DSCR (Debt Service Coverage Ratio)
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DSCR — Debt Service Coverage Ratio
Banking Promotion Study Material
1. DSCR kya hota hai?
DSCR measures a business’s capacity to pay loan interest and scheduled principal instalments from the amount available for debt servicing during the same period.
Simple language: Business se available earnings/cash flow, loan ki interest aur principal instalments ko kitni baar cover kar sakta hai?
Basic formula:
DSCR = Amount Available for Debt Service ÷ Debt Service Due
Suppose ₹30 lakh is available and debt payments due are ₹20 lakh:
DSCR = 30 ÷ 20 = 1.50 times
This means every ₹1 of debt payment has ₹1.50 of calculated cover.
| DSCR | Interpretation |
|---|---|
| Below 1.00 | Available amount is insufficient; a funding gap exists. |
| Exactly 1.00 | Debt service is just covered, with no calculated cushion. |
| Above 1.00 | Debt service is covered with a calculated cushion. |
A higher ratio provides more cover if the underlying projections are credible. Annual cover alone does not guarantee timely monthly payments.
2. Common formula for term-loan appraisal
DSCR = (PAT + Depreciation + Interest on Term Loan) ÷ (Interest on Term Loan + Scheduled Principal Repayment)
| Component | Meaning |
|---|---|
| PAT | Profit after tax, after deducting the relevant interest and depreciation |
| Depreciation | Non-cash expense already deducted in arriving at profit |
| Interest | Interest relating to the debt covered by the calculation |
| Principal repayment | Instalments due during the period—not the entire outstanding loan |
Why is interest added back?
PAT is calculated after deducting interest. Interest is added back to determine the amount available before servicing that interest, because the denominator includes it.
Why is depreciation added back?
Depreciation reduces accounting profit without being a current-period cash payment. Adding it back reverses that non-cash charge.
Depreciation add back karne ka matlab fresh cash receive hona nahi hai.
Formula variations: Some project appraisals use CFADS/CADS—cash flow/cash available for debt service. This may account for cash taxes, working-capital changes and other adjustments. It is not automatically equal to EBITDA or PAT plus depreciation.
Always follow the definition specified in the question or applicable bank policy. Keep the period and debt scope consistent.
3. Solved Example A — Annual DSCR
| Particulars | ₹ lakh |
|---|---|
| Profit after tax | 12 |
| Depreciation | 8 |
| Interest on term loan | 5 |
| Principal repayment due during the year | 15 |
Step 1: Calculate available amount
12 + 8 + 5 = ₹25 lakh
Step 2: Calculate debt service
5 + 15 = ₹20 lakh
Step 3: Calculate DSCR
25 ÷ 20 = 1.25 times
Interpretation: Har ₹1 ke debt payment ke against ₹1.25 ka calculated cover hai.
Calculated surplus = 25 − 20 = ₹5 lakh.
This cushion is 25% of debt service, not 25% of the available amount.
4. Solved Example B — Cash accrual is given
Assume:
- Net cash accrual, explicitly defined as PAT + depreciation, is ₹24 lakh.
- Term-loan interest is ₹6 lakh.
- Principal repayment due is ₹14 lakh.
Available amount = 24 + 6 = ₹30 lakh
Debt service = 6 + 14 = ₹20 lakh
DSCR = 30 ÷ 20 = 1.50 times
Exam trap: Do not add depreciation again—it is already included in the given cash accrual.
5. Solved Example C — Positive profit, insufficient cover
| Particulars | ₹ lakh |
|---|---|
| PAT | 3 |
| Depreciation | 4 |
| Relevant interest | 3 |
| Principal repayment due | 9 |
Available amount = 3 + 4 + 3 = ₹10 lakh
Debt service = 3 + 9 = ₹12 lakh
DSCR = 10 ÷ 12 = 0.83 times
Calculated shortfall = 12 − 10 = ₹2 lakh
Important: The business has positive PAT but insufficient debt-service cover.
Profit hona aur repayment cover hona alag baat hai.
6. Average DSCR
Calculate each year’s DSCR first.
Amounts in ₹ lakh.
| Year | Available amount | Debt service | Annual DSCR |
|---|---|---|---|
| 1 | 12 | 15 | 0.80 |
| 2 | 30 | 20 | 1.50 |
| 3 | 48 | 30 | 1.60 |
| Total | 90 | 65 | — |
Aggregate Average DSCR = Total Available Amount ÷ Total Debt Service
Average DSCR = 90 ÷ 65 = 1.38 times
This method weights annual coverage by the amount of debt service in each year.
Why not take a simple average?
Simple arithmetic mean:
(0.80 + 1.50 + 1.60) ÷ 3 = 1.30
This differs from 1.38 because annual debt-service amounts are unequal.
Use the aggregate method unless the question or applicable methodology specifies otherwise.
7. Minimum DSCR
Minimum Annual DSCR = Lowest annual DSCR during the period
In the above example:
Minimum DSCR = 0.80 times in Year 1
Although average DSCR is 1.38, Year 1 has a shortfall:
₹15 lakh − ₹12 lakh = ₹3 lakh
Future surplus does not automatically fund an earlier instalment. Check whether credible opening liquidity, reserves or support will be available when the payment falls due.
Memory cue:
- Average DSCR: Overall cover.
- Minimum DSCR: Weakest year.
- Cash-flow timing: Whether funds arrive before payments fall due.
8. Moratorium ka treatment
A principal moratorium does not automatically remove interest obligations.
Include principal and interest actually due under the repayment schedule.
