What is DSCR? (Debt Service Coverage Ratio)

DSCR (Debt Service Coverage Ratio) compares a business's yearly cash with what it must pay that year on its loan.

Written 11 September 2026. For bankers in India.

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In one line

DSCR shows whether a business earns enough cash in a year to cover that year's loan principal and interest.

Why it matters to you

• It is the core loan check. DSCR shows if a business can repay a loan from its own cash.
• One low year is a warning. A weak year can mean a cash shortfall, even if other years look fine.
• It shapes the repayment plan. A weak early DSCR can lead to a step-up structure instead of equal instalments.
• The formula has more than one version. Two correct-looking DSCR numbers can differ if they use a different formula.
• It signals stress early. A falling DSCR can show an account needs review before it turns bad.

How it works

BANKPULSE VIEW: DSCR is one number divided by another. Lenders do not all fill in the two numbers the same way.

The basic shape is:

DSCR = (cash available to repay the loan that year) ÷ (principal due that year + interest due that year)

BANK PRACTICE: lenders use different versions of the top number (the numerator). We found three versions in real use:

• Cash profit version. Profit after tax, plus depreciation, plus interest on the loan. The classic Indian bank formula.
• EBIT version. Earnings before interest and tax, shown by some banks and NBFCs (Non-Banking Financial Companies) as "net operating income."
• EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) version. This adds tax back on top of the EBIT version.

These three versions give three different DSCR numbers for the same business. See the worked example below.

BANK PRACTICE: lenders also differ on the bottom number (the denominator). Most use principal plus interest on the term loan. Some also add lease payments and other fixed yearly loan-linked charges. Ask which version your own lender's policy uses before you compare two DSCR figures.

BANKPULSE VIEW: a lender may also compute DSCR two ways in time:

• Single-year DSCR. The ratio for one specific year of the loan.
• Average DSCR (ADSCR). The average of the single-year ratios across the whole loan term.

A loan can show a healthy average DSCR while still having one weak year inside it. Check both numbers, not just the average.

Worked examples

Both examples are computed by machine below.

Example 1: a manufacturing term loan, one year

• Profit after tax: Rs 12,00,000.
• Depreciation: Rs 8,00,000.
• Interest on the term loan: Rs 6,00,000.
• Tax paid: Rs 4,00,000.
• Principal due this year: Rs 15,00,000.
• Cash profit version: (12,00,000 + 8,00,000 + 6,00,000) ÷ (15,00,000 + 6,00,000) = 26,00,000 ÷ 21,00,000 = 1.238.
• EBITDA version: (12,00,000 + 4,00,000 + 8,00,000 + 6,00,000) ÷ 21,00,000 = 30,00,000 ÷ 21,00,000 = 1.429.
• The two versions differ by 0.191. Both are correct for their own formula. Ask which formula your lender's policy uses.

Example 2: the same loan across five years

• Loan amount: Rs 75,00,000. Five equal yearly principal payments of Rs 15,00,000. Interest at 10 per cent a year on the falling balance.
• Yearly cash available before interest: Rs 20,00,000, plus that year's interest added back.

• Simple average DSCR across the five years: 1.260.
• Lowest single-year DSCR: 1.222, in Year 1. Interest is highest in Year 1, since the loan balance is at its highest then.
• A lender checking only the average (1.260) would miss that Year 1 is the tightest year.

Example 3: lease rental discounting

• Gross yearly rent: Rs 60,00,000. Property tax and other non-recoverable cost: Rs 3,00,000. Net rent: Rs 57,00,000.
• Year 1 principal due: Rs 25,00,000. Year 1 interest due: Rs 30,00,000. Debt service: Rs 55,00,000.
• Net rent version: 57,00,000 ÷ 55,00,000 = 1.036.
• Gross rent version: 60,00,000 ÷ 55,00,000 = 1.091.
• Check which rent figure, net or gross, your lender's policy uses before you judge this loan.

What the rule says

NO RBI NUMBER (standing rule): the Reserve Bank of India fixes no DSCR number today. This applies to a fresh business, project or term loan. We checked the Prudential Framework for Resolution of Stressed Assets (2019) and the Project Finance Directions, 2025. The word DSCR does not appear in either. Each bank or NBFC sets its own DSCR policy, as part of its board-approved credit policy.

HISTORICAL RBI RULE (closed scheme, does not apply today): in one past case, RBI did fix DSCR numbers. RBI's Resolution Framework for COVID-19-related Stress, from 7 September 2020, allowed a one-time restructuring for businesses hurt by the pandemic.

For an account using that scheme, RBI required five ratios to be checked:

• TOL/ATNW (Total Outside Liabilities to Adjusted Tangible Net Worth).
• Total Debt to EBITDA.
• Current Ratio.
• DSCR.
• Average DSCR (ADSCR).

The framework set these floors for an account using the scheme:

• DSCR: 1.0 or above.
• Current Ratio: 1.0 or above.
• Average DSCR: 1.2 or above.
• A stricter number applied instead for some named sectors.

Lenders had to reach these levels by 31 March 2022. That deadline has passed. This scheme is closed. It does not set any DSCR floor for a loan taken today.

BANK PRACTICE: the bank and NBFC pages we checked show a working target. Lenders read 1.25 or above as comfortable. They read 1.0 to 1.24 as acceptable but tight. They read below 1.0 as a warning sign that cash may fall short. These are each lender's own chosen levels, not an RBI rule.

Common mistakes

• Calling a bank's target an RBI rule. DSCR targets are each lender's own policy, except the closed 2020 scheme.
• Comparing two DSCR figures from different formulas. Check the numerator and denominator definition each time first.
• Reading only the average DSCR. A weak single year can sit inside a healthy average, as in Example 2.
• Forgetting a lease or other fixed charge. Some lenders add this to the denominator. Leaving it out understates debt service.
• Treating the 2020 COVID-19 floor as current. That scheme's deadline passed on 31 March 2022.

How to use it at your desk

1. Ask which numerator formula your lender's policy uses: cash profit, EBIT, or EBITDA.
2. Ask which items go into the denominator: principal and interest only, or also lease and other fixed charges.
3. Compute DSCR for every year of the loan, not only the average.
4. Flag to your reviewing officer any single year below your lender's minimum level.
5. For a lease rental discounting loan, confirm whether gross or net rent is used.
6. Record the figures and the formula used, so the number can be checked later.

Related terms

• Working capital cycle — Working capital cycle counts days in the cash cycle. DSCR counts yearly cover for loan repayment.
• Bullet payment — A bullet payment puts all principal in the last year. That year's DSCR falls sharply.
• EMI — The fixed monthly payment on a consumer loan. DSCR is the yearly check for a business loan.

Quick check

Does the Reserve Bank of India fix one DSCR number for a fresh business loan today?

Answer: No. Each lender sets its own DSCR policy, except for a closed 2020 scheme that no longer applies.

Can two lenders compute a different DSCR for the same business, and both be correct?

Answer: Yes, if they use different numerator or denominator formulas.

Is a healthy average DSCR enough to prove a loan is safe in every year?

Answer: No. Check every single year. One weak year can sit inside a healthy average.

Sources

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