DSCR Calculation for Term Loans in India: The Method Indian Banks Actually Use

Indian banks do not compute DSCR from EBITDA. They build it from cash profit: (PAT + Depreciation + Interest on term loan) ÷ (Interest on term loan + Principal repayment), computed separately for every year of the repayment period, and reported as two numbers — an average across the tenor and a minimum in the worst year. The minimum is the one that binds.

That year-by-year schedule is the actual deliverable in a term loan appraisal note, and it is where the mistakes live. This page builds one in full, in rupees, with the arithmetic visible. YuSight extracts the audited P&L, the projections and the sanctioned repayment schedule at 95.2% extraction accuracy against a manual benchmark, then computes the schedule year by year with every figure cited to its source page.

Key facts

• The RBI does not prescribe a DSCR formula or a minimum DSCR for term lending. The Reserve Bank of India (Project Finance) Directions, 2025 (RBI/2025-26/59, DOR.STR.REC.34/21.04.048/2025-26), issued 19 June 2025 and in force from 1 October 2025, require that "the post DCCO repayment schedule has been realistically designed to factor in the initial cash flows" — a cash-flow test with no ratio attached (RBI). Every DSCR level in this article is bank policy.
• The tenor is capped, and the cap includes the moratorium. The same Directions state that "the original or revised repayment tenor, including the moratorium period, if any, shall not exceed 85% of the economic life of a project". A 7-year door-to-door structure therefore needs a project with an economic life of at least 8.24 years (7 ÷ 0.85).
• Asset quality gives banks room, and appraisal discipline is why. The gross NPA ratio of scheduled commercial banks fell to "a multi-decadal low of 2.2 per cent at end-March 2025 and 2.1 per cent at end-September 2025" (RBI, *Report on Trend and Progress of Banking in India 2024-25*, 29 December 2025).
• MSME term loans are the volume segment for this calculation. The revised classification — micro up to ₹2.5 crore investment and ₹10 crore turnover, small up to ₹25 crore and ₹100 crore, medium up to ₹125 crore and ₹500 crore — was notified by gazette S.O. 1364(E) dated 21 March 2025 (RBI, MSME FAQs, 30 July 2025).
• In the worked schedule below, "average DSCR" takes four different values — 1.61x, 1.65x, 1.66x and 1.76x — on identical numbers, depending on whether the moratorium year is included and which averaging method is used. The minimum stays stubbornly at 1.15x.

What formula do Indian banks use, and why not EBITDA?

The convention in a CMA-based appraisal note, a project report and a term loan proposal is the cash profit build-up:

Gross DSCR = (Profit after tax + Depreciation + Interest on term loan) ÷ (Interest on term loan + Principal repayment on term loan)

Three deliberate features, each of which an analyst trained on EBITDA gets wrong the first time:

1. It is a post-tax measure. PAT is after tax and the convention does not add tax back. An EBITDA DSCR on the same accounts is pre-tax and will always print higher. That is not a discrepancy to reconcile away; it is a different, more conservative question.
2. Only term loan interest is added back. Interest on cash credit, working capital demand loans, bill discounting and unsecured promoter loans stays inside PAT and is never restored. The convention is measuring the term loan's own coverage, not the company's total interest cover.
3. It ties to the sanctioned repayment schedule, not to the accounts. The denominator comes from the loan schedule the bank is about to sanction, year by year — not from a single historical interest figure.

The full family of DSCR definitions, and how the Indian convention compares to EBITDA, CFADS, global and CRE variants on one borrower, is set out in every DSCR formula lenders use. What the ratio is measuring in the first place — and what a given level buys in downside protection — is in what DSCR is, explained for commercial lenders.

Which interest belongs in the calculation?

This is the single most common error in an Indian appraisal note, and it is an error of symmetry rather than of arithmetic.

The rule: whatever interest you add back must have its principal in the denominator, and whatever principal is in the denominator must have its interest added back. Working capital interest fails both tests — the cash credit revolves and is not amortised — so it is excluded from both sides. Put it in one side only and the ratio is arithmetically meaningless. The related question of how a cash credit limit is separately controlled is covered in drawing power versus ratio covenants in cash credit facilities.

How do you build the DSCR schedule year by year?

Sriveda Textiles Private Limited, Coimbatore. Capacity expansion in open-end spinning. Term loan ₹1,200 lakh at 9.50% p.a., door-to-door tenor 7 years: a 12-month moratorium during which interest is serviced but no principal falls due, then principal repaid in equal annual instalments of ₹200 lakh over six years. Cash credit limit ₹300 lakh, average utilisation ₹250 lakh at 9.75%. Book depreciation ₹145 lakh a year on a straight-line basis under Schedule II of the Companies Act, 2013. Tax at 25%.

