Business loan eligibility in India: how lenders use DSCR, and how much you can borrow
Work out your debt service coverage ratio and the maximum MSME loan you can service, with worked rupee examples, stress tests and the other eligibility checks lenders apply.
Banks and NBFCs decide how much a business can borrow mainly from its debt service coverage ratio (DSCR): the cash the business generates for debt service, divided by the interest and principal it must pay in the year. Many lenders look for a DSCR of at least about 1.25 to 1.5 on projected figures (the exact threshold depends on lender, sector and loan type). Working backwards from that target gives you the maximum EMI, and from the EMI the maximum loan. Credit reports, business vintage, GST and banking track record, and leverage then decide whether you get it and at what rate.
This guide belongs to the business loan calculation guide and checklist. All figures are illustrative.
The DSCR formula
DSCR = (Net profit after tax + depreciation + interest on term loans) ÷ (Interest on term loans + principal instalments due in the year)
- Depreciation is added back because it is a non-cash expense.
- Interest is added back in the numerator because it is paid out of this cash; it appears again in the denominator.
- Some lenders include other non-cash items or deduct drawings and dividends. For proprietorships, lenders often subtract the owner's living expenses if they are not already in the accounts.
Banks usually calculate DSCR year by year over the loan tenure on your projections and look at both the average and the minimum year.
Worked example 1: what is my DSCR now?
Illustrative last-year figures for a small manufacturer:
| Item | Amount |
|---|---|
| Net profit after tax | ₹18,00,000 |
| Depreciation | ₹4,00,000 |
| Interest on existing term loans | ₹2,00,000 |
| Principal repaid on existing loans | ₹4,00,000 |
Numerator = 18 + 4 + 2 = ₹24 lakh. Denominator = 2 + 4 = ₹6 lakh. DSCR = 4.0. There is plenty of headroom.
Worked example 2: the maximum new loan
Target DSCR: 1.5.
- Maximum total debt service = ₹24,00,000 ÷ 1.5 = ₹16,00,000 a year.
- Existing debt service = ₹6,00,000. Room for new EMIs = ₹10,00,000 a year ≈ ₹83,333 a month.
- Maximum loan for that EMI (present value of the EMIs): - at 11% for 5 years: about ₹38.3 lakh - at 18% for 3 years (typical unsecured NBFC): about ₹23.1 lakh
The cheaper, longer loan supports about 65% more principal for the same monthly payment. (In reality the new loan's interest also reduces profit, but since interest is added back in the numerator, the effect on DSCR is small before tax; lenders will model it precisely.)
If the new loan funds a machine that adds profit, lenders include the projected increase. Be conservative: banks discount optimistic projections.
Worked example 3: stress test
Re-run example 1 with sales down 20% and the same costs, which cuts net profit to, say, ₹10 lakh (illustrative). Numerator = 10 + 4 + 2 = ₹16 lakh. If you have taken the ₹38.3 lakh loan, debt service is ₹6 lakh + ₹10 lakh = ₹16 lakh: DSCR = 1.0 (a conservative simplification that ignores adding back the new loan's interest). The business only just covers its EMIs, with nothing left for a bad month. Borrowing somewhat less than the maximum, or choosing a longer tenure, protects you.
Other eligibility tests lenders apply
| Test | What lenders look at | Typical comfort level (varies) |
|---|---|---|
| Business vintage | Years of operation and ITR history | Often 2–3 years for unsecured loans |
| Credit reports | Promoter's personal score; firm's commercial report and CIBIL MSME Rank | No overdues, no recent settlements; see credit reports |
| Turnover consistency | GST returns vs bank credits vs ITR | Figures should reconcile |
| Leverage | Total outside liabilities ÷ tangible net worth (TOL/TNW) | Lower is better; many banks are wary of very high ratios |
| Current ratio | Current assets ÷ current liabilities | Often around 1.33 for working capital limits |
| Banking conduct | Cheque/ECS bounces, average balance, cash deposits | Few or no bounces |
| Promoter contribution | Your own margin in the project | 10–25% for many term loans |
How to improve eligibility before applying
- Clean up the accounts. Book genuine depreciation and avoid showing artificially low profit for tax and then expecting a large loan.
- Reconcile GST, ITR and bank statements, and route sales through the business account.
- Close or reduce costly short loans that drag DSCR down; a single longer loan may serve better.
- Choose a longer tenure for long-life assets to reduce annual debt service.
- Bring more margin or ask for a smaller first loan and build a track record.
- Fix credit report errors at least 30–45 days before you apply.
The document checklist lists the papers lenders use to verify these numbers.
Frequently asked questions
Is DSCR the same as FOIR?
No. FOIR (fixed obligations to income ratio) is mainly used for salaried personal and home loans. Business loans are assessed on DSCR and cash flow, though some NBFCs use a simpler bank-statement-based EMI-to-credits ratio.
What if my DSCR is below 1.25?
Expect a smaller sanction, a request for more margin or collateral, or a decline. Improving profit, extending tenure or reducing existing debt are the usual fixes.
Do lenders use projected or past figures?
Both. Past audited or CA-certified figures show credibility; projections show capacity during the loan. Large gaps between the two invite questions.
Does a new business have a DSCR?
Not on history. Lenders rely on the project report, your own contribution, Mudra or CGTMSE cover and your personal credit record. See PM Mudra Yojana.
Sources
- SIDBI — MSME credit resources
- Reserve Bank of India — MSME lending directions
- TransUnion CIBIL — personal and commercial credit reports
