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DSCR meaning: debt service coverage ratio in plain words

DSCR meaning: DSCR stands for Debt Service Coverage Ratio. It shows how many times a business's yearly cash accruals cover the loan principal and interest due that year. A DSCR above 1 means the business earns more cash than it must repay. Lenders read it to judge whether repayments are safe.

Loan products, rates, and eligibility are determined by the lenders on our panel. Capnix is not a lender and does not lend its own capital. We run your loan journey end to end.

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DSCR meaning and the RBI formula

RBI's wording (RBI notification, 07-Sep-2020): DSCR = (net cash accruals + interest and finance charges) ÷ (current portion of long-term debt + interest and finance charges), for the year.

Net cash accrual is usually profit after tax plus depreciation and other non-cash charges. That breakdown is lender practice, not RBI text. An average DSCR uses the same ratio summed over the whole loan period (RBI notification).

How lenders use DSCR

DSCR is the main repayment test for term loans to businesses. Lenders compute it from your financial statements and projections. A ratio near 1 leaves no buffer if sales dip. Each lender sets its own comfort level.

Example

Example figures for one year: profit after tax ₹8,00,000, depreciation ₹2,00,000, interest ₹3,00,000, principal due ₹6,00,000.

DSCR = (₹10,00,000 + ₹3,00,000) ÷ (₹6,00,000 + ₹3,00,000) = 1.44.

The business earns ₹1.44 in cash for every ₹1 it must repay.

Frequently asked questions

Debt Service Coverage Ratio.

The year's cash accruals do not cover the repayments due, so the business must find the gap from elsewhere.

Raise cash profit, or lower yearly repayments, for example with a longer tenor.

Sources

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