Haircut

After taking a substantial haircut in a debt restructuring proposal of Supreme Infrastructure India Ltd (SIIL), State Bank of India (SBI) has proposed to invest in the preferential share issue of the defaulting company.

About Haircut in Banking

• A haircut is a term used in banking to describe the amount of money a lender forgoes during the loan resolution process. 
• It is the difference between the loan amount and the actual value of the asset used as collateral.

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Different Conditions for Haircut

Loan Recovery

• When a borrower defaults on a loan, the bank may agree to accept a settlement amount that is less than the full amount owed.
• This difference between the original debt and the settlement amount is known as the haircut.
  • For 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 often take haircuts on loans where there is a high risk of default and full recovery is unlikely.

Debt Restructuring

• When a company faces financial difficulties and needs to restructure its debt, creditors may agree to accept a haircut on their claims.
• This means they agree to reduce the amount they are owed in exchange for other concessions, such as longer repayment terms or lower interest rates.

Asset Valuation

• The haircut can also refer to the difference between the market value of an asset and the value assigned to it by a lender when it is used as collateral.
• Riskier assets are typically assigned lower values, resulting in larger haircuts.

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IBC Process

• In the Insolvency and Bankruptcy Code (IBC) process, the haircut can refer to the difference between the claims of financial creditors and the amount they actually receive through the resolution process.
• The haircut can vary widely depending on the circumstances of the case and the value of the company’s assets.
  • The IBC process can yield a zero haircut (100% recovery of claimed amount) in one case and 100 per cent haircut (i.e. 0% recovery) in another.

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