Executive Summary
- DSCR is the primary metric banks use to assess repayment capacity
- Most PSU banks require minimum average DSCR of 1.25, with 1.5 preferred
- Banks examine DSCR across the entire repayment tenure, not just Year 1
- Cash flow timing — not just annual totals — also factors into the assessment
The DSCR Formula
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 the relevant period. This formula adds back depreciation and interest because those represent the actual cash available to service debt, not the accounting profit figure alone, which understates true repayment capacity if used on its own.
The Minimum Threshold Banks Apply
Most PSU banks require a minimum average DSCR of 1.25 across the loan tenure for MSME term loans, with 1.5 considered a comfortably strong figure that reduces scrutiny. A DSCR below 1.25 in your projections is one of the most common, and most avoidable, reasons a technically eligible proposal fails at the bank appraisal stage — well before any question of collateral or guarantee structure even arises.
Why Banks Look at the Full Tenure, Not Just Year 1
A proposal showing strong DSCR in Year 1 but declining sharply in later years raises more concern than one showing moderate but consistent DSCR throughout the tenure. Banks model repayment capacity across the entire loan period because a business that struggles to service debt in Year 4 is just as much a credit risk as one that struggles immediately — the average DSCR threshold exists precisely to catch this kind of back-loaded weakness.
Cash Flow Timing Matters Too
Beyond the annual DSCR figure, banks increasingly examine cash flow timing within the year — a business with strongly seasonal revenue, common in agro-processing and certain manufacturing segments in Karnataka, needs to demonstrate that EMI obligations can be met even during low-revenue months, not just that the annual total works out. See our guide on DSCR calculation in project reports for how to present this correctly in your DPR.