interest coverage ratio

This query is : Open

Querist : Anonymous

Querist : Anonymous (Querist)

02 February 2011 Hi
respected sir/mam

i want to know what is interest coverage ratio and for project finance whether is it should be high or low.

if suppose it is high then what will be the effect?

if suppose it is low then what will be the effect and meaning

please help

thanks in advance

CA Debasish Banerjee

CA Debasish Banerjee (Expert)
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02 February 2011 Interest coverage ratio is the relation between (1)the amount available to (2) the Interest payable.
Higher the ratio .. better for the bank as the borrower is having adequate fund to meet its interest obligations and vice versa for low ratios. You are also required to understand that the ratio calculated is based on projections which are always not achievable and hence bank does a SENSIVITY TEST ( reduction in Sales by say 5% and / or increase in expenses by say 5% )when low interest ratio will boil down to negative ratio suggesting that during adverse situations the borrower will not have enough fund to pay the interest