What DSCR measures
The debt service coverage ratio compares the cash a business generates with the term-loan instalments and interest due in the same year. The common Indian appraisal format adds back depreciation, other non-cash charges and term-loan interest to PAT, and divides by principal repayment plus that interest. A DSCR of 1.0 means every rupee of cash accrual goes to the lender; banks look for a cushion, usually an average of 1.25 to 1.5 over the loan tenure, with a floor for any single year.
Sizing the loan from a target DSCR
Divide the cash available for debt service by the target DSCR to get the debt service the business can carry each year, deduct what existing loans already take, and convert the balance into a loan using the rate and tenure. For equal-principal loans the first year carries the most interest, so the tool sizes on that year.
FOIR for individuals
For salaried and self-employed individuals, lenders cap the total of all EMIs, including the new one, at a percentage of net monthly income, the fixed obligations to income ratio. The cap differs by lender and income band and is usually between 40% and 65%. The maximum EMI then converts into a loan amount at the offered rate and tenure.
Common questions
Should interest on working-capital loans be added back?
Not in the usual format. Only term-loan interest is added back and included in debt service, because DSCR tests the ability to service the term loan. Working-capital interest stays as an expense in PAT. Follow the lender's format if it differs.
Is a DSCR above 2 always better?
It means comfortable cover, but a lender may then offer a shorter tenure. A very high DSCR with a long tenure can also signal that the loan could be repaid faster at lower total interest.
Which DSCR does the bank use, average or minimum?
Both. Appraisal notes usually report the average over the repayment period and the minimum year. A sanction letter may set a covenant such as a minimum DSCR of 1.20 tested on audited annual results.