Definition
Haircut (Resolution)
A haircut is the portion of their dues that lenders forgo when a stressed loan is resolved, settled or sold below its full value.
When a defaulting borrower cannot repay in full, creditors recover only part of their claim; the shortfall is the haircut. In IBC resolutions, one-time settlements and ARC sales, haircuts can range from modest to very steep depending on the asset's value and number of claimants.
Large haircuts in some high-profile IBC cases have drawn criticism, though supporters note that the alternative, liquidation, often recovers even less. Banks size their provisions anticipating likely haircuts, so the eventual recovery versus provisioning drives the profit impact.
Related terms
- Recovery (Loans)Loan recovery is the money a bank gets back from a defaulted or written-off borrower, through settlement, asset sale, legal action or insolvency proceedings.
- Insolvency and Bankruptcy Code (IBC)The Insolvency and Bankruptcy Code, 2016 is India's unified framework for time-bound resolution or liquidation of defaulting companies through the NCLT.
- One-Time Settlement (OTS)A One-Time Settlement is a negotiated agreement where a bank accepts a lump-sum payment less than the full dues to close a defaulted loan account.
- Asset Reconstruction Company (ARC)An Asset Reconstruction Company buys bad loans from banks at a discount and works to recover or restructure them, helping clean up bank balance sheets.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.