Security Coverage Ratio – This is the most required terminology in the field of loan assessment. Majority of loan inclusive of Term loan and SODH limits are assessed based on this formula. Security or asset coverage ratio is the measurement tools for company debt obligations against its assets.
There are many bankers which define the security coverage ratio as the specific ability to cover the amount of its existing or proposed debts.Under this all the tangible and monetary assets of a company are measured against its outstanding debts. This shows the overall liquidity position of company’s current financial situation.
The balance sheet figures which are considered for calculating the security coverage ratio are cash on hand, long-term financial obligations, and current liquidity assessments.
Security coverage ratio allows the banker’s to reasonably predict the future earnings of the company and to asses the risk of insolvency.
Benchmark security coverage ratio is 1.5
How To calculate the Security Coverage Ratio – Formula ?
There are various method to calculate the security coverage ratio. Watch out for the most common method of assessment of Security Coverage ratio, commonly used in Banking loan proposals.
- Difference of Current liabilities and short term debt.
- Difference of Total assets and intangible assets (like which are not physical in nature. Corporate intellectual property, including items such as patents, trademarks, copyrights and business methodologies)
- Difference of above 1 and 2 and divided by Total Debt or loan required.
Asset Coverage Ratio = ((Total Assets – Intangible Assets) – (Current Liabilities – Short-term Debt)) / Total Debt Obligations
Assessment of Loan through Security Coverage Ratio :
There are many of the proposals which are assessed by the loan department are on projection or estimation. Majority of the business proposals including MSME loans assessed needed to be fixed based on the security coverage ratio. While in projected / estimated balance sheet if the security in the term of primary are projected at higher side the overall security coverage ratio will not show the actual strength of the company or individual. This is the negative aspect of the security coverage ratio.