Haircut refers to the decrease made to the value of an asset in finance.
This arises when the lender has to settle for a lower valuation (like a bank) than it was expected to get back.
For instance, let’s assume a bank gives a borrower a loan of Rs 2 crore.
The borrower is unable to repay the full amount when the loan is repaid. The borrower has the choice of paying one crore the loan or default on it.
If the bank accepts the Rs 1 crore bid from the borrower, a 50 percent haircut on the loan is said to have been taken by the bank.
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