A credit rating tells a lender how a business looks to the market. But before sanctioning, a bank runs its own, narrower test: a handful of lending ratios that answer one question — can this borrower service the debt and survive a bad year? These are different from the ratios that drive a credit rating; they are the operational thresholds a credit committee checks line by line. Know them, and you know whether your file is bankable before you submit it.
The six ratios that decide your file
| Ratio | What it measures | Benchmark lenders like |
|---|---|---|
| DSCR | Cash flow vs debt servicing | Avg 1.5–2.0x; min ~1.2–1.25x |
| Current ratio | Short-term liquidity | ~1.33:1 |
| TOL / TNW | Total leverage | Generally below 3:1 |
| Interest coverage (ICR) | Ability to pay interest | Above ~2x |
| Debt / EBITDA | Debt relative to earnings | Below ~3–3.5x |
| Quick ratio | Liquidity excluding stock | Around 1:1 |
1. DSCR — the term-loan gatekeeper
The Debt Service Coverage Ratio measures whether operating cash flow covers principal plus interest. Lenders look at the average across the loan tenor (comfortable at 1.5–2.0x) and the minimum in any single year (should stay above ~1.2–1.25x). For term loans and projects, this is the single most important number — covered in depth in our DSCR guide.
2. Current ratio — short-term safety
Current assets ÷ current liabilities. A ratio around 1.33:1 signals the business can meet short-term obligations without scrambling. It is also the level the Tandon MPBF method is structured to produce.
3. TOL / TNW — how leveraged you are
Total Outside Liabilities to Tangible Net Worth shows how much the business owes for every rupee of the promoter’s own money. Below 3:1 is generally comfortable; below 2:1 is strong. A high ratio says the promoter has too little skin in the game.
4. Interest coverage ratio — can you pay the interest
EBIT ÷ interest expense. Above 2x means earnings comfortably cover interest. Slipping toward 1x is an early warning of stress, and lenders watch it closely as a covenant.
5. Debt / EBITDA — debt in earnings terms
How many years of earnings it would take to repay all debt. Below 3–3.5x is typically acceptable; higher suggests the business is over-borrowed relative to what it earns.
6. Quick ratio — liquidity without inventory
(Current assets − inventory) ÷ current liabilities. Around 1:1 confirms the business can meet obligations even if stock cannot be sold quickly — important for slow-moving inventory businesses.
No single ratio sanctions a loan, but any one of them can sink it. A thin DSCR, a stretched TOL/TNW or an interest cover near 1x will stop a file regardless of how good the rest looks.
How to use them
Run these ratios on your own numbers before you approach a bank. If one is weak, you usually have options — bring in more promoter contribution to fix TOL/TNW, restructure tenor to lift DSCR, or improve the working-capital cycle to strengthen the current ratio. Fixing them on the front foot is far easier than arguing them at the credit desk.
Our corporate finance team builds the projections so these ratios hold up through appraisal — and where a rating is involved, aligns them with the agency view too.
FAQ
What financial ratios do banks look at before giving a loan?
Banks focus on six: DSCR (debt service coverage), current ratio, TOL/TNW (leverage), interest coverage, debt/EBITDA and the quick ratio. Together they test whether the borrower can service debt, stay liquid, and is not over-leveraged relative to its earnings and net worth.
What is a good DSCR for a 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. A DSCR near or below 1.0 means cash flow cannot cover debt servicing and the proposal will struggle.
What TOL/TNW ratio do banks accept?
Total Outside Liabilities to Tangible Net Worth below 3:1 is generally considered comfortable, and below 2:1 is strong. A higher ratio indicates heavy leverage and too little promoter capital, which lenders treat as a risk.
How are lending ratios different from credit-rating ratios?
Credit-rating ratios assess overall creditworthiness for the market across a wider set of factors, while lending ratios are the specific operational thresholds — DSCR, current ratio, TOL/TNW, interest coverage — a bank checks to confirm a particular loan can be serviced and protected.
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