The 6 Ratios Banks Check Before Sanctioning a Business Loan: Current Ratio, TOL/TNW, DSCR, ISCR, Debt-Equity and Holding Periods (2026)
- Banks test liquidity (current ratio), leverage (TOL/TNW and debt-equity), repayment capacity (DSCR and ISCR) and efficiency (holding periods) — a weak number in any one delays or cuts the sanction.
- Tangible net worth excludes intangibles and loans to promoters; subordinated promoter loans can be added as quasi-equity and often fix a TOL/TNW breach.
- Fix ratios by changing the balance sheet — retain profit, convert promoter loans to capital, lengthen creditor terms, clean old receivables — not by reclassifying entries.
Every bank's credit policy has a table of benchmark ratios, and the appraisal note compares your audited and projected numbers against it line by line. A proposal that fails a benchmark is not automatically rejected, but it needs a written justification, goes to a higher sanctioning authority and usually comes back with a lower limit or extra collateral. Knowing the six ratios and their benchmarks lets you fix the balance sheet before the bank sees it. This guide defines each ratio the way banks compute it, shows a worked balance sheet, and lists the legitimate fixes.
The six ratios and their benchmarks
| Ratio | Formula (bank version) | Typical benchmark | What it tells the bank |
|---|---|---|---|
| Current ratio | Current assets ÷ current liabilities (including the working-capital limit and the current portion of term loans) | ≥ 1.33 (1.25 accepted for some MSME schemes) | Liquidity and the 25% margin on current assets |
| TOL / TNW | Total outside liabilities ÷ tangible net worth | ≤ 3 (up to 4 for trading) | Overall leverage — how much of the business is funded by others |
| Debt-equity | Term debt ÷ tangible net worth | ≤ 2 (project loans often 1.5–2) | Long-term gearing |
| DSCR | (PAT + depreciation + interest on term loans) ÷ (interest on term loans + principal repayments) | ≥ 1.5 average, ≥ 1.25 in any year | Whether cash profit covers loan instalments |
| ISCR | EBIT ÷ total interest | ≥ 2 | Comfort on interest alone |
| Holding periods | Inventory days, debtor days, creditor days | Industry norm; debtors over 90–180 days excluded | Efficiency and quality of current assets |
Tangible net worth: computed the bank's way
Tangible net worth (TNW) = paid-up capital + reserves and surplus − intangible assets (goodwill, software not in use, preliminary expenses, deferred revenue expenditure) − accumulated losses − loans and advances to promoters, directors and group companies − investments in group companies (at some banks). Unsecured loans from promoters are added back as quasi-equity only if the promoters give a written undertaking that they will not be withdrawn during the currency of the loan (subordination letter). This single adjustment changes TOL/TNW more than anything else in a small-business balance sheet.
Worked example
Balance sheet of a manufacturer (₹ lakh): capital 50, reserves 70, goodwill 10, loan to a director 15, promoter unsecured loan 40, term loan 120 (of which 24 repayable within a year), cash-credit 80, creditors 60, other current liabilities 10; current assets 200; PAT 30, depreciation 15, interest on term loan 12, EBIT 60, total interest 22.
- TNW = 50 + 70 − 10 − 15 = 95; with the promoter loan subordinated, quasi-equity TNW = 135.
- TOL = 120 + 80 + 60 + 10 + 40 = 310 (promoter loan is an outside liability unless subordinated). TOL/TNW = 310 ÷ 95 = 3.26 → breach at a bank with a 3.0 cap. After subordination: TOL 270, TNW 135 → 2.00 → clears.
- Current ratio = 200 ÷ (80 + 60 + 10 + 24) = 200 ÷ 174 = 1.15 → breach. Options: lengthen creditor terms, reduce the CC drawing, or move part of the promoter loan into the current-asset build-up as long-term funds.
- DSCR = (30 + 15 + 12) ÷ (12 + 24) = 57 ÷ 36 = 1.58 → clears 1.5.
- ISCR = 60 ÷ 22 = 2.7 → clears.
- Debt-equity = 120 ÷ 135 = 0.89 → clears.
Two of six ratios failed on the raw balance sheet; one fix (subordination letter) and one operating change (creditor terms from 30 to 45 days, adding about ₹30 lakh to creditors and reducing CC usage) bring all six within benchmark before the file is submitted.
Why the benchmarks differ between banks and products
The numbers above are typical, not statutory. Public-sector banks tend to apply the 1.33 current ratio and a TOL/TNW cap of 3 strictly for limits above ₹5 crore, while MSME schemes appraised on the turnover method accept 1.25 and look mainly at the promoter's margin. Trading businesses are allowed higher leverage because their assets are liquid; capital-intensive manufacturers are allowed lower current ratios if the term-loan schedule is comfortable. Non-banking lenders replace several ratios with a cash-flow-based score from bank statements and GST data. Ask the branch for the policy benchmarks for your product before you prepare the file, and address in a covering note any ratio that will not meet them — an explained deviation is sanctionable; an unexplained one is a query cycle.
Legitimate ways to improve each ratio
- Current ratio: convert short-term promoter loans to long-term or capital; negotiate longer supplier credit; do not fund fixed assets from the cash-credit account; write off dead stock and old receivables so the ratio is real, then rebuild it.
- TOL/TNW: retain profits instead of drawing them; infuse capital; subordinate promoter loans; repay group-company advances into the business.
- DSCR: lengthen the term-loan tenure or add a moratorium so annual instalments fall; time capex to profits; in projections, do not assume 100% capacity in year one.
- Holding periods: chase receivables above 90 days before the balance-sheet date; sell slow stock; separate consignment stock.
Rerun the numbers whenever you change one line — a longer creditor period improves the current ratio but raises TOL. The Loan Eligibility Checker on KyaTax computes all six ratios from your balance sheet and shows which benchmark each one clears.
Common mistakes
- Excluding the cash-credit balance from current liabilities when computing the current ratio; the bank includes it.
- Counting goodwill and director loans in net worth.
- Projections where DSCR is 1.1 in year one and 3.0 in year five — the bank sanctions on year one.
- Promoter loan shown but no subordination letter, so it counts against you instead of for you.
- Fixing the ratio by reclassification (moving creditors to “long-term” in the projection) — the audited column exposes it.
Do it yourself in minutes — free to try, no login needed.
Open Loan Eligibility Checker →Frequently asked questions
What current ratio do banks require for a working capital loan?
Most banks benchmark 1.33, computed with the working-capital limit and the current portion of term loans included in current liabilities. Some MSME schemes accept 1.25.
What is TOL/TNW and what is a good value?
Total outside liabilities divided by tangible net worth. Banks generally accept up to 3, and up to 4 for trading businesses. Subordinated promoter loans are treated as quasi-equity and improve the ratio.
How is DSCR calculated for a bank loan?
Cash accruals (profit after tax plus depreciation plus interest on term loans) divided by term-loan interest plus principal repayments for the year. Banks look for an average of 1.5 or more and a minimum of about 1.25 in any year.
What is tangible net worth?
Capital plus reserves minus intangible assets, accumulated losses and loans or advances to promoters and group companies. Promoter unsecured loans are added back only if subordinated to the bank in writing.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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