Understanding DSCR: the ratio that decides whether a loan can be repaid

If you apply for a term loan, the lender will compute your DSCR (Debt Service Coverage Ratio). It answers one question: for every rupee the business must pay towards loans in a year, how many rupees of cash does it generate to pay with?

The formula

The most common version used in MSME term lending:

DSCR = (Net profit after tax + Depreciation + Interest on term loans) ÷ (Interest on term loans + Principal instalments due in the year)

• Numerator: the cash available to service debt. Depreciation is added back because it is not a cash expense. Interest is added back because it is part of what is being serviced.
• Denominator: the debt service: the interest and principal actually payable on term loans in that year.

Lenders calculate DSCR year by year over the loan period and also look at the average DSCR. Some definitions differ in detail, for example whether lease rentals or other obligations are included. Ask your lender which version it uses.

A worked example

How to read it

• Below 1: the business does not generate enough cash to pay its instalments from operations. It would need fresh capital or more borrowing to stay current.
• Just above 1: it can pay, but any dip in sales or margins leaves no cushion.
• Comfortably above 1: there is room for a bad year.

What counts as "comfortable" is set by each lender's credit policy and depends on the industry, the stability of cash flows and the security available. There is no single regulatory number that applies to every loan.

Why a "good" DSCR can still be questioned

A strong DSCR built on unrealistic projections does not help. Lenders test:

• whether projected sales and margins are consistent with past performance;
• whether the working capital needed for higher sales has been provided for;
• how sensitive the ratio is: what happens to DSCR if sales are 10% lower, or costs 10% higher.

Ways to improve DSCR honestly

1. Lengthen the repayment period to match the asset's useful life. Smaller instalments raise DSCR.
2. Ask for a realistic moratorium if the asset needs time to start earning.
3. Bring in more of your own money. A smaller loan means lower debt service.
4. Retire expensive short-term debt that eats into cash flow.
5. Improve the underlying business: margins, collections and capacity use. This is the only improvement that lasts.

DSCR appears in your CMA data and your project report. Compute it yourself before you apply, so you are not surprised by the lender's view.

---

References

1. Master Direction: Lending to MSME Sector (July 24, 2017), Reserve Bank of India (accessed 3 November 2026)
2. Frequently Asked Questions: Micro, Small and Medium Enterprises (updated as on July 29, 2025), Q.7, Reserve Bank of India (accessed 3 November 2026)

Educational content only, not financial advice or an offer of credit. Rules and rates change: confirm with the official source and your lender before acting. Disclaimer · Editorial policy