What is the debt-equity ratio? (Debt to equity ratio, or gearing ratio)

The debt-equity ratio compares what a business owes to lenders with what its owners put in.

Written 12 September 2026. For bankers in India.

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In one line

Debt-equity ratio is total debt divided by total equity. A ratio of 2 means Rs 2 of debt for every Rs 1 of owner funds.

Why it matters to you

• It shows who carries the risk. More debt means lenders carry more of the business's risk than the owners do.
• It shapes a term loan decision. A high ratio can mean the owners have not backed the business enough.
• No single rule covers everyone. Each bank's own policy sets what ratio it will accept.
• What counts as equity can change the answer. A promoter's own loan may, or may not, count as equity.
• It reads differently by business type. A capital-heavy factory can carry more debt than a small trading firm.

How it works

BANKPULSE VIEW: the debt-equity ratio is one number divided by another.

Debt-equity ratio = total debt ÷ total equity.

Define the two words first.

• Total debt: all interest-bearing borrowing, such as a term loan, a cash credit limit in use, and other loans.
• Total equity: paid-up share capital, plus reserves and surplus, as shown in the business's own balance sheet.

BANK PRACTICE, a second, stricter formula some lenders use: total liabilities, not only interest-bearing debt. It is divided by equity after removing intangible assets, such as goodwill. This gives a lower equity figure, so a more cautious ratio. Ask which formula your lender's policy uses.

BANK PRACTICE, the harder question, what counts as equity: promoters sometimes lend their own money to the business. This is on top of share capital. Lenders call this an unsecured loan, or a quasi-equity loan. A lender may treat it in three ways:

• As plain debt. The loan sits with other borrowing. It does not help the ratio.
• As equity in full. This is done only when the loan stays for the whole loan tenure.
• As part debt, part equity. One rating agency we checked treats such a loan as roughly 75 per cent equity.

Each bank's own credit policy decides which of these three ways it follows. Ask which one your lender uses, before you trust a figure that includes a promoter's loan.

Worked examples

Both examples are computed by machine below.

Example 1: a private manufacturing company

• Paid-up share capital: Rs 50,00,000. Reserves and surplus: Rs 70,00,000.
• Total equity: Rs 50,00,000 + Rs 70,00,000 = Rs 1,20,00,000.
• Term loan outstanding: Rs 1,80,00,000. Working capital debt in use: Rs 60,00,000.
• Total debt: Rs 1,80,00,000 + Rs 60,00,000 = Rs 2,40,00,000.
• Debt-equity ratio: Rs 2,40,00,000 ÷ Rs 1,20,00,000 = 2.00.
• This company carries Rs 2 of debt for every Rs 1 the owners put in.

Example 2: the same company, with a promoter's unsecured loan

• The promoters also lend the company Rs 40,00,000. It is unsecured. It stays for the whole loan tenure.
• Total debt, if this loan is counted fully as debt: Rs 2,40,00,000 + Rs 40,00,000 = Rs 2,80,00,000.
• Strict view, promoter loan stays as debt: debt-equity ratio = Rs 2,80,00,000 ÷ Rs 1,20,00,000 = 2.33.
• Quasi-equity view, the loan is treated fully as equity: adjusted equity = Rs 1,20,00,000 + Rs 40,00,000 = Rs 1,60,00,000.
• Adjusted debt = Rs 2,80,00,000 − Rs 40,00,000 = Rs 2,40,00,000. Debt-equity ratio = Rs 2,40,00,000 ÷ Rs 1,60,00,000 = 1.50.
• Partial view, one rating agency's own method: 75 per cent of the loan treated as equity, and 25 per cent as debt.
• Adjusted equity = Rs 1,20,00,000 + Rs 30,00,000 = Rs 1,50,00,000. Adjusted debt = Rs 2,80,00,000 − Rs 30,00,000 = Rs 2,50,00,000.
• Debt-equity ratio, partial view: Rs 2,50,00,000 ÷ Rs 1,50,00,000 = 1.67.
• Three honest answers for one company: 2.33, or 1.50, or 1.67.
• The gap comes only from how the promoter's loan is treated. Ask your lender's policy first.

What the rule says

NO RBI NUMBER (standing rule): the Reserve Bank of India fixes no debt-equity ratio for a fresh business loan today. RBI deregulated bank lending assessment from 1997. We checked the Master Circular on Management of Advances, updated to 30 June 2004.

It confirms banks are now free to set their own credit norms, through their own boards. This covers term loan appraisal. So it covers the debt-equity ratio a bank will accept.

Your bank's own credit policy decides its own norm. It also decides its own rule for a promoter's loan. Ask your bank for its written policy, before you rely on any single figure.

A DIFFERENT, RELATED RBI RULE, so as not to confuse the two: RBI does fix a leverage ratio. But this is for an NBFC's (Non-Banking Financial Company's) own balance sheet, not for a business it lends to.

Under the Master Direction on Non-Banking Financial Company Scale Based Regulation, 2023, an NBFC in the Base Layer shall keep its own total outside liabilities at no more than 7 times its own owned fund. This is the NBFC's own regulatory limit on itself. It is a wider figure than plain debt over equity, since total outside liabilities counts more than interest-bearing debt alone. Do not read this as an RBI number for a borrower's debt-equity ratio.

BANK PRACTICE: the bank pages we checked read a ratio between 1.0 and 1.5 as generally reasonable. They read a ratio of 2.0 as carrying more risk. These are each source's own reading, not an RBI rule. Capital-heavy sectors are commonly allowed a higher figure.

Common mistakes

• Calling a bank's own target an RBI rule. No RBI rule fixes this ratio for an ordinary business borrower.
• Confusing the NBFC leverage ratio with a borrower's ratio. The 7:1 NBFC figure sits on a different balance sheet.
• Counting a promoter's loan as equity without checking the tenure. It counts only if it stays for the loan's term.
• Ignoring intangible assets inside equity. Some lenders remove goodwill and similar items first.
• Comparing two ratios from different formulas. Check what each side counted as debt, and as equity, first.

How to use it at your desk

1. Take the latest audited or provisional balance sheet.
2. Add up all interest-bearing borrowing for total debt.
3. Add up paid-up capital, reserves and surplus for total equity.
4. Divide total debt by total equity.
5. Check if a promoter's unsecured loan sits inside the numbers, and how your bank treats it.
6. Ask your bank's policy for its own acceptable range, since RBI fixes none here.
7. Note in the credit file which formula, and which loan treatment, you used.

Related terms

• Current ratio — Current ratio tests short-term safety. Debt-equity ratio tests how the business is funded.
• DSCR — DSCR checks yearly cash cover for loan repayment.
• Working capital cycle — A long cycle can push a business towards more short-term debt.
• Product pages: Working capital rules, MSME loan rules.

Quick check

Does RBI fix one debt-equity ratio for every business loan today?

Answer: No. Each bank sets its own norm through its own board policy.

A company has total debt of Rs 90,00,000 and total equity of Rs 30,00,000. What is its debt-equity ratio?

Answer: Rs 90,00,000 ÷ Rs 30,00,000 = 3.00.

Does a promoter's unsecured loan always count as equity?

Answer: No. It counts only if it stays for the whole loan tenure, and only if your bank's policy allows it.

Sources

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