By Sharda Associates | CA Firm, Bhopal, Madhya Pradesh, India
Your bank said your DSCR is too low—but you are not sure what that actually means or what to do about it.
DSCR is the single number that decides whether a loan gets approved, no matter how good your business actually is. And yet most business owners hear this term for the first time only when their loan application is already stuck because of it.
The good news is that DSCR problems are almost always fixable, and most of the time the fix has nothing to do with your business performing badly. It has to do with how the number was calculated, how the loan was structured, or what was left out of the picture.
This guide explains exactly what DSCR is, why it comes out lower than it should in so many applications, and the specific, practical steps that improve it, whether your DSCR is marginally below the required level or significantly below it.
Sharda Associates is a CA firm based in Bhopal, Madhya Pradesh, India. Our CA team prepares CA-certified CMA reports and project reports where DSCR is calculated correctly from the start, and we have helped over 45,500 businesses across India get this right. If your loan application is stuck because of DSCR,
What DSCR Actually Measures and Why It Comes Out Wrong So Often
DSCR, or Debt Service Coverage Ratio, measures whether your business generates enough cash in a year to comfortably cover that year’s loan repayment and interest. Most banks require this ratio to be at least 1.25 for every individual repayment year, meaning your business must generate at least Rs.1.25 in cash for every Rs.1 of loan repayment due that year.
The Formula That Gets It Right : The correct calculation is Net Cash Accruals divided by Total Debt Service for the year. Net Cash Accruals is Net Profit After Tax plus Depreciation. Total Debt Service is the Term Loan Principal Repayment plus the Term Loan Interest for that year.
The two words that matter most here are Net Cash Accruals, and specifically the word Cash. Net profit alone is an accounting figure. It includes depreciation as an expense, which reduces the profit figure on paper without any money actually leaving the business. When calculating how much cash is genuinely available to repay a loan, that depreciation has to be added back.
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Why This Single Step Changes Everything : Consider a business with Net Profit After Tax of Rs.2,80,000 and annual Depreciation of Rs.3,00,000. Without adding depreciation back, the available figure is Rs.2,80,000. With depreciation correctly added, it becomes Rs.5,80,000. Against a Total Debt Service of Rs.5,10,000 for that year, the first version gives a DSCR of 0.55, which looks like the business cannot even cover half its obligations. The second version gives a DSCR of 1.14, which is a completely different picture of the same business in the same year.
This single omission is the most common reason DSCR appears far worse than the business actually performs, and correcting it is the first and most important step in improving DSCR for almost every application we review.
The Second Most Common Error : The denominator should contain only the Term Loan Principal Repayment and Term Loan Interest. Working capital interest on a Cash Credit or Overdraft limit is an operating expense that belongs in the Profit and Loss Statement, not in the DSCR denominator. Including CC interest in the denominator overstates the debt service figure and understates DSCR, sometimes by a significant margin when the working capital limit is large relative to the term loan.
Six Ways to Genuinely Improve DSCR Without Inflating Numbers
Once the formula itself is correct, if DSCR is still below the level your bank requires, the fix is not to change the figures until the ratio looks acceptable. The fix is to change the structure of the loan or the completeness of the financial picture, in ways that are entirely legitimate and that banks see and approve regularly.
Extend the Loan Tenure : DSCR is calculated year by year, and the annual principal repayment is the loan amount divided across the tenure. A loan of Rs.20 lakh repaid over 5 years requires Rs.4 lakh of principal repayment each year. The same loan repaid over 8 years requires Rs.2.5 lakh each year. Since DSCR is Net Cash Accruals divided by Total Debt Service, and Total Debt Service includes this annual principal figure, a longer tenure directly reduces the denominator and improves DSCR in every single year.
This is one of the most effective and most commonly used fixes, particularly for businesses where the underlying cash generation is genuinely close to the required threshold but not quite there with a shorter tenure.
Request a Longer Moratorium Period
A moratorium is the period during which only interest is due and no principal repayment is required. For a new business or a project that takes time to reach full production, the first year or two of operation often generates lower cash flow than later years. A moratorium aligns the start of principal repayment with the point at which the business has ramped up enough to comfortably service it.
