Project Finance
What DSCR Tells a Bank About Repayment Capacity
The ratio that decides term loan appraisal, how it is computed and what moves it.
The Debt Service Coverage Ratio compares the cash a project generates for servicing debt with the debt service due in the same period. Banks look at it year by year and on average over the loan tenure, and most have a minimum they expect to see.
The computation
Numerator: profit after tax, plus depreciation, plus interest on term loans. Denominator: interest on term loans plus principal instalments due in the year. A ratio above one means the project generates more than it must pay; the margin above one is the cushion the lender wants.
What moves it
Capacity utilisation, selling price and raw material cost drive the numerator; loan amount, interest rate, moratorium and tenure drive the denominator. A longer tenure lowers each year's principal and raises the ratio, which is why repayment schedules are a negotiation, not a given.
Sensitivity
A lender will ask what happens at lower utilisation or thinner margins. A DPR that already shows DSCR under those cases, and still clears the minimum, answers the question before it is asked.
The subsidy question
Interest subsidy under the state policy, where applicable, reduces the effective interest cost over its period. It can be shown in the projections, but only on the basis the policy actually provides and after the unit's eligibility has been established. Showing a subsidy that does not exist is the quickest way to lose a credit officer's confidence.
Official references
Official portals and notifications are the authority on current conditions. Links are provided for reference and may change.
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