DSCR explained for underwriters, with a worked example

Why it matters for underwriters

Profit is an accounting result, and loan instalments are paid in cash. DSCR adds back the non-cash charge and the interest, then compares that with what is due. RBI’s Credit Risk Management Directions describe the top line as profit after tax, plus depreciation, plus interest on debt, plus lease rentals, if any.

How it works

DSCR = (PAT + depreciation + interest + lease rentals) / (interest + principal + lease rentals)

Same borrower, read differently

Suppose ₹10 lakh of that profit is a one-off gain from selling a machine.

Nothing about the business changed. Only the reading did.

Pitfalls

• One-off income: asset sales, write-backs and subsidies can lift a single year.
• Average versus yearly: an average DSCR can hide one year below 1. Look at each year, especially in projections.
• Projected growth: a DSCR built on a sharp sales rise says more about the assumptions than the business.
• Other debt: check whether all term debt is in the denominator, including loans the borrower did not mention. Compare with the bureau report and bank statement.
• Moratorium years: the year with no principal due can flatter the ratio.
• Working capital interest: check how your institution treats it, and be consistent.

Checklist

1. Tie PAT and depreciation to the audited statements.
2. Remove one-off items from the top line.
3. List all debt, then match it to the bureau report and bank statement.
4. Calculate each year separately, and note the lowest.
5. Stress the projected years with lower sales or margin.
6. Compare with the level your institution’s policy asks for.

The acceptable level depends on institution, product and tenor.