Term Loan Appraisal Ratios: What Banks Actually Check

TL;DR

• RBI prescribes no DSCR, current-ratio, or debt-equity floor for fresh term loans. What RBI mandates is the process: due-diligence on project viability. Every number you hear is either an illustrative restructuring benchmark or a bank's own internal bar.
• The famous 1.25 / 1.33 DSCR figures come from RBI's restructuring-viability appendix (Corporate Debt Restructuring era), worded "should" and "around". That is explicitly illustrative, not a sanction rule.
• For fresh sanctions, most Indian banks work to 1.50–2.00 average DSCR; large PSU banks go higher (around 2.0 net). A viable project can pass the RBI-style bar and still fail a bank's internal bar. The fix is structuring, not fudging projections.
• The ratios that matter, in order: DSCR, interest coverage, current ratio, leverage (TOL/ANW), asset coverage, promoter contribution. The worked example below computes all of them on a real ₹1 crore loan.

Ask any CA what DSCR a term loan needs and you will hear a number with total confidence: 1.25. Or 1.33. Or 1.5. Ask for the circular behind it and the confidence evaporates, because there is no circular. RBI never set a DSCR floor for fresh term-loan sanctions. This article untangles the three layers borrowers keep mixing up: what RBI mandates, what RBI merely illustrates, and what your bank's own credit policy demands.

What does RBI actually require for term loan appraisal?

The mandate is a process, not a number. RBI's Master Circular on Loans and Advances tells banks they should undertake due diligence on the viability of projects and ensure that "the individual components of financing and returns on the project are well defined and assessed." Note the modal verb: should, not shall. There is no DSCR, no current ratio, no debt-equity figure anywhere in that paragraph.

The same pattern holds in RBI's newest project-finance framework, the RBI (Project Finance) Directions, 2025 (RBI/2025-26/59, dated June 19, 2025; effective October 1, 2025). In the full text of the Directions, DSCR appears only as a mandatory reporting field: lenders must maintain a project-specific database recording the original DSCR, the revised DSCR after any change in the date of commencement of commercial operations, and the revised DSCR after credit events. The Directions set no acceptable-DSCR threshold anywhere. They define project finance by cash-flow predominance (at least 51% of repayment from the project's own cash flows), require financial closure covering at least 90% of project cost, and insist that disbursements stay proportionate to completion stages and equity infusion, certified by an independent engineer. In other words: RBI wants banks to track DSCR rigorously and disburse in step with real progress. The bar for what the number must be is the bank's own call.

Where does the famous DSCR of 1.25 or 1.33 come from?

From a restructuring appendix, and the wording proves it. The Appendix to RBI's Master Circular on Income Recognition and Asset Classification carries "broad benchmarks for the viability parameters" adopted by the Corporate Debt Restructuring mechanism. Verbatim: "the debt service coverage ratio should be greater than 1.25 within the 5 years period in which the unit should become viable and on year to year basis the ratio should be above 1. The normal debt service coverage ratio for 10 years repayment period should be around 1.33."

Three things matter about that quote. First, it sits in a restructuring appendix, not in fresh-sanction guidance: these are tests for whether a stressed account can be nursed back, not gates for new loans. Second, every benchmark is couched in "should" and "around". Guidance language, not mandate language. Third, the older CDR Empowered Group circular describes these as "illustrative parameters, which may be applied on a case-by-case basis." The NBFC Scale-Based Regulation Directions (paras 169–171) repeat the same numbers with the same caveat: NBFCs must determine their own viability benchmarks, which "may be applied on a case-by-case basis" and are "illustratively" suggested.

What DSCR do Indian banks actually want for a term loan?

Their own numbers, from their own credit policies, and they are stricter than the RBI illustration. The going convention across Indian banks is an average DSCR of 1.50 to 2.00 on fresh term-loan appraisals, computed year by year over the loan tenor. Large public-sector banks sit at the stricter end: circulated internal training material from SBI's SME programme puts DSCR (Net) at not normally below 2.0 and DSCR (Gross) not normally below 1.75. NBFCs and small-business lenders are more flexible, tolerating floors around 1.15–1.20 on the minimum year. Treat all of these as bank-policy convention. A bank can tighten or relax them for a sector, a scheme, or a borrower, and no circular stops it.

Two mechanics decide more sanctions than the number itself. First, which DSCR variant the bank uses. The Indian banking / CMA variant is: DSCR = (PAT + Depreciation + Interest on term loan) ÷ (Principal repayment + Interest on term loan), computed year by year, with the average compared against the benchmark. Rating agencies and large corporates often use an EBITDA-based variant instead. If the term loan is the borrower's only debt, the two numerators are equivalent. But if there are other borrowings, they diverge sharply. Ask your bank which variant it uses before you lock your projections.

Second, average versus minimum. Most banks look at both. An average of 1.6 with a Year-1 of 1.05 is a very different file from an average of 1.6 with every year above 1.4. The worked example below shows exactly why Year 1 is where files die.

Which other ratios does the credit officer run?