For dairy farms, poultry units, manufacturing projects with an installation and commissioning period, or any business with a genuine ramp-up curve, requesting a moratorium of 12 to 18 months instead of the standard 6 months can be the difference between a DSCR that fails in Year 1 and one that clears comfortably from Year 1 onwards once principal repayment actually begins.
Include Every Legitimate Revenue Stream
It is common for Operating Statements, particularly in agriculture and manufacturing, to capture only the primary product and leave out genuine secondary income that the business actually generates. A flour mill produces bran as a by-product with real market value. A dairy farm generates income from calf sales and manure. A manufacturing unit may generate scrap sale income.
Adding these at current, verifiable local market prices is not optimistic projection. It is completing a picture that was incomplete. For some businesses, this alone can move Net Cash Accruals enough to clear the DSCR threshold, particularly in the early years when the primary product revenue has not yet reached full scale.
Verify Depreciation Is Calculated at the Correct Rate
Depreciation rates under the Income Tax Act vary by asset category. Plant and machinery is generally depreciated at 15 percent on a written down value basis. Buildings at 10 percent. Livestock such as cattle and buffaloes at 25 percent. Computers at 40 percent. Using the wrong rate, particularly understating the rate for livestock or machinery, understates the depreciation figure and therefore understates Net Cash Accruals.
For businesses with significant investment in livestock or machinery, getting this rate correct can make a meaningful difference to DSCR, especially in the early years when the asset value, and therefore the depreciation amount, is at its highest.
Reduce the Loan Amount Through Higher Promoter Contribution
If a portion of the project cost can be funded through additional promoter contribution rather than bank loan, the loan amount itself reduces, which reduces both the annual principal repayment and the interest, improving DSCR directly. This is particularly relevant when DSCR is only marginally below the required level, where even a relatively modest increase in promoter contribution, for example by ten percent of the project cost, can be enough to close the gap.
Review Whether Working Capital Has Been Correctly Separated
As covered earlier, working capital interest should sit in the Operating Statement as an expense, not in the DSCR denominator. If a combined term loan and working capital application has not made this separation correctly, DSCR for the term loan component appears artificially depressed by an obligation that should not be part of that calculation in the first place. Separating these correctly often resolves DSCR concerns for the term loan without changing anything about the actual loan structure.
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What a Correctly Improved DSCR Looks Like Across the Loan Period
Banks do not expect DSCR to be uniformly high from Year 1. What they look for is a credible progression that reflects how a business genuinely grows, with every individual year still meeting the minimum threshold.
The Progression Banks Want to See : A typical pattern for a business with a ramp-up period, after the corrections above are applied, might show DSCR starting at around 1.25 to 1.35 in the first repayment year, when the business has reached enough scale to begin repayment but is not yet at full capacity. By the third or fourth year, as revenue and Net Cash Accruals grow while the principal repayment amount remains the same or reduces under a reducing balance structure, DSCR typically rises to 2.0 or higher.
This rising pattern is itself a positive signal to a credit officer. It shows the loan structure was designed around how the business actually performs over time, rather than the figures being adjusted to produce a flat number that clears the threshold in every year regardless of the underlying story.
When DSCR Cannot Be Improved Through Structuring Alone
In a small number of cases, even after correcting the formula, extending tenure, adjusting moratorium, and including all legitimate revenue, the underlying business simply does not generate enough cash to support the loan amount being requested. In these situations, the honest and useful outcome is reducing the requested loan amount to a level the business can genuinely service, rather than continuing to adjust other variables to force a result. A smaller loan that is genuinely viable and gets sanctioned is a far better outcome than a larger loan application that continues to generate queries.
How This Comes Together in Practice
At Sharda Associates, when we review an application where DSCR has been flagged, our CA team works through this in sequence. First, the formula is checked and corrected if needed. Second, all legitimate revenue streams are verified and included. Third, depreciation rates are checked against the correct statutory categories. Fourth, if DSCR is still below the required level, loan structuring options, tenure and moratorium, are reviewed against what the specific bank and scheme permit. Only after all of this is the resulting DSCR presented, year by year, as the genuine financial picture of the business under the proposed loan structure.
