Check sibling questions
Accounts and Finance
Step 7 Ratio Analysis

Types of loans and coverage ratios relevant

Normally person take 2 types of loan

1.OD/CC (overdraft/cash credit)

2.TL (Term Loan)                 



Term Loan

They are taken to meet working capital requirement of business


to meet day to day expenses of business

They are normally taken for purchasing fixed assets of business

There is no repayment of OD/CC.

Only interest amount is to be paid, not the principal


They are like negative balance in bank account.

Interest is charged only on amount withdrawn



There is proper repayment of both principal an interest amount.

It is normally done in equal quarterly or monthly instalments (EMI)

Interest Coverage Ratio(ICR)  is used to measure repayment


Debt Service Coverage Ratio (DSCR)  is used to measure repayment

Formula for Interest Coverage Ratio(ICR)


(PAT+Interest Exp +Depreciation)/ Interest Repaid




Formula for Interest Coverage Ratio(ICR)


(PAT+Interest Exp +Depreciation) / Interest and Principal Repaid


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CA Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 13 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.