Executive Summary
- DSCR = (Net Profit After Tax + Depreciation + Interest on TL) ÷ (Principal + Interest on TL)
- Most PSU banks require average DSCR of 1.25 minimum, 1.5 preferred
- The most common calculation error is omitting depreciation and interest add-back
- Present DSCR year-by-year across the full tenure, not just an average figure
The DSCR Formula, Precisely
DSCR — Debt Service Coverage Ratio — is calculated as: (Net Profit After Tax + Depreciation + Interest on Term Loan) divided by (Principal Repayment + Interest on Term Loan), for each year of the projection. This is not the same as net profit margin or any other simple profitability ratio — it specifically measures whether the cash actually available in a given year covers that year's debt servicing obligation.
Why Depreciation and Interest Are Added Back
Depreciation is added back to net profit because it is a non-cash accounting charge — it reduces reported profit but doesn't reduce actual cash in hand. Interest on the term loan is added back because it appears separately in the denominator (as part of debt servicing), so including it in both numerator and denominator would double-count it incorrectly if omitted from the numerator add-back.
The Most Common Calculation Error
The single most frequent DSCR error MSME Central encounters in self-prepared DPRs is using net profit alone, without adding back depreciation and interest — this systematically understates true repayment capacity and can make a genuinely bankable business appear to fail the bank's 1.25 minimum threshold. Always verify the full formula has been applied before finalising a DPR.
How to Present DSCR in Your DPR
Present DSCR year-by-year across the entire loan tenure, not just as a single average figure — a credit officer wants to see that repayment capacity holds up throughout the loan period, not just in aggregate. A DPR showing strong average DSCR driven by exceptional later years, while early years run close to or below threshold, will draw more scrutiny than one showing consistent coverage throughout. See our guide on credible financial projections for how this fits into the broader financial model.
Frequently Asked Questions
What DSCR ratio does SBI or Canara Bank require for MSME loan approval?
Most PSU banks in Karnataka — SBI, Canara Bank, Union Bank — require a minimum average DSCR (Debt Service Coverage Ratio) of 1.25 across the loan tenure, with 1.5 or above considered comfortably strong. A DSCR below 1.0 in any single projected year raises serious concerns even if the average is acceptable. The DSCR must be calculated correctly — net profit after tax plus depreciation plus interest, divided by principal plus interest — a formula many self-prepared DPRs get wrong.
Why does my DSCR look low even though my business is profitable?
A common error in self-prepared DPRs is calculating DSCR using net profit alone without adding back depreciation and interest. Depreciation is a non-cash charge that does not reduce actual cash available; interest is already accounted for in the denominator. Omitting these add-backs systematically understates genuine repayment capacity and can make a viable business appear to fail the 1.25 threshold. An MSME loan consultant in Bengaluru will verify the correct formula is applied before submission.
Can a bank reject my MSME loan only because of low DSCR?
Yes. DSCR below the bank's minimum threshold is one of the most common reasons PSU banks in Karnataka decline MSME loan applications. The ratio directly answers the bank's core question — can this business repay this specific loan from its own cash flow? If the answer is no, the bank cannot sanction regardless of how strong other aspects of the proposal are. Addressing DSCR weakness before submission, by adjusting loan amount, tenure, or projection assumptions, is the only effective remediation.