If total debt service for a period is zero, DSCR is not applicable/undefined for that period. Do not divide by zero.
9. Acceptable DSCR kitna hona chahiye?
A ratio above 1 indicates calculated cover. The required cushion depends on:
- Bank policy and scheme.
- Sector and business risk.
- Reliability of cash flows.
- Loan structure and repayment terms.
1.50 is not a universal RBI minimum for every loan. Follow the relevant policy or the norm explicitly stated in the exam question.
10. Sensitivity analysis
Assume debt service remains ₹20 lakh. Only the available amount changes in this simplified illustration.
| Scenario | Available amount | Debt service | DSCR |
|---|---|---|---|
| Base case | ₹30 lakh | ₹20 lakh | 1.50 |
| Available amount falls 20% | ₹24 lakh | ₹20 lakh | 1.20 |
| Available amount falls 40% | ₹18 lakh | ₹20 lakh | 0.90 |
Learning: Base-case comfort can disappear under stress.
In a full appraisal, model sales, margins, costs, taxes, interest and working capital together.
11. DSCR vs other ratios
| Ratio | Main purpose | Basic formula |
|---|---|---|
| DSCR | Interest and principal repayment capacity | Defined available amount ÷ defined debt service |
| Interest Coverage Ratio | Interest-servicing capacity | EBIT ÷ relevant interest |
| Current Ratio | Short-term balance-sheet cover | Current assets ÷ current liabilities |
Interest Coverage Ratio excludes principal instalments. Strong interest cover alone does not establish sufficient cover for principal repayment.
12. Common exam mistakes
| Mistake | Correct treatment |
|---|---|
| Using the entire loan outstanding in the denominator | Use principal due during the relevant period, plus relevant interest. |
| Using PAT alone in the numerator | Make the adjustments required by the specified formula. |
| Adding depreciation twice | Check whether it is already included in cash accrual. |
| Treating EBITDA as automatically equal to CFADS | Reconcile the prescribed cash-flow calculation. |
| Looking only at average DSCR | Examine annual ratios, minimum cover and payment timing. |
| Applying one benchmark to every loan | Follow the applicable policy, scheme or question. |
13. Practical appraisal checks
A banker should examine:
- Realistic sales and capacity-utilisation projections.
- Profit margins and operating expenses.
- Receivable collection and working-capital requirements.
- Existing debt obligations.
- Seasonal cash flows.
- Balloon instalments.
- Interest-rate sensitivity.
Extending tenure may reduce annual repayment obligations, but it does not create operating cash flow by itself.
14. Practice MCQs
Q1. PAT ₹10 lakh; depreciation ₹6 lakh; term-loan interest ₹4 lakh; principal repayment due ₹12 lakh. DSCR is:
A. 1.00
B. 1.25
C. 1.50
D. 2.00
Q2. Scheduled principal repayment in the denominator means:
A. Original sanctioned loan
B. Entire outstanding loan
C. Principal due during the period
D. Interest only
Q3. Available amounts for two years are ₹18 lakh and ₹42 lakh. Debt service is ₹15 lakh and ₹30 lakh. Aggregate average DSCR is:
A. 1.20
B. 1.30
C. 1.33
D. 1.40
Q4. Annual DSCRs are 0.90, 1.40 and 1.60. Minimum DSCR is:
A. 0.90
B. 1.30
C. 1.40
D. 1.60
Q5. Why is relevant interest added back to PAT?
A. It is a non-cash expense.
B. PAT is after interest, while debt service includes that interest.
C. It reduces principal repayment.
D. It represents fresh equity.
Q6. DSCR is 0.80 and debt service is ₹25 lakh. Calculated shortfall is:
A. ₹2 lakh
B. ₹5 lakh
C. ₹20 lakh
D. ₹25 lakh
Q7. Net cash accrual is explicitly defined as PAT plus depreciation. Under the stated term-loan method, calculate the numerator by:
A. Adding depreciation again
B. Deducting principal repayment
C. Adding relevant interest
D. Deducting relevant interest
Q8. Which statement is correct?
A. A high average eliminates weak individual years.
B. DSCR above 1 guarantees timely payment.
C. Every loan must meet the same DSCR threshold.
D. Review methodology, annual cover and cash-flow timing.
15. Answers with explanations
| Question | Answer | Explanation |
|---|---|---|
| 1 | B | (10 + 6 + 4) ÷ (4 + 12) = 1.25 |
| 2 | C | Include instalments due during the relevant period. |
| 3 | C | (18 + 42) ÷ (15 + 30) = 1.33 |
| 4 | A | The lowest annual ratio is 0.90. |
| 5 | B | Reverse the relevant interest deduction to measure cover before servicing debt. |
| 6 | B | Available amount = 0.80 × 25 = ₹20 lakh; shortfall = ₹5 lakh. |
| 7 | C | Depreciation is already included. Add relevant interest once. |
| 8 | D | Assessment requires consistent methodology, annual cover and payment timing. |
One-minute revision
Debt service = Relevant interest + Scheduled principal due
Common term-loan numerator = PAT + Depreciation + Relevant interest
Aggregate Average DSCR = Sum of available amounts ÷ Sum of debt-service amounts
Minimum DSCR = Lowest annual DSCR
Concept references used in the PDF: ICAI’s coverage-ratio learning material, RBI’s Expert Committee report on the Covid-19 resolution framework for ratio definitions, and NPTEL’s Project Finance lesson. The RBI report is a historical conceptual reference; its framework-specific thresholds are not general current sanction norms.
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