DSCR (Debt Service Coverage Ratio)

DSCR (Debt Service Coverage Ratio) is calculated as: Net Operating Income (NOI) ÷ Annual Debt Service, where Annual Debt Service = principal repayment + interest payments in a given year. A DSCR of 1.0 means the business earns exactly enough to service its debt with nothing left over; a DSCR of 1.25 means income is 25% above debt obligations. Indian commercial banks (SBI, Bank of Baroda, SIDBI) typically require a minimum DSCR of 1.25–1.5 for term loans on manufacturing and recycling projects. SIDBI and NABARD, which provide concessional finance to MSMEs and green businesses, may have slightly more flexible norms for sectors with government policy support, but 1.25 remains the practical floor.

For a recycling project, DSCR is calculated over the loan repayment period (typically 5–10 years). Year-by-year DSCR calculation in a Detailed Project Report (DPR) must show: projected revenue (tonnes processed × realised price), less operating costs (raw material, power, labour, maintenance, overhead), = EBITDA, less taxes and working capital changes, = DSCR numerator. The denominator is the loan repayment schedule from the bank term sheet. Years 1–2 are typically low DSCR as the plant ramps up capacity utilisation — banks account for this with a moratorium period (no principal repayment for the first 12–18 months) and look at the DSCR from Year 3 onward when the plant is at 70–80% capacity.

Common reasons DSCR projections fail in Indian recycling DPRs: (1) overstating capacity utilisation in Year 1 (90% utilisation from day one is unrealistic — 50–60% in Year 1, 70–80% in Year 2 is more credible); (2) understating feedstock procurement costs — assuming government-supplied waste at zero cost without contractual basis; (3) using virgin plastic prices as the proxy for recycled plastic selling prices without market evidence; (4) omitting working capital interest (receivables from OEM customers can be 30–90 days); (5) using power tariff estimates from the DPR that are 12–18 months old when actual commercial operation starts.

For project finance conversations with Indian banks, prepare a sensitivity analysis showing DSCR under three scenarios: base case, 20% revenue reduction, and 15% cost increase. A project where DSCR stays above 1.1 even in the downside scenario is fundable. If the project depends on EPR credit revenue to maintain DSCR, explicitly model the EPR credit price risk and show what happens when EPR prices drop 40% — which they have done in some categories between FY2022 and FY2024.