---
title: "Debt service coverage ratio (DSCR)"
url: "https://www.highmarkcapital.in/explainers/debt-service-coverage-ratio"
type: "explainers"
summary: "DSCR tells a lender whether your cash flow can carry the debt you are asking for. It divides the cash available for debt service by the principal and interest falling due in the same period. Lenders check it year by year and on average over the loan, and it often decides how much you can borrow and over how many years."
service: "Debt Syndication"
author: "CA Jaideep Soni"
reviewed_by: null
published: "2026-10-13T12:43:14.489Z"
updated: "2026-10-13T12:45:58.088Z"
last_reviewed: null
---

# Debt service coverage ratio (DSCR)

DSCR tells a lender whether your cash flow can carry the debt you are asking for. It divides the cash available for debt service by the principal and interest falling due in the same period. Lenders check it year by year and on average over the loan, and it often decides how much you can borrow and over how many years.

## Key takeaways

- DSCR = cash available for debt service ÷ principal and interest due in the same period.
- Lenders look at each year’s DSCR and at the average over the loan (ADSCR).
- Below 1.0, the business cannot meet that year’s repayments from its own cash.
- Tenor, moratorium and repayment schedule change the ratio, not just profit.

## Debt service coverage ratio

Compares the cash a business generates in a year with the loan principal and interest due in that year. At 1.0, cash just covers the repayments; above 1.0, there is a cushion.

## How DSCR is calculated

In Indian bank appraisal, the numerator starts from profit after tax and adds back non-cash charges such as depreciation, plus the interest on the loan itself. The denominator is the principal and interest falling due in the same year. The RBI used this definition in its 2020 resolution framework: net cash accruals plus interest and finance charges, divided by the current portion of long-term debt plus interest and finance charges.

| Part | What goes in |
| --- | --- |
| Cash available for debt service | Profit after tax, plus depreciation and other non-cash charges, plus interest and finance charges |
| Debt service | Principal instalments falling due in the year, plus interest and finance charges |

## A worked example

Take a manufacturer with ₹3.0 Cr of profit after tax, ₹1.2 Cr of depreciation and ₹1.0 Cr of interest on its term loan in a year, and ₹2.5 Cr of principal falling due. Cash available for debt service is 3.0 + 1.2 + 1.0 = ₹5.2 Cr. Debt service is 2.5 + 1.0 = ₹3.5 Cr. The DSCR is 5.2 ÷ 3.5, or about **1.49**.

## Yearly DSCR and average DSCR

The first years of a project usually carry the lowest DSCR: the plant has not reached full capacity, but repayments may already have started. So lenders look at the DSCR for each year of the loan and at the average across the repayment period, the ADSCR. In its 2020 framework the RBI required a DSCR of at least 1.0 and an ADSCR of at least 1.2 for sectors without a specific threshold. For fresh loans, each lender sets its own norms.

## What moves the number

- Tenor: spreading the principal over more years lowers each year’s repayment.
- Moratorium: a repayment holiday while the project ramps up protects the weakest years.
- Repayment shape: instalments that rise with expected cash flow, rather than equal instalments, even out the ratio.
- Working capital: cash locked in inventory and receivables is not available for debt service, even when the profit is.

> A low DSCR is often a structuring problem as much as a profit problem. The same business can show a very different ratio under a different tenor and repayment schedule.

## Frequently asked questions

### What is a good DSCR?

There is no single number: it depends on the lender, the sector and the type of loan. In the RBI’s 2020 resolution framework, a DSCR of 1.0 and an average DSCR of 1.2 were the minimums for sectors without a specific threshold, but lenders usually expect a comfortable margin above 1.0 for new term loans. Ask your lender which norm applies to your proposal.

### Is DSCR the same as the interest coverage ratio?

No. Interest coverage compares earnings with interest alone. DSCR also counts the principal instalments due, so it shows whether the business can repay the loan on schedule, not just pay the interest.

### Does DSCR apply to working capital limits?

DSCR is mainly used for term loans, where principal is repaid in instalments. Working capital limits are usually assessed on the operating cycle, the current ratio and projected turnover instead.

## Sources

1. [Resolution Framework for COVID-19-related Stress – Financial Parameters (RBI/2020-21/34)](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11961), Reserve Bank of India, 2020-09-07