ISCR (interest service coverage ratio) shows how many times a borrower’s earnings cover its interest cost. FCCR (fixed charge coverage ratio) asks whether earnings also cover lease rentals and scheduled principal. ISCR tests whether the borrower can carry the cost of its debt. FCCR tests whether it can also meet its repayment schedule and other contractual charges.
A reading below one times means earnings do not cover the charges in that ratio. The formula behind the number matters as much as the number, because both ratios are calculated in more than one way.
Why it matters for underwriters
The two ratios fail for different reasons, so reading them together points to different fixes.
| ISCR | FCCR | Likely reading | What to examine |
|---|---|---|---|
| Comfortable | Comfortable | Earnings carry both cost and repayment | Whether the earnings will last |
| Comfortable | Thin | Interest is manageable, but the repayment or lease burden is heavy | Tenor, instalment profile, lease commitments |
| Thin | Thin | Earnings are weak against the debt taken on | Debt level, pricing, margin trend |
For an MSME (micro, small and medium enterprise) term loan, FCCR often gives the earlier warning. A new instalment or a rented unit can tighten FCCR while ISCR barely moves.
For a mid-corporate borrower, these ratios may also appear as financial covenants in the sanction terms. Acceptable levels vary by institution, product and borrower, so test against your own institution’s policy.
How it works
The common forms are:
ISCR = EBITDA / Interest expense
FCCR = (EBITDA + Lease rentals) / (Interest expense + Lease rentals + Scheduled principal repayments)EBITDA is earnings before interest, tax, depreciation and amortisation. Lease rentals are added back in the FCCR numerator because they were already deducted in reaching EBITDA. Without that step, the same cost would count against the borrower twice.
Definitions differ on these points:
| Choice | Common options | Effect on the ratio |
|---|---|---|
| Earnings base | EBITDA, or EBIT (earnings before interest and tax) | EBIT gives a lower ratio because depreciation stays deducted |
| Tax | Pre-tax earnings, or earnings after tax paid | After-tax gives a lower ratio |
| Other income | Included, or stripped out if non-recurring | Stripping it out gives a truer ratio, usually lower |
| Interest | Expensed interest only, or including capitalised interest | Including capitalised interest gives a lower ratio |
| Fixed charges | Interest, lease rentals and principal only, or wider contractual payments | A wider scope gives a lower ratio |
| Principal | As scheduled, or grossed up for tax (principal divided by one minus the tax rate) | Gross-up gives a lower ratio, because principal is repaid from post-tax money |
The nearest relative is DSCR (debt service coverage ratio), which tests earnings against interest and principal. FCCR widens that test to other fixed charges. Do not confuse FCCR with the fixed asset coverage ratio, which measures security cover rather than earnings cover.
India specifics
The regulatory points below come from the Reserve Bank of India (Commercial Banks – Credit Risk Management) Directions, 2025, as updated on October 01, 2026. Under paragraph 3, they apply to banking companies other than Small Finance Banks, Payments Banks and Local Area Banks, plus corresponding new banks and the State Bank of India. If you work at another type of lender, including an NBFC, check what applies to it.
No definition of either ratio. The definitions in paragraph 4(1) do not include ISCR or FCCR. Paragraph 4(2) sends undefined expressions to other sources, including other RBI regulations, RBI’s glossary and commercial parlance. So state the formula you used in the appraisal note. Paragraph 6 also requires banks to follow a separate Guidance Note on Credit Risk Management, which is outside the scope of this piece.
EBID is defined. Paragraph 4(1)(vi) sets out EBID (earnings before interest and depreciation), with the same meaning as for computing DSCR:
EBID = Profit After Tax + Depreciation + Interest on debt + Lease Rentals, if anyEBID starts from profit after tax, so it is a post-tax figure and is not the same as EBITDA. It also already adds back lease rentals.
EBID drives one capital test. Under Chapter VII, a bank compares the potential loss from an entity’s UFCE (unhedged foreign currency exposure) with its EBID over the last four quarters. Incremental requirements under paragraph 58 run from nil at up to 15 per cent, to 80 basis points of provisioning and a 25 percentage point risk weight increase above 75 per cent. A borrower can show sound domestic coverage and still sit in a higher bucket here.
