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
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