| Particulars | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
Profit after tax After interest, depreciation and tax | |||||
Depreciation & non-cash charges Added back — no cash goes out | |||||
Interest on term loan On term debt only, not cash credit | |||||
Principal instalments Term-loan repayments due in the year | |||||
| A. Cash accruals before interest | 100 | 105 | 105 | 103 | 102 |
| B. Debt service (principal + interest) | 90 | 84 | 78 | 72 | 66 |
| DSCR (A ÷ B) | 1.11 | 1.25 | 1.35 | 1.43 | 1.55 |
| Interest cover (A ÷ interest) | 3.33 | 4.38 | 5.83 | 8.58 | 17.00 |
Asked to certify the ratio? Start from the DSCR certificate format and state the basis of computation in it. For the interest and principal split of each year, use the loan amortisation schedule generator.
The Debt Service Coverage Ratio asks one question: for every rupee of instalment and interest falling due in a year, how many rupees of cash does the business generate? In term-loan appraisal the numerator is profit after tax, plus depreciation and other non-cash charges, plus interest on the term loan. Depreciation is added back because no cash leaves the business; interest is added back because it has already been deducted in arriving at profit and now sits in the denominator. The denominator is the principal instalments due in the year plus the interest on the term loan. Interest on cash credit is left where it is — an operating cost already charged before profit — and is not added to either side.
The ratio is worked for each year of the repayment period, and then once for the whole period. The average DSCR is the total of the cash accruals for all the years divided by the total debt service for all the years; it is not the arithmetic mean of the yearly ratios, which would give a low-repayment year the same weight as a heavy one. Lenders look at both figures and at the weakest year. A project whose average is healthy but whose first or second year falls below 1 is telling the banker that the moratorium is too short or the early instalments too steep, and the usual answer is a ballooning repayment schedule rather than a rejection.
There is no statutory or regulatory minimum for the ratio in a bank term loan. Each bank writes its own in its loan policy, and it differs by sector and tenor. In practice minimums sit between about 1.2 and 1.5, and an average of roughly 1.5 to 2 is treated as comfortable; a ratio far above that often means the loan could be repaid faster. Interest cover is read alongside. This calculator shows cash accruals before interest divided by interest, from the same inputs; some lenders use EBIT or profit before depreciation, interest and tax in the numerator, so name the basis when quoting the figure. The DSCR that companies disclose under Schedule III is a related but wider ratio — it takes all borrowings and lease payments — and will not usually match the project DSCR in a loan proposal.
A unit borrows ₹300 lakh, repayable in five equal annual instalments of ₹60 lakh, at about 10% on the reducing balance. Projected profit after tax rises from ₹40 lakh to ₹80 lakh; depreciation falls from ₹30 lakh to ₹16 lakh.