Step 1 — Lay out the repayment schedule and the interest

Interest is computed on the opening balance, which is the convention in most project reports. (Some banks use the average of opening and closing balance, which reduces interest and lifts every DSCR in the schedule — agree the basis before you build it.)

Total interest over the tenor is ₹513 lakh on ₹1,200 lakh drawn.

Step 2 — Project the P&L, down to PAT

All figures in ₹ lakh. Year 1 is a partial operating year — commercial production starts in month four.

Year 2 checks out as: 420 − 145 − 114 − 24 = 137; tax 34; PAT 103.

Step 3 — Build the numerator and the denominator

Numerator = PAT + Depreciation + Term loan interest Denominator = Term loan interest + Principal repaid

Year 2 in full:

Numerator = 103 + 145 + 114 = 362 Denominator = 114 + 200 = 314 DSCR = 362 ÷ 314 = 1.15x

The shape of this schedule is typical and worth naming: DSCR rises every year of a straight-amortisation term loan, because principal is flat while interest falls and profits grow. The worst year is almost always the first year of repayment. If your schedule does not show that shape, either the repayment is stepped-up or the projections are.

How should the moratorium year be treated?

Year 1 shows a DSCR of 2.42x. It is the highest ratio in the schedule and it is meaningless — there is no principal in the denominator. Three treatments are in use, and the appraisal note has to say which:

• Show it and exclude it from the average. The cleanest treatment. The moratorium year is not a coverage year.
• Show it as "NA". Common where interest during the moratorium is capitalised rather than serviced, so the denominator is genuinely zero.
• Include it in the average. This inflates the average DSCR and is the reason a proposal can show 1.76x average on a schedule whose worst year is 1.15x.

Capitalising the moratorium interest changes the whole schedule, not just year 1. If Sriveda's ₹114 lakh of year-1 interest is added to principal instead of serviced, the loan becomes ₹1,314 lakh repayable in six instalments of ₹219 lakh:

Year 2 interest = 1,314 × 9.50% = 125 Year 2 principal = 219 Year 2 denominator = 344 Year 2 PBT = 420 − 145 − 125 − 24 = 126 Tax at 25% = 32 PAT = 94 Year 2 numerator = 94 + 145 + 125 = 364 Year 2 DSCR = 364 ÷ 344 = 1.06x

The minimum DSCR falls from 1.15x to 1.06x on a purely structural decision, with no change to the business. If the proposal is close to a policy floor, the servicing-versus-capitalisation choice decides it, and it should be an explicit sanction condition rather than an assumption buried in the model.

Average DSCR or minimum DSCR — and which average?

Both are quoted in every Indian term loan note, and they answer different questions. The problem is that "average DSCR" is not one number.

A 0.15x spread on identical numbers, produced entirely by method. A proposal quoting 1.76x against a 1.50x average policy floor passes comfortably; the same proposal quoting 1.61x passes narrowly; and the borrower is at 1.15x in the year it starts repaying either way.

The instruction that follows is short. Quote the minimum first, name the year it falls in, and state which averaging method the average uses. A note that says "Average DSCR 1.76x" and nothing else is not telling the sanctioning authority what it needs to know.

What is the difference between gross DSCR and net DSCR?

Indian appraisal formats use both, often on the same page, and rarely define either.

Gross DSCR = (PAT + Depreciation + Term loan interest) ÷ (Term loan interest + Principal) Net DSCR = (PAT + Depreciation) ÷ (Principal)

Net DSCR strips interest out of both sides and asks a narrower question: do the cash accruals cover the principal repayment alone? On Sriveda:

Year 2: (103 + 145) ÷ 200 = 248 ÷ 200 = 1.24x.

Net DSCR reads higher here because interest is a large share of the denominator in the early years. It is the more useful number for testing whether the amortisation profile is affordable, and the weaker number for testing total burden. Use both. Never compare a net DSCR at one borrower with a gross DSCR at another.

What DSCR levels do Indian banks look for?

These are policy positions, set by individual banks and NBFCs in their credit policies. None of them comes from the RBI, and they move with sector, tenor, security and whether the facility is greenfield or brownfield.

Sriveda's 1.15x minimum sits below a 1.20x floor. The appraisal has three honest routes: extend the repayment to seven instalments of ₹171 lakh, reduce the loan and raise promoter contribution, or add a debt service reserve sized to the year-2 shortfall. What it should not do is quote the 1.76x average and let the minimum go unmentioned.

