TOL/TNW: The Ratio Your Banker Judges You On

When a bank declines a working capital limit without saying much, TOL/TNW is often the reason. It is the ratio Indian lenders use to decide how much of your business is funded by other people’s money rather than your own, and unlike most ratios you will meet, it is a lending convention rather than anything defined in an accounting standard.

That matters, because it means different banks compute it slightly differently, and the adjustments they make are where businesses get caught.

The definition

TOL/TNW = Total Outside Liabilities ÷ Tangible Net Worth.

Total outside liabilities is everything you owe to anyone who is not a shareholder. Long-term borrowings, short-term borrowings, trade payables, statutory dues, provisions, lease liabilities, acceptances. In practice: total liabilities minus net worth.

Tangible net worth is share capital plus reserves and surplus, minus every intangible on the balance sheet. Goodwill, patents, trademarks, capitalised software, preliminary expenses, deferred revenue expenditure and accumulated losses all come out.

The word doing the work is tangible. A bank recovering from a failed borrower can sell machinery and collect receivables. It cannot sell your goodwill.

Worked from a balance sheet

TOL/TNW = 380 ÷ 160 = 2.38.

Had you used reported net worth of 230, you would have computed 1.65 and thought you were comfortable. The ₹70 lakh of intangibles moved the ratio by nearly three quarters of a turn. This is the single most common reason a business is surprised by its own number.

What lenders typically accept

There is no statutory threshold, and any figure quoted as universal is wrong. What can be said honestly is that the tolerance varies by sector and by facility, and that manufacturing and trading businesses are generally held to tighter ratios than asset-light service businesses, because the asset cover behind the lending is different.

The practical points are these. Sanction letters frequently carry a TOL/TNW covenant as a continuing condition, not merely an entry test, so a ratio that drifts after drawdown can trigger a breach. Where a promoter has lent money to the business, banks will often agree to treat that loan as quasi-equity if it is formally subordinated, which moves it out of outside liabilities and improves the ratio without any new money. And the ratio is usually computed on audited figures, so provisional numbers you present mid-year are indicative only.

If you want to know your own bank’s threshold, the sanction letter or the credit officer will tell you. Published benchmarks will not.

When the ratio is computed, and on what

Two mechanical points decide whether your number matches the bank’s.

Which balance sheet. Almost always the latest audited one. If your audit runs late, you are assessed on figures that may be fifteen months old by the time the facility is reviewed, which cuts both ways: a good year does not help you until it is signed, and a bad one does not hurt you yet.

Standalone or consolidated. For a group, the two can differ sharply. Consolidation brings in subsidiary payables and borrowings, and goodwill arising on consolidation is stripped out of tangible net worth, so a group that looks fine standalone can look stretched consolidated. Which basis applies is stated in the sanction letter and is worth reading before you build a plan around the wrong number.

Compute it yourself each quarter rather than once a year at review. The ratio moves with ordinary trading, and a business that discovers a covenant breach when the bank does has already lost the chance to explain it.

The three ways to improve it, honestly

Retain profit. The slow route, and the only one that improves the business rather than the presentation. Every rupee retained adds directly to tangible net worth. On the figures above, ₹40 lakh retained takes the ratio from 2.38 to 1.90.

Bring in equity, or subordinate promoter debt. Converting a ₹50 lakh promoter loan to equity moves it from the numerator to the denominator, a double benefit: 330 ÷ 210 = 1.57. Formal subordination often achieves most of the same effect and is cheaper to execute.

Reduce payables and borrowings with idle cash. Paying down ₹30 lakh of cash credit takes the ratio to 350 ÷ 160 = 2.19. Real, but temporary if the facility is redrawn the following week, and banks that compute on average balances will see through it.

What does not work is writing intangibles up. An internally generated brand cannot be capitalised into tangible net worth, and a revaluation reserve is routinely excluded by lenders for exactly this reason.

Why an intangible-heavy balance sheet scores badly

A software company with ₹2 crore of capitalised development and ₹40 lakh of plant may be a better business than a fabricator with ₹2.4 crore of machinery. The ratio will say the opposite, because it is not measuring quality. It measures what a lender could realise in a bad outcome.

If that is your position, the answer is usually not to fight the ratio but to change the conversation: cash flow lending, receivables-backed facilities or venture debt price the risk differently. Arguing that your goodwill is real rarely moves a credit committee.

How it differs from the ratios you already know

Debt-to-equity counts only borrowings and uses reported equity. TOL/TNW counts everything you owe, including trade payables, against a stripped-down equity figure. A business funded largely by supplier credit can look modestly geared on debt-to-equity and heavily geared on TOL/TNW, and the second is the one the bank is looking at.

Check your own position with the debt-to-income calculator for the personal equivalent, and read the components off your balance sheet.

Where this fits

• Finding the inputs: how to read a balance sheet
• The funding gap this ratio is often used to assess: working capital calculator
• The personal-borrowing equivalent: debt-to-income calculator
• Terms used here: banking glossary