TOL/TNW, FACR and Current Ratio Benchmarks
The formulas are short. The judgement is in the adjustments, and in knowing whose benchmark you are quoting.
Three ratios decide a large share of credit proposals: total outside liabilities to tangible net worth (TOL/TNW), the fixed asset coverage ratio (FACR) and the current ratio. The formulas are short. The judgement lies in what you put into them, and in knowing where a benchmark figure actually comes from.
This page works through the adjustments banks make, on one balance sheet, and then sets each commonly quoted benchmark against its source.
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The Three Ratios
- TOL/TNW
- Total outside liabilities ÷ tangible net worth. Outside liabilities are everything owed to anyone other than the owners: term loans, unsecured loans, bank working capital, creditors and provisions. It measures how far the business runs on other people's money.
- FACR (fixed asset coverage ratio)
- Net fixed assets charged to the lender ÷ term loan outstanding. It shows how far the security covers the term loan if cash flows fail. It is a project and term loan ratio, read alongside DSCR and debt-equity.
- Current ratio
- Current assets ÷ current liabilities. It tests whether short-term assets cover short-term obligations, and is the main check on a working capital proposal.
Worked Example: XYZ Ltd Balance Sheet (₹ lakh)
Share capital
₹ lakh
300
Assets
Net fixed assets (includes a ₹60 lakh land revaluation)
₹ lakh
960
Reserves (includes revaluation reserve of 60)
₹ lakh
200
Assets
Goodwill
₹ lakh
40
Unsecured loans from promoters (subordinated to the bank)
₹ lakh
100
Assets
Inventory
₹ lakh
450
Term loan (of which ₹120 lakh due within 12 months)
₹ lakh
600
Assets
Receivables
₹ lakh
300
Cash credit
₹ lakh
300
Assets
Cash and bank
₹ lakh
50
Sundry creditors
₹ lakh
250
Assets
₹ lakh
Provisions and other current liabilities
₹ lakh
50
Assets
₹ lakh
Total
₹ lakh
1,800
Assets
Total
₹ lakh
1,800
| Liabilities | ₹ lakh | Assets | ₹ lakh |
|---|---|---|---|
| Share capital | 300 | Net fixed assets (includes a ₹60 lakh land revaluation) | 960 |
| Reserves (includes revaluation reserve of 60) | 200 | Goodwill | 40 |
| Unsecured loans from promoters (subordinated to the bank) | 100 | Inventory | 450 |
| Term loan (of which ₹120 lakh due within 12 months) | 600 | Receivables | 300 |
| Cash credit | 300 | Cash and bank | 50 |
| Sundry creditors | 250 | ||
| Provisions and other current liabilities | 50 | ||
| Total | 1,800 | Total | 1,800 |
TOL/TNW Three Ways
The same company gives three different answers depending on the adjustments.
Book figures, no adjustment
TOL
100 + 600 + 300 + 250 + 50 = 1,300
TNW
300 + 200 = 500
TOL/TNW
2.60
Tangible net worth (strip revaluation and goodwill)
TOL
1,300
TNW
500 − 60 − 40 = 400
TOL/TNW
3.25
Promoter loans treated as quasi-equity
TOL
1,300 − 100 = 1,200
TNW
400 + 100 = 500
TOL/TNW
2.40
| Version | TOL | TNW | TOL/TNW |
|---|---|---|---|
| Book figures, no adjustment | 100 + 600 + 300 + 250 + 50 = 1,300 | 300 + 200 = 500 | 2.60 |
| Tangible net worth (strip revaluation and goodwill) | 1,300 | 500 − 60 − 40 = 400 | 3.25 |
| Promoter loans treated as quasi-equity | 1,300 − 100 = 1,200 | 400 + 100 = 500 | 2.40 |
The Adjustments, One by One
- 1
Strip the revaluation reserve
Revaluing land raises net worth on paper without adding a rupee of cash. Rating agencies such as CRISIL exclude it, and so should a lender.
- 2
Strip intangibles
Goodwill, deferred revenue expenditure and similar items cannot be sold to repay the bank. That is what 'tangible' net worth means.
- 3
Decide on promoter loans
If promoters' unsecured loans are subordinated to the bank and will stay in the business, many banks treat them as quasi-equity: out of TOL, into TNW. Corporation Bank's 2019 credit policy wrote this into its TOL/TNW definition. Without a subordination undertaking, they stay as outside liabilities.
- 4
Use the definition the question gives
Exam questions usually state whether to treat promoter loans as quasi-equity. If they do not, take TNW as capital plus reserves minus intangibles and revaluation, and count every outside liability.
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Current Ratio: The Trap in the Term Loan
Correct: include term loan instalments due within 12 months
Current liabilities
300 + 250 + 50 + 120 = 720
Current ratio
800 ÷ 720 = 1.11
Wrong: leave the ₹120 lakh out
Current liabilities
300 + 250 + 50 = 600
Current ratio
800 ÷ 600 = 1.33
| Approach | Current liabilities | Current ratio |
|---|---|---|
| Correct: include term loan instalments due within 12 months | 300 + 250 + 50 + 120 = 720 | 800 ÷ 720 = 1.11 |
| Wrong: leave the ₹120 lakh out | 300 + 250 + 50 = 600 | 800 ÷ 600 = 1.33 |
A 1.33 That Is Really 1.11
Leaving the current portion of the term loan out makes XYZ look exactly at the 1.33 benchmark. Counted correctly, it is 1.11. Net working capital is 800 − 720 = ₹80 lakh, while the second Tandon method expects the borrower to fund 25% of current assets, or ₹200 lakh. That ₹120 lakh shortfall is the real finding.
FACR on the Same Company
Excluding the revaluation
Fixed assets
960 − 60 = 900
Term loan
600
FACR
1.50
Including the revaluation
Fixed assets
960
Term loan
600
FACR
1.60
| Version | Fixed assets | Term loan | FACR |
|---|---|---|---|
| Excluding the revaluation | 960 − 60 = 900 | 600 | 1.50 |
| Including the revaluation | 960 | 600 | 1.60 |
Reading FACR
FACR above 1 means the fixed assets charged exceed the term loan outstanding. It usually rises over the loan's life, because the loan is repaid faster than the assets are depreciated in the books. A falling FACR is a warning that assets are being run down or debt added.
Use only assets actually charged to the lender, net of any prior charge, and leave out revaluation unless the bank's policy says otherwise. RBI's IRAC master circular names FACR alongside debt-equity and DSCR among the ratios used in project loan appraisal. No RBI rule sets a minimum FACR; each bank fixes its own in its loan policy.
Benchmarks and Where They Come From
1.33 : 1
Ratio
Current ratio
Source
Arithmetic of the Tandon Committee's second MPBF method: the borrower funds 25% of current assets, so 100 ÷ 75 = 1.33
1.25 : 1 acceptable; 1.10 : 1 export units
Ratio
Current ratio
Source
Corporation Bank Group Credit Policy, 2019
Normally not beyond 4 : 1
Ratio
TOL/TNW (promoter quasi-equity moved to TNW)
Source
Corporation Bank Group Credit Policy, 2019
Up to 4.50 : 1 TOL/TNW, 1.15 : 1 current ratio
Ratio
Deviation limits
Source
Same policy: what its zonal and circle credit committees could approve in deserving cases
Up to 10 : 1
Ratio
TOL/TNW for microfinance institutions
Source
Same policy, separate MFI norms
No fixed figure
Ratio
FACR
Source
Set by each bank's loan policy
| Figure | Ratio | Source |
|---|---|---|
| 1.33 : 1 | Current ratio | Arithmetic of the Tandon Committee's second MPBF method: the borrower funds 25% of current assets, so 100 ÷ 75 = 1.33 |
| 1.25 : 1 acceptable; 1.10 : 1 export units | Current ratio | Corporation Bank Group Credit Policy, 2019 |
| Normally not beyond 4 : 1 | TOL/TNW (promoter quasi-equity moved to TNW) | Corporation Bank Group Credit Policy, 2019 |
| Up to 4.50 : 1 TOL/TNW, 1.15 : 1 current ratio | Deviation limits | Same policy: what its zonal and circle credit committees could approve in deserving cases |
| Up to 10 : 1 | TOL/TNW for microfinance institutions | Same policy, separate MFI norms |
| No fixed figure | FACR | Set by each bank's loan policy |
Why One Number Does Not Fit All
A trader with fast-moving stock can carry a higher TOL/TNW than a manufacturer, and an MFI far higher still, because its liabilities fund loans, not machines. That is why the same 2019 policy set a 4 : 1 norm for commercial borrowers and 10 : 1 for MFIs. Benchmarks belong to a bank's policy and a borrower segment, not to the ratio itself.
FAQs
What is the ideal TOL/TNW ratio for bank loans?expand_more
There is no single regulatory figure. Banks set it by policy and borrower type. Corporation Bank's 2019 policy, for example, said TOL/TNW should not normally exceed 4 : 1 for commercial borrowers, with promoter quasi-equity moved into net worth.
How is tangible net worth calculated?expand_more
Share capital plus reserves, minus intangible assets such as goodwill and minus revaluation reserves. Some banks add subordinated promoter loans as quasi-equity.
What is FACR in project appraisal?expand_more
The fixed asset coverage ratio: net fixed assets charged to the lender divided by the term loan outstanding. It shows how well the security covers the loan. Each bank sets its own minimum.
Why is 1.33 the benchmark current ratio?expand_more
It follows from the second Tandon method, where the borrower funds at least 25% of current assets from long-term sources. Current liabilities can then be at most 75% of current assets, and 100 ÷ 75 = 1.33.
Is TOL/TNW the same as debt-equity?expand_more
No. Debt-equity compares long-term debt with net worth. TOL/TNW counts all outside liabilities, including creditors and working capital borrowings, so it is always the larger ratio.
Access exam-specific mock tests directly from your Android device.Next steps
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