Haircut

Also called: Creditor haircut · Topic: Banking Regulation, NPAs and Financial Stability · NCERT: Beyond NCERT

Meaning

A haircut is the loss a creditor (a lender) accepts when they get back less than the amount owed to them. The word has a second meaning: the discount a lender applies to the value of collateral (an asset pledged against a loan) before deciding how much to lend against it.

• Formula (IBC sense): Haircut (%) = (Admitted claim − Amount realised) ÷ Admitted claim × 100
• Realisation (%) = 100 − Haircut (%)

Haircuts matter because they show how much of a bad loan banks actually recover. That shapes bank balance sheets, NPA levels and the public debate on whether the Insolvency and Bankruptcy Code (IBC) is working.

Explanation

How a creditor haircut arises

• A borrower stops paying. The loan becomes an NPA (non-performing asset, a loan whose interest or principal has been unpaid for 90 days).
• The bank takes the company to the NCLT (National Company Law Tribunal) under the IBC. This starts the CIRP (Corporate Insolvency Resolution Process).
• The Committee of Creditors (CoC), made up of financial creditors only, votes on resolution plans (bids from buyers to revive the company). A plan needs 66% of the vote by value.
• The winning bidder usually offers less than the total debt. The part creditors give up is the haircut.
• If no plan is approved, the company goes into liquidation (it is shut down and its assets are sold). Money is then paid out in the order of the s.53 waterfall, so lower-ranked creditors often take the biggest haircuts.

Worked example (from the IBC context)

• Admitted claims = Rs 1,000 crore. The resolution plan pays Rs 330 crore.
• Haircut = (1,000 − 330) ÷ 1,000 × 100 = 67%
• Realisation = 100 − 67 = 33%
• Compare with liquidation: the liquidation value is Rs 200 crore.
• The plan gives 330 ÷ 200 = 165% of liquidation value.
• So the haircut is large, but creditors still get far more than they would by closing the firm down.

Haircut on collateral (the second meaning)

• A lender does not lend the full market value of an asset pledged to it. It cuts that value down first, to guard against the price falling.
• Example (made-up numbers): a bond worth Rs 100 is pledged. With a 10% haircut, the lender gives only Rs 90.
• The riskier or less liquid the asset (the harder it is to sell quickly), the bigger the haircut.
• Central banks, including the RBI, apply such haircuts to securities they accept as collateral when lending to banks.

What makes creditor haircuts rise or fall

• Delay:
• The longer a case drags on, the more the assets lose value.

• Buyers then offer less, so the haircut grows.

• Rank in the s.53 waterfall:

• Secured creditors and workmen's dues for 24 months rank equally and near the top.
• Unsecured financial creditors, then government dues, rank lower.

• Lower rank means a bigger haircut.

• Condition of the business: a firm that is still running keeps more value than one that has stopped work. This is one reason pre-packs (PPIRP) keep the business going.

• Dissenting creditors (2026 Act): a creditor who votes against a plan must get at least the lower of (a) its liquidation value or (b) what it would get if the plan's money were shared under the s.53 waterfall [3]. This sets a floor on how deep its haircut can be.

In India

• Law and institutions:
• The IBC 2016 is the main law.
• The IBBI (Insolvency and Bankruptcy Board of India) is the regulator. It publishes recovery and haircut data.
• The NCLT approves plans, and appeals go to the NCLAT.

• The CoC decides how much haircut to accept. In Essar Steel (SC, 2019), the Supreme Court held that the CoC's "commercial wisdom" is supreme, so courts cannot rewrite the business terms of an approved plan.

• Latest figures:

• Average recovery was 33% of admitted claims, which means an average haircut of about 67% (as of 30 June 2025) [2].
• An IIM Ahmedabad study found 32% of admitted claims and 168% of liquidation value [3].
• Plans delivered over 170% of liquidation value and over 93% of fair value (August 2025, 1,194 companies resolved, Rs 3.89 lakh crore realised) [1].
• Creditors realised about Rs 4.32 lakh crore, over 94.56% of fair value (March 2026, 1,419 companies resolved) [3].
• Average resolution time was 602 days, against the 330-day legal limit (30 June 2025) [2].

• 43% of closed cases ended in liquidation, which is 2,824 of 6,587 (30 June 2025) [2].

• Share in bank recoveries: the IBC brought in Rs 54,528 crore (52.4%) of the Rs 1,04,099 crore recovered by scheduled commercial banks in 2024-25. That is more than SARFAESI, DRTs or Lok Adalats [3].

Don't confuse with

• Realisation: this is the share of the claim that is recovered. Haircut is the share that is lost. Realisation (%) = 100 − Haircut (%).
• Liquidation value: this is what the assets would fetch if the firm were shut down and sold. Haircut is measured against the admitted claim, not liquidation value. So a 67% haircut can still mean 165% of liquidation value.
• Write-off: a bank removes a bad loan from its books, but it can still try to recover the money. A haircut is a loss that is actually given up in a settlement or resolution.
• Collateral haircut vs creditor haircut: a collateral haircut is a cut applied before lending, to protect the lender. A creditor haircut is a loss taken after the borrower defaults.

Prelims Hooks

• Haircut (%) = (Admitted claim − Amount realised) ÷ Admitted claim × 100. Realisation = 100 − Haircut.
• Average IBC recovery was 33% of admitted claims (June 2025) [2], which is an average haircut of about two-thirds.
• Trap: plans deliver over 170% of liquidation value (August 2025) [1]. A high haircut on claims does not mean creditors did worse than they would have in liquidation.
• The CoC (financial creditors only) decides the haircut by approving a plan with 66% of the vote by value. Operational creditors do