When a business applies for a term loan, one fundamental question for the lender is: will the business generate sufficient cash to repay the proposed debt?

One commonly used analytical ratio for answering that question is the Debt Service Coverage Ratio (DSCR).

What is DSCR?

DSCR compares the cash accrual available for servicing debt with the debt obligations falling due during the relevant period.

A commonly encountered formulation in project/credit appraisal is conceptually: Cash available for debt servicing ÷ Debt service obligations. The exact numerator and denominator used by a bank can vary according to its credit policy and appraisal format.

Simple Example

Suppose a business has cash accrual available for servicing debt of ₹75 lakh and relevant debt servicing obligation of ₹50 lakh. Indicative DSCR = ₹75 lakh ÷ ₹50 lakh = 1.50 times.

This broadly indicates ₹1.50 of available cash coverage for every ₹1 of relevant debt service under that calculation.

Why Banks Care About DSCR

A profitable company is not automatically a comfortable borrower. Two businesses can report the same accounting profit but have very different annual debt obligations. That is why lenders examine repayment capacity, not merely reported profit.

Average DSCR vs Year-Wise DSCR

Year-wise DSCR considers whether repayment is comfortable in each particular year.

Average DSCR considers overall debt-service coverage across the relevant repayment period.

A satisfactory average can still hide a weak individual year. The repayment schedule should ideally align with realistic cash-generation expectations.

What Can Improve DSCR?

Depending on circumstances: higher operating profitability; lower project debt; higher promoter contribution; longer repayment tenure; appropriate moratorium; reduction of unnecessary existing debt; and better working-capital management.

Artificially extending projections simply to produce an attractive DSCR does not make a proposal stronger. Banks examine whether assumptions are credible.

Fynmate Insight

For a term-loan proposal, do not start with "How much loan can we get?" Start with "How much debt can the business realistically service?" That approach usually leads to a more sustainable financing structure.