1. What are haircuts in the Indian banking system?A haircut is the difference between the loan amoun

1. What are haircuts in the Indian banking system?A haircut is the difference between the loan amount and the actual value of the asset used as collateral. It reflects the lender's perception of therisk of fall in the value of assets. But in the context of loan recoveries, it is the difference between the actual dues from a borrower and the amount he settles with the bank.

 

Suppose you have given loan to someone, now that someone has to pay you back suppose a total of Rs 1000 (interest + actual).. but he is not able to pay you back.. so you will ask him, "bro, atleast give me Rs 800, I will forget rest Rs 200".. so that Rs 200 is the haircut, the larger the haircut the bigger will be loss for you.. Now suppose you are a bank, think of this in larger context..

 

For eg If u take loan of rs 800 Bank took collateral of rs 1000 ...See more

 

Bank can't offer 0% haircut Because of liquidity risk

 

See Rahul mishra's answer. He is correct. What you are talking about is called LTV (Loan to Value).