This sequence is why corrected CMA Reports prepared this way typically clear appraisal without further DSCR-related queries, because every number in the resubmission can be traced back to a real, verifiable basis.
Conclusion
DSCR is not a verdict on whether your business is good or bad. It is a calculation, and like any calculation, it can be done correctly or incorrectly, and it depends on inputs that can be structured well or poorly.
In our experience, the majority of DSCR problems trace back to one of a small number of specific, identifiable issues, depreciation not added back, working capital interest wrongly included, legitimate revenue left out, an incorrect depreciation rate, or a loan structure, tenure and moratorium, that does not match how the business actually generates cash over time. Every one of these has a clear, legitimate fix.
The businesses that move from a DSCR query to an approved loan are not the ones that found a way to make a number look better. They are the ones whose CMA Report, once corrected, tells an accurate and complete story of a business that genuinely can, and will, repay what it borrows.
At Sharda Associates, our CA team works through DSCR issues using exactly this approach, correcting the calculation first, completing the financial picture second, and structuring the loan appropriately third, so that the DSCR your bank sees is both correct and genuinely achievable.
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Frequently Asked Questions
1. What is a good DSCR for a bank loan?
Most banks require a minimum DSCR of 1.25 for every individual repayment year, meaning the business must generate at least Rs.1.25 in cash for every Rs.1 of annual loan repayment and interest. A DSCR that starts around 1.25 to 1.35 in the early years and rises toward 2.0 or higher in later years is generally viewed as a healthy and credible profile.
2. Why is my DSCR coming out below 1, even though my business is profitable?
The most common reason is that depreciation has not been added back to net profit when calculating Net Cash Accruals. Depreciation reduces accounting profit but does not reduce actual cash in the business. Correcting this single step often raises DSCR substantially without anything about the business itself changing.
3. Does extending the loan tenure actually improve DSCR, or does it just delay the problem?
It genuinely improves DSCR in every year of the loan, because the annual principal repayment amount is lower when spread over a longer period, and DSCR is calculated separately for each year. As long as the underlying cash generation is real, a longer tenure reflects a more accurate match between the business’s cash flow pattern and its repayment obligation.
4. Can I improve DSCR by simply increasing my revenue projections?
Increasing revenue figures without a basis in actual production capacity or verified market prices creates a credibility problem that banks identify quickly, and can also create inconsistencies with other statements in the CMA Report. Genuine improvements come from correcting calculation errors, including legitimate revenue that was missing, and structuring the loan appropriately, not from adjusting projections upward without justification.
5. What is the correct DSCR formula?
DSCR equals Net Cash Accruals divided by Total Debt Service for the same year. Net Cash Accruals is Net Profit After Tax plus Depreciation. Total Debt Service is the term loan principal repayment plus the term loan interest for that year. Working capital interest should not be included in the denominator.
6. How does a moratorium period help DSCR?
During a moratorium, only interest is due and no principal repayment is required, so the total debt service for those years is much lower. This is particularly useful for new businesses or projects with a ramp-up period, where principal repayment can be aligned to begin once the business has reached a stable level of production and cash generation.
7. Does livestock depreciation really make a noticeable difference to DSCR?
Yes, particularly for dairy, poultry, and other animal husbandry projects. Livestock such as cattle and buffaloes is depreciated at 25 percent on a written down value basis, which is a high rate compared to most other asset categories. For a project with significant investment in animals, correctly including this depreciation in Net Cash Accruals can be one of the largest single factors in the DSCR calculation, especially in the first one or two years.
8. If my DSCR is still below 1.25 after all corrections, what should I do?
If the formula is correct, all legitimate revenue is included; the loan is already structured with an appropriate tenure and moratorium; and DSCR is still below the required level, the most honest and practical step is to reduce the loan amount requested to a level the business can genuinely service, rather than continuing to adjust figures.
9. Will banks accept a DSCR that starts low and rises over the years?
Yes, provided every individual year still meets the minimum threshold, typically 1.25. A rising DSCR profile that reflects genuine business growth, supported by realistic capacity utilisation assumptions, is generally seen as more credible than a flat DSCR that looks the same in every year regardless of the business’s actual growth pattern.