DSCR is the decider, but it never travels alone. A credit officer runs the file through five more gates, and a fail on any one of them means a query, a restructuring of the proposal, or a rejection. Every row is tagged with its true source, using the three-layer discipline: RBI mandate, RBI illustration, bank convention, or scheme norm.

A word on the current ratio's history, because borrowers still hear "RBI norm 1.33" from older CAs. The 1.33:1 comes from the Tandon Committee's Method II for Maximum Permissible Bank Finance. RBI withdrew the mandatory MPBF prescription in April 1997; banks have been free to set their own working-capital methods with board approval ever since. The ratio survived as convention. It is not in any current RBI mandate, and that is exactly the confusion this article's three-layer framing exists to kill.

For the deep dive on DSCR mechanics, forward and reverse calculation, see our DSCR explained guide. For how these ratios sit inside the full appraisal note, see the Credit Appraisal Memorandum guide.

How do the ratios work on a real ₹1 crore term loan?

A small manufacturing unit sets up with a project cost of ₹1.50 crore. The promoter puts in ₹50 lakh (33.3%) and borrows ₹1.00 crore (66.7%), so the debt-equity is 2:1, inside both the SBI convention cap and SIDBI's 3:1 scheme cap. The loan runs 5 years at 11.5% p.a., principal repaid at ₹20 lakh a year, depreciation 10% straight-line on ₹1.5 crore (₹15 lakh a year), tax 25%. PBDIT runs ₹40 lakh in Year 1 rising to ₹52 lakh in Year 5, roughly a 12% operating margin on sales of ₹3.2–4.4 crore, realistic for small manufacturing.

Verdict: average DSCR ≈ 1.54, minimum 1.16 in Year 1. Against the RBI illustrative restructuring benchmarks, it passes: the average clears 1.25, every year clears 1.0. Against fresh-appraisal bank conventions (1.50–2.00), it passes, but at the thin end. A conservative PSU bank holding the ~2.0 net-DSCR bar would likely push back: more promoter margin, a longer tenor to soften Year 1 debt service, or additional collateral. That is the money line of this whole topic: a viable project can still fail a bank's internal bar, and the fix is structuring the loan, not fudging the projections.

What breaks first when projections miss?

Banks run sensitivities; borrowers should run them first. Take the same ₹1 crore loan and miss Year-1 PBDIT by just 10%: ₹36 lakh instead of ₹40 lakh. Profit before tax becomes ₹9.5 lakh (36 − 15 depreciation − 11.5 interest), tax ₹2.375 lakh, and Year-1 DSCR becomes (36 − 2.375) ÷ 31.5 = 1.07. That is below the RBI illustrative "above 1" year-wise marker with barely any margin, and a credit officer will notice.

Year 1 is where term-loan files die, for a structural reason: interest is highest when the balance is highest, and PBDIT is lowest when the plant is still stabilising. Three honest fixes, in the order banks prefer them: extend the tenor (a 7-year schedule on the same loan lifts Year-1 DSCR to about 1.42), raise promoter contribution (less debt, less Year-1 service), or phase the drawdown so interest does not accrue on money sitting idle. All three change the structure. None of them require touching the sales line.

Does FOIR matter for a business term loan?

What should you ask your bank before you apply?

Walk in with these six questions answered, and your file stops being a guessing game:

1. Which DSCR variant do you use, PAT-plus-depreciation or EBITDA-based? The answer changes your numerator.
2. Average or minimum DSCR, and what is the floor for the weakest year?
3. What current-ratio covenant will the sanction letter carry, and is there penal interest on breach?
4. What promoter-margin percentage do you expect for my sector, 25, 30, or 33?
5. What tenor are you comfortable with before Year-1 DSCR stops being the binding constraint?
6. Which projections do you stress-test, sales, margins, or both, and by how much?

If you are assembling the full projection pack these questions feed into, our CMA data guide covers the six-part format banks expect, and the cash budget vs fund flow guide shows how officers cross-check your liquidity claims.

Sources

• RBI Master Circular: Income Recognition, Asset Classification and Provisioning (ID 8089): DSCR figures (average above 1.25, year-wise above 1, around 1.33 for ten-year repayments) as illustrative restructuring-viability benchmarks, worded "should" and "around". No numeric floor for fresh sanctions.
• RBI (Project Finance) Directions, 2025 (RBI/2025-26/59), effective October 1, 2025: DSCR as a mandatory reporting field (original, revised after DCCO changes, after credit events) with no acceptable-DSCR threshold prescribed anywhere in the text.
• IREDA financing norms: minimum 25% promoter contribution of project cost.
• Moneycontrol on the 2025 project finance norms: reporting on the October 1, 2025 effective date and construction-phase provisioning.

Regulatory claims were checked against the primary RBI sources above. Ratio bands (1.5-2.0 DSCR, 1.33 current ratio, 25-33% promoter contribution) are described as bank-policy convention or scheme norms, not RBI law; the binding source is the individual sanction letter.

Frequently Asked Questions

Last updated: September 2026. Regulatory claims were checked against the RBI IRAC Master Circular and the RBI (Project Finance) Directions, 2025; ratio bands are stated as bank-policy convention or scheme norms, not RBI law.