Appraisal duties that bear on these ratios. Chapter III sets these requirements. How they apply to ISCR and FCCR is working practice, not RBI wording.
| Paragraph | Requirement | What it means for the ratios |
|---|---|---|
| 7 | Independent, objective appraisal, with no dependence on outside consultants’ reports | Rebuild the ratios from the financials rather than lifting them from a project report |
| 8 | Sensitivity tests and scenario analysis, especially for infrastructure projects, including project delays and cost overruns | Run coverage under the delayed and overrun cases, not only the base case |
| 9 | Ascertain the source and quality of promoter equity, and ensure parent debt is not infused as equity in a subsidiary or SPV (special purpose vehicle) | Look at parent-level debt service, which the SPV’s own ratios will not show |
| 11 | Provisions for obtaining credit information reports from credit information companies | Reconcile the interest and instalments in the ratio to the debt shown in the reports |
| 12A | Assessments to factor in the possible impact of calamities on borrowers | Consider a calamity scenario where the borrower is exposed |
Term and demand debt behave differently. The Directions define term loans as having a specified maturity, payable in instalments or as a bullet (a single payment at maturity). The outstanding on cash credit is repayable on demand. In practice, scheduled principal in FCCR usually means term debt instalments, while cash credit contributes interest only. A bullet falling due can sharply lower that year’s FCCR.
Worked example, made-up numbers
A small manufacturer has this year’s figures, in ₹ lakh:
| Item | Amount |
|---|---|
| Profit after tax | 60 |
| Tax (25 per cent of profit before tax) | 20 |
| Interest (term loan 40, cash credit 20) | 60 |
| Depreciation | 30 |
| EBIT (60 + 20 + 60) | 140 |
| EBITDA (140 + 30) | 170 |
| Lease rentals, already expensed | 15 |
| Scheduled term loan principal | 70 |
The fixed charge total is 60 + 15 + 70 = 145. The same accounts give different ratios depending on the definition:
| Ratio and definition | Calculation | Result |
|---|---|---|
| ISCR, EBITDA based | 170 / 60 | 2.83x |
| ISCR, EBIT based | 140 / 60 | 2.33x |
| FCCR, EBITDA based | (170 + 15) / 145 | 1.28x |
| FCCR, using EBID | 165 / 145 | 1.14x |
| FCCR, EBIT based | (140 + 15) / 145 | 1.07x |
| FCCR, EBIT based, principal grossed up for tax | 155 / (60 + 15 + 93.33) | 0.92x |
EBID here is 60 + 30 + 60 + 15 = 165. The FCCR range of 0.92x to 1.28x comes from definition alone, with no change in the business.
Now stress the EBITDA-based version. EBITDA falls 20 per cent to 136, then a rate rise adds 10 to interest.
| Case | ISCR | FCCR |
|---|---|---|
| Base | 2.83x | 1.28x |
| EBITDA down 20 per cent | 2.27x | 1.04x |
| EBITDA down 20 per cent, interest up 10 | 1.94x | 0.97x |
ISCR still looks adequate in the last case, while FCCR has fallen below one. That gap sends the discussion to tenor and instalment size, as well as to earnings.
Pitfalls
- Comparing unlike formulas. A borrower’s number, a peer’s number and a covenant can each use a different definition. Restate them on one basis before comparing.
- Counting non-recurring income. Asset sale gains and one-off receipts can lift EBITDA without adding repayment capacity.
- Missing capitalised interest. Interest capitalised during construction skips the profit and loss account, so ISCR can look better than the cash position.
- Leaving out debt. Finance cost in past accounts will not show a new loan. Use the post-sanction debt and a full year of interest on it.
- Testing during a moratorium. While principal is deferred, FCCR looks strong. Test the first full repayment year as well.
- Mishandling leases. Depending on the accounting treatment, lease cost may appear as rent or as depreciation and interest. Find where it sits before adding it back, or it may be missed or double counted.
- Ignoring owner-related charges. Interest on promoter loans and partner remuneration can be treated in different ways in MSME accounts. State the treatment you used.
- Treating EBID as EBITDA. The Directions’ definition is post-tax and includes lease rentals.
- Reading one year alone. A single year says little about the trend. Look at historical and projected years together.
Checklist
- Formula written in the appraisal note, including earnings base and tax treatment
- Ratios rebuilt independently from the financial statements
- Non-recurring income removed or shown separately
- Capitalised interest identified
- Lease cost located in the accounts and treated once
- All existing and proposed debt included, and reconciled to credit information reports
- Moratorium and first full repayment years both tested
- Bullet repayments and other uneven instalments identified year by year
- Earnings and interest rate stress run on both ratios
- Parent or group debt service considered where relevant
- EBID calculated as defined in the Directions wherever the UFCE test applies
- Result checked against your own institution’s policy, since limits vary by institution
Sources
- Reserve Bank of India (Commercial Banks – Credit Risk Management) Directions, 2025, rbi.org.in, accessed 2026-11-06
