DSCR, Current Ratio and 3 Other Numbers Your Bank Checks

Banks judge a loan file mostly on a handful of ratios. The debt service coverage ratio (DSCR) asks whether your yearly cash covers interest and instalments. The current ratio asks whether short-term assets cover short-term dues. Leverage ratios ask how much of the business is your money. No law fixes the cut-offs. Each bank sets its own.

Why ratios, and why not one fixed rule?

A credit officer reads many files a week. Ratios let the officer compare your business with others in your trade and with your own past years, in a few minutes. They are a screening tool, not a verdict.

Is there an RBI number you must hit? No. The cut-offs come from each bank's credit policy, and they move with the loan type, the sector and how strong the rest of your file is. A bank may accept a weaker ratio if you have a long, clean track record, and may ask for more from a new unit. So treat every benchmark below as a guide, and confirm it with the bank you are applying to.

The ratios a banker usually looks at

A few terms in plain words. Depreciation is the yearly wear on your machines and fittings; it is a cost on paper but no cash leaves, so it is added back. Tangible net worth is your capital plus profits kept in the business, minus things like goodwill. Total outside liabilities are everything you owe to anyone else, long term and short term.

A worked example for an online seller

You sell home decor on marketplaces. You want a term loan of Rs 20,00,000 for racking, a packing machine and a small van, repaid over five years. That is Rs 4,00,000 of principal a year. In the first projected year you show:

• Profit after tax: Rs 3,20,000
• Depreciation: Rs 1,50,000
• Interest on the term loan: Rs 1,90,000

DSCR. Cash available is Rs 3,20,000 + Rs 1,50,000 + Rs 1,90,000 = Rs 6,60,000. Debt due is Rs 1,90,000 + Rs 4,00,000 = Rs 5,90,000. DSCR is 6,60,000 divided by 5,90,000, about 1.12. That is below the 1.25 many banks look for.

What can you change? Ask for seven years instead of five. Principal falls to about Rs 2,86,000 a year, so debt due becomes about Rs 4,76,000 and DSCR rises to about 1.39. Interest in later years would shift a little, but the point holds: tenure, not optimism, is often the honest fix.

Current ratio. At year end you expect stock of Rs 18,00,000, marketplace payouts not yet received of Rs 6,00,000 and cash of Rs 1,00,000. Current assets total Rs 25,00,000. Against that you owe suppliers Rs 9,00,000, have Rs 10,00,000 drawn on cash credit and Rs 1,00,000 of GST payable. Current liabilities total Rs 20,00,000. Current ratio is 1.25, right at the line.

TOL/TNW. Outside liabilities are the Rs 20,00,000 term loan plus Rs 20,00,000 of current liabilities, Rs 40,00,000 in all. If your capital and retained profit come to Rs 12,00,000, TOL/TNW is about 3.3, inside a 4:1 limit.

How to read your own numbers before the bank does

1. Work the DSCR for every year, not only the average. One weak year, often the first, is what the banker circles.
2. Check the current ratio at the peak of your season. Sellers carry the most stock and the most pending payouts before festive sales.
3. List every loan. Business loans taken in your personal name, vehicle loans and marketplace or fintech credit lines all count.
4. Take out your drawings. In a proprietorship, money you take home reduces the cash that services the loan.
5. Write one line on each assumption. Sales growth, margin, stock days and payout days should each have a reason.

The mistake people usually make

The usual mistake is to tune the projections until the ratios pass. Sales are pushed up, margins widened and stock trimmed, and the DSCR comes out at 2.5 or 3. A credit officer who sees a ratio far above others in your trade reads it as a warning, not a strength, and checks it against your GST returns and bank credits.

The second mistake is counting things that are not really current assets. Old stock that will not sell, or a marketplace claim that has been pending for months, makes the current ratio look better than your cash position is. Leave them out or show them at a realistic value.

What does it cost to get this wrong? A lower limit, a demand for collateral, or a file sent back for rework while your season passes.

When to do it yourself and when to get help

If you keep clean books, you can work these ratios in a spreadsheet in an evening, and you should, before you meet the bank. A Chartered Accountant earns the fee when the projected balance sheet has to tally year after year, or when the ratios fail and the structure of the loan needs rethinking. For the full layout of a loan file, see what a project report contains and what CMA data is.

Frequently asked questions

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