DSCR, IRR and Debt-Equity Ratio: Three Different Tests in Project Finance

DSCR, IRR and debt-equity ratio answer different questions. A project can offer an attractive estimated return and still fail to generate enough cash when loan repayments fall due. Understanding the distinction makes funding discussions more useful.

Generic office building, illustrating business funding and planning

Image: Side of office building by Alanthebox; CC0 1.0. Unmodified, illustrative photograph.

DSCR: can scheduled debt be serviced?

Debt-service coverage compares the agreed cash available for debt service with the relevant interest and principal payments. Lenders may define the numerator and testing period differently; use the sanction’s definition consistently.

In a simplified illustrative period, ₹12 crore available against ₹10 crore debt service produces 1.20 times coverage. That is arithmetic, not a universal acceptable minimum. A strong annual average can conceal a weak quarter or a large final repayment.

SBI’s Surya Shakti page includes an average gross DSCR condition for that particular product. It is a lender-specific example, not a standard for every project.

IRR: what return do the projected cash flows imply?

Internal rate of return is the discount rate at which the net present value of the modelled cash flows is zero. State whether you are evaluating project cash flows or cash flows to equity after financing.

IRR depends on dates, investment outlay and later receipts. It is not a guaranteed yield. Unconventional cash-flow patterns can produce multiple rates or an unhelpful result; examine net present value and the underlying cash flows as well.

Debt-equity ratio: how is the investment funded?

With illustrative debt of ₹60 crore and recognised equity of ₹40 crore, the ratio is 1.5:1. Confirm whether the lender tests project, company or consolidated debt and which instruments qualify as equity.

A lower ratio does not cure weak demand. A higher ratio increases the fixed financial burden but must be assessed with cash flows and terms.

Use the three together

Stress-test delayed commissioning, lower margins and slower collections. Observe both returns and repayment capacity. Reconcile the project model to the actual funding documents, then identify the extra contribution or revised repayment profile required under the downside. Ratios support judgment; they do not replace it.

Connect with Monei Matters

Contact Monei Matters to review the assumptions and funding implications in your project-finance model.

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Phone: +91 93138 03227 / +91 93110 03227
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Services include business finance, working capital, commercial mortgage/LAP, lease rental discounting, debt syndication, restructuring, settlements, FDI advisory and equity syndication.

Disclaimer

General information based on sources reviewed for the position as at 10 September 2026; not transaction-specific legal, tax or investment advice. Illustrations are hypothetical. Applicable law, documents and lender or investor terms govern each case; funding and settlement outcomes are not guaranteed.

Sources

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