What is Haircut?
A Haircut is the discount a lender accepts on the original dues during settlement, restructuring or insolvency resolution. Haircuts are typically expressed as a percentage of total claims and depend on security cover, asset quality and the resolution route.
| Meaning | A Haircut is the discount a lender accepts on the original dues during settlement, restructuring or insolvency resolution. Haircuts are typically expressed as a percentage of total claims and depend on security cover, asset quality and the resolution route. |
|---|---|
| Category | Banking & NPA |
| Related Laws | RBI Compromise Settlement Direction; IBC |
| Who Uses It | Banks, ARCs, IPs, borrowers |
| Why It Matters | Defines actual loss the bank absorbs. |
Haircut explained in plain English
A practitioner's view written for borrowers and advisors — not a textbook definition.
A Haircut is the discount a lender accepts on the original dues during settlement, restructuring or insolvency resolution. Haircuts are typically expressed as a percentage of total claims and depend on security cover, asset quality and the resolution route.
In practice, Haircut is used most often by banks, arcs, ips, borrowers. Each of them sees the term from a slightly different angle: borrowers care about protection and outcomes, lenders care about classification and recovery, regulators care about consistency and disclosure.
The legal anchor for Haircut is RBI Compromise Settlement Direction; IBC. RBI master directions, the SARFAESI Act 2002, the RDB Act 1993 and the IBC 2016 commonly interplay, depending on the loan size, security and stage of stress.
Why does it matter? Defines actual loss the bank absorbs. For a stressed borrower, getting this concept right early often saves several months of penal interest, legal cost and credit-score damage.
A real example: Bank takes a 55% haircut on a ₹100 crore NPA through OTS. The mechanics may look complex, but the underlying logic — the bank wants closure, the borrower wants a fair outcome — is straightforward once the right framework is in place.
If you are facing a situation involving Haircut, the safest first step is a structured case review with a senior ex-banker who has handled comparable matters across banks and ARCs in India.
Where you'll encounter Haircut
Whenever a loan moves from "Standard" to "stressed", Haircut is one of the words that starts appearing in notices, bank emails and lawyers' opinions.
Sanctioning committees, recovery teams and risk officers use Haircut to classify accounts, decide provisioning and approve resolution paths.
Haircut appears in pleadings, securitisation applications, OAs, Section 7/9 petitions and SARFAESI writs as part of the dispute record.
When stressed loans are sold to ARCs or special-situations investors, Haircut is used in term sheets, assignment agreements and due-diligence reports.