Where the numbers come from, and what breaks

The inputs are scattered across documents that arrive in different formats, and each has a characteristic failure:

• Audited financial statements — the historic PAT and depreciation. Watch for depreciation restated between the Companies Act books and the income tax computation. The DSCR uses book depreciation, because it corresponds to the PAT in the same statement. Mixing WDV depreciation from the tax computation with book PAT overstates the numerator.
• CMA data, Form III and Form IV — the projected P&L and the fund flow. Preparing these correctly is the subject of what CMA data is and why Indian banks ask for it and the CMA data format in Excel.
• The sanctioned repayment schedule — the denominator. If the model uses a straight amortisation and the sanction letter says quarterly instalments with a step-up, the DSCR schedule is wrong from year 1.
• The existing debt schedule — other term loans whose principal falls due in the same years. A DSCR computed on the new facility alone, ignoring existing amortisation, is a common and material omission.
• ITR, Form 26AS and GST returns — validation that the historic base the projections grow from is real. See ITR and Form 26AS spreading for MSME lending.

Where this sits in the wider sanction process is set out in the credit appraisal process in Indian banks, and the working capital assessment that runs alongside it in MPBF calculation explained.

FAQ

How is DSCR calculated for an Indian term loan?

Take profit after tax, add back depreciation and the interest on the term loan, and divide by that same interest plus the principal falling due in the year. Do it for every year of the repayment schedule, not once — the answer changes materially from year to year.

What DSCR do Indian banks require?

Most credit policies want an average of around 1.50x or better across the tenor and a minimum of 1.20x to 1.25x in the worst year. Infrastructure and annuity-backed structures are often accepted lower. These are policy numbers set by each bank, not RBI requirements.

What is the difference between average DSCR and minimum DSCR?

Minimum DSCR is the worst single year in the schedule and it is the year the loan is closest to failing. Average DSCR smooths the whole tenor and always looks better. Our worked borrower is 1.66x average and 1.15x minimum, and only the second number tells you anything useful.

Should working capital interest be included in DSCR?

No, on either side. Cash credit revolves and is not being amortised, so its interest belongs in neither the numerator nor the denominator. The mistake that matters is putting it in one side only, which makes the ratio arithmetically meaningless.

How is DSCR calculated during a moratorium period?

If interest is serviced, the denominator is interest alone and the ratio comes out artificially high — 2.42x in our schedule. If interest is capitalised, there is no debt service at all and the year should be shown as not applicable. Either way, leave the moratorium year out of the average and say that you have.

What is the difference between gross DSCR and net DSCR?

Gross DSCR puts term loan interest on both sides of the ratio. Net DSCR takes it off both sides and tests cash accruals against principal alone. Our borrower is 1.15x gross and 1.24x net in year 2 — same year, same accounts, different question.

Does the RBI prescribe a minimum DSCR?

Not for general term lending. The Project Finance Directions, 2025 require that the repayment schedule be realistically designed around the project's cash flows and cap the tenor at 85% of economic life, but they set no ratio.

Which depreciation figure goes into the DSCR — book or income tax?

Book depreciation, computed under Schedule II of the Companies Act. It has to match the profit after tax you are adding it back to. Using written-down-value depreciation from the tax computation alongside book PAT double-counts the difference and inflates the numerator.

Do promoter loans count in debt service?

Only if they are actually being repaid during the tenor. If they are subordinated and locked in until the bank is repaid — which is the usual sanction condition — they belong in neither the numerator nor the denominator, and the subordination letter should be on file.

Why does DSCR rise every year in the schedule?

Because principal is flat and interest falls as the balance amortises, while projected profits grow. That is the normal shape, and it is why the first year of repayment is nearly always the binding year. A schedule that does not show this shape needs explaining.

Key takeaways

• The Indian convention is cash profit, not EBITDA: PAT plus depreciation plus term loan interest, over term loan interest plus principal. It is a post-tax measure and prints lower than an EBITDA DSCR on the same accounts.
• Working capital interest is excluded from both sides. Add it to one side only and the ratio means nothing.
• Build the schedule year by year off the sanctioned repayment terms, not off a single historic interest figure.
• The moratorium year is not a coverage year. Show it, and exclude it from the average.
• Capitalising moratorium interest instead of servicing it took our borrower's minimum DSCR from 1.15x to 1.06x with no change to the business.
• "Average DSCR" took four values between 1.61x and 1.76x on one schedule. State the method, and quote the minimum first.
• Every acceptance level is bank policy. The RBI prescribes a realistic repayment schedule and an 85%-of-economic-life tenor cap, not a ratio.

Watch YuSight spread a real balance sheet — bring one term loan proposal and see the DSCR schedule built year by year from the audited accounts, the CMA projections and the repayment terms, every figure cited to its source page.

Next: every DSCR formula and when each applies, what DSCR is and what it actually protects you against, and the credit appraisal process in Indian banks.