How to Improve DSCR Before Applying
for a Bank Loan

What DSCR Measures and Why Banks Fix 1.25

The Debt Service Coverage Ratio (DSCR) answers one fundamental question: for every ₹1 the business must pay as loan EMI, how many rupees of cash profit does it generate?

• DSCR = 1.0 → business earns exactly enough to pay EMIs — zero buffer
• DSCR = 1.25 → business earns 25% more than its EMI obligations — minimal safety margin
• DSCR = 1.50 → business earns 50% more than EMIs — comfortable; this is the bank's preferred average
• DSCR = 2.0+ → strong; bank may offer better pricing or larger sanction

Banks enforce 1.25 as the floor because even a 20% drop in revenue — very possible in a downturn — brings DSCR to 1.0, leaving no room for EMI default.

The DSCR Formula — Numerator and Denominator

To improve DSCR, you must either increase the numerator (cash profit) or reduce the denominator (loan repayment obligation) — or both.

Strategy 1: Request a Moratorium Period

A moratorium (also called a repayment holiday) means principal repayment is deferred for 12–24 months while the business ramps up. During the moratorium, only interest is paid — not principal.

Effect on DSCR: During the moratorium, the denominator drops sharply (only interest, no principal). The DSCR in Year 1 automatically improves. This is the most commonly used strategy for new projects.

How to apply: Request the moratorium in your project report and CMA covering letter. The EMI schedule in the CMA should reflect interest-only for the moratorium period, followed by full EMI thereafter.

Strategy 2: Extend the Loan Tenure

A longer repayment tenure reduces the annual principal repayment, lowering the denominator without changing the business's cash generation.

Limitation: Banks cap tenure based on asset life. Machinery loans typically max out at 5–7 years; building/land loans can go 10–15 years. Don't request a tenure longer than the useful life of the asset being financed.

Strategy 3: Close Existing High-EMI Loans

Every existing term loan increases the denominator. Closing even one high-EMI vehicle loan or equipment loan before applying for the new term loan can significantly improve DSCR.

Example: If you have an existing car loan with ₹3 lakh annual EMI and close it before applying, your DSCR denominator drops by ₹3 lakh — directly improving the ratio.

Check all existing term loan schedules. If any loan is within 6–12 months of closure, pre-pay and close it. The upfront cost of pre-payment is often far less valuable than the DSCR improvement it delivers.

Strategy 4: Increase Promoter Equity Contribution

A higher promoter margin (equity) means a smaller term loan — directly reducing the denominator. If the bank requires 25% margin on a ₹4 crore project, the loan is ₹3 crore. If you bring 35% margin, the loan drops to ₹2.6 crore — and every EMI payment is proportionally smaller.

Sources of additional promoter contribution:

• Personal savings or FD encashment
• Unsecured loans from family (shown as capital/partners' loan in Balance Sheet)
• Subsidy amount (PMEGP, state government schemes) counted as margin money
• Asset contribution (land or building already owned, brought in as capital)

Strategy 5: Revise Revenue Projections Upward (Justifiably)

If your current revenue projections are conservative and you have confirmed orders, LOIs, or contracts that support higher revenue, revise the projections upward. Higher revenue → higher profit → higher DSCR numerator.

What "justifiably" means:

• Attach purchase orders, work orders, or distributor agreements as annexures to the CMA
• Tie revenue to capacity — don't project above installed capacity
• Year 1 projection above 70% utilisation for a new plant needs strong justification
• If you inflate revenue without backing, banks will cut it during assessment — making DSCR worse, not better

Strategy 6: Reduce Operating Costs in Projections

Identify genuine cost efficiencies that will materialise with the new loan — and reflect them in projections. Common examples:

• New machinery replacing labour-intensive process → lower labour cost per unit
• In-house production replacing outsourced job work → lower job work expenses
• Economies of scale — raw material costs as % of revenue fall at higher volumes
• Solar power installation → lower power & fuel costs

Be conservative and document each saving. Banks accept cost improvements that are clearly tied to the capital investment being financed.

Strategy 7: Convert Short-Term Debt to Term Loan

Short-term loans (STLs, working capital term loans with 1–2 year tenure) have very high annual principal repayment relative to their outstanding balance. If restructured into a 5-year term loan, the annual repayment burden drops significantly — improving DSCR while keeping the same outstanding debt.

This requires bank agreement and is typically done during annual CC/OD review discussions. Approach your bank relationship manager about reclassifying existing STLs before applying for the new term loan.

Strategy 8: Add Non-Operating Income Sources

Non-operating income (rental income, dividend income, interest income on FDs) contributes to net profit and thus to the DSCR numerator — without adding to the denominator. If your business or promoters have such income that is genuinely part of the entity's financials, ensure it is included in the CMA projections.

Caution: Do not inflate non-operating income. Banks verify it against bank statements and TDS credits. Fictitious income entries are fraud — not a strategy.

DSCR Improvement Checklist