Haircut (Banking)

A Haircut ensures that lenders are protected against market risk and price fluctuations of collateral. Instead of lending the full value of an asset, banks discount its value to reduce risk.

Haircuts are widely used in secured lending, repo transactions, and margin trading. In India, such practices are guided by the Reserve Bank of India.

Formula

👉 Loan Value = Market Value of Asset × (1 – Haircut %)

Why Haircut Matters

• Protects lenders from asset price decline
• Reduces credit risk
• Ensures safer lending

Factors Affecting Haircut

• Asset type (shares, property, gold)
• Market volatility
• Liquidity of asset
• Credit risk of borrower

Haircut vs Margin

• Haircut: Reduction in collateral value
• Margin: Additional amount required from borrower

"If shares worth ₹1 lakh have a 20% haircut: 👉 Loan given = ₹80,000"