Interest Cover Ratio

Interest Cover Ratio is calculated by dividing the total cash flow available to service debt during a specific period and dividing it by the interest payment for the same period. Where interest is not being paid, the lending bank will have to account for the loan as being non-performing and make necessary loss provisions in its accounts. The bank may, however, agree to delay repayment of the principal loan balance without necessarily having to account for the loan as being non-performing. If a loan is classified as non-performing the bank has to make provisions for the potential loss and also increase its risk weighting for that loan. This again affects the cost of funding for the bank.

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