What exactly is a 'Haircut' in banking?
When a bank takes a 'haircut', it means it accepts less than what was due in a particular loan account. Example: if a bank was owed Rs 10,000 by a borrower and it agrees to take back only Rs 8,000, it takes a 20% haircut. Banks do this for accounts where chances of making a full recovery are bleak. Instead of losing all the money or letting an asset lose value over time, banks sometimes choose to settle for less. Of late, India's insolvency law has come in for criticism as banks took high haircuts in some large accounts. Critics argue that with banks agreeing to as much as 90-95% haircut on a loan amount, India's bankruptcy laws are proving to be inefficient in terms of loan recovery.