0 in an early year is where default risk concentrates.
How can I improve a low DSCR?
Lengthen the loan tenor or moratorium to spread principal, increase promoter contribution to reduce debt, structure step-up repayments so early instalments are smaller, and strengthen cash flow through a tighter working-capital cycle and realistic revenue assumptions.
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