A project report is not a document about your business. It is a document about a lender's risk, written in your business's language. Borrowers who understand that distinction get sanctions. Borrowers who do not, submit forty pages of description and are asked for the same four ratios anyway.
What follows is what an appraisal officer extracts from the file, in roughly the order it is extracted.
1. Debt service coverage — the ratio that decides
The debt service coverage ratio asks one question: does the cash the business generates cover what it owes the bank this year, with room to spare?
In its usual form for a term loan appraisal:
The numerator adds back depreciation because it is not a cash outflow, and interest because it is being counted in the denominator as part of the obligation. Working capital interest is generally excluded from both sides, being a revenue expense rather than part of the term obligation — though treatment varies between institutions, and the ratio should be built the way the lender in question builds it.
Lenders typically look at the ratio in two forms: the average across the loan tenure, and the minimum in any single year. A project that averages comfortably but dips below one in year three is a project whose repayment schedule needs restructuring before submission, not after rejection. As a general orientation, an average DSCR in the region of 1.5 to 2 with no year falling below approximately 1.2 is treated as satisfactory by most institutions — but these are internal credit-policy norms, not statutory thresholds, and they differ by bank, by sector and by security cover.
2. Promoter contribution — how much of your own money is in it
No lender funds the whole project. The margin — the portion the promoter brings — determines both whether the proposal is entertained and how it is priced. For term loans the expectation commonly falls somewhere between a quarter and a third of project cost; for working capital, the margin is computed against the working capital gap.
What is examined is not only the quantum but the source. Contribution demonstrably from taxed savings, from the sale of an identified asset, or from an unsecured loan from a director that is subordinated to the bank's debt, is treated very differently from a round figure appearing in the capital account with no traceable origin. Where the contribution has already been brought in, the bank statements evidencing it should be in the file from the start.
3. The margins the projections claim
This is where most reports lose credibility. The appraisal does not test whether your margin is good. It tests whether your margin is consistent — with your own history, with the industry, and with the assumptions elsewhere in your own document.
- Gross margin projected materially above the last three audited years, with no stated reason, invites a question you must be able to answer
- Revenue growing at thirty per cent while employee cost grows at five per cent describes a business that has stopped needing people — it needs explaining
- Capacity utilisation rising to ninety per cent in year one of a new plant is rarely believed, and rightly so
- A margin above the sector norm requires a stated structural reason: a contract, a process, a location advantage, a captive input
A projection is not a forecast of what you hope will happen. It is a set of assumptions you are prepared to be asked about, one at a time.The AKV working rule
4. The balance sheet ratios read alongside
| Ratio | What the lender is testing |
|---|---|
| Current ratio | Short-term liquidity. A level around 1.33 has long been treated as the conventional benchmark for working capital facilities. |
| Total outside liabilities to tangible net worth | How much of the business is other people's money. Rising leverage across projected years is examined closely. |
| Interest coverage | Whether operating profit comfortably absorbs the interest burden at the sanctioned limit, not the current one. |
| Inventory and receivable days | Whether the working capital assessed matches the operating cycle actually described elsewhere in the report. |
The last of these is a frequent internal contradiction. A report that assesses working capital on a ninety-day cycle while the audited accounts show receivables running at one hundred and forty days is asking the lender to fund a gap the promoter has not acknowledged.
5. Sensitivity — the section that shortens appraisal time
Include it before it is asked for. Take the two or three variables the project is genuinely exposed to — selling price, principal raw material cost, capacity utilisation, and where relevant the exchange rate — and show what happens to DSCR when each moves adversely by ten and twenty per cent.
Two things follow. The lender sees that the borrower understands his own risk, which is itself a credit signal. And where the project breaks under a modest adverse move, the promoter learns it in his own office rather than in the sanction meeting.
6. What should be in the file, and what should not
- Audited financial statements for three years, with the tax audit report where applicable
- Income-tax returns and computation for the same years, reconciling to the accounts
- GST returns for the recent period, agreeing with the turnover shown
- Quotations or firm orders supporting the capital cost — not indicative estimates
- Evidence of land and building title, statutory approvals and licences applicable to the activity
- Existing borrowing arrangements with repayment history, disclosed in full
What should not be in the file: turnover projections that do not tie to the GST returns already filed; a capital cost that has moved between the covering letter and the schedule; and any figure the promoter cannot explain from memory in a meeting.
7. The one thing that shortens the process most
Reconcile before submission. Turnover per the accounts to turnover per the GST returns to turnover per the projections. Profit per the accounts to profit per the tax computation. Borrowings per the balance sheet to the credit information report. Where a difference is legitimate, put the explanation in the file rather than waiting to be asked. Most appraisal delay is not disagreement — it is the time taken to answer questions that a one-page reconciliation would have pre-empted.
Scope of advice. This firm advises on the Indian tax, exchange-control and regulatory position. Where a matter also turns on the law of the country in which you are resident or in which an entity is incorporated, we set out the Indian position and coordinate with your adviser in that jurisdiction; we do not render advice on foreign law.
Discussing your position. If any part of this affects a transaction you are contemplating, the useful conversation is the one that happens before it is executed. A scoping call is the appropriate first step.
This article is general commentary on the law as it stands and is not advice on any specific facts. Positions in tax, corporate and exchange-control law change with amendments, notifications and judicial decisions; please confirm the current position with the firm before acting.