Module: General Practice
Q117: In the context of Term Loan appraisal, what does the Debt Service Coverage Ratio (DSCR) primarily indicate, and what is generally considered the minimum acceptable benchmark for most banks?
✅ Correct Answer: B
Debt Service Coverage Ratio (DSCR) is the most critical ratio for Term Loan appraisal.
Formula: (Net Profit + Depreciation + Interest on Term Loan) / (Interest on Term Loan + Principal Installment). Significance: It measures the cash flow available to pay current debt obligations.
A ratio of 1.0 means the firm generates just enough cash to pay its debt (which is high risk). Benchmark: Banks generally prefer a DSCR between 1.5 and 2.0. An average DSCR (over the loan tenor) below 1.25 is usually considered risky and may lead to rejection.
Formula: (Net Profit + Depreciation + Interest on Term Loan) / (Interest on Term Loan + Principal Installment). Significance: It measures the cash flow available to pay current debt obligations.
A ratio of 1.0 means the firm generates just enough cash to pay its debt (which is high risk). Benchmark: Banks generally prefer a DSCR between 1.5 and 2.0. An average DSCR (over the loan tenor) below 1.25 is usually considered risky and may lead to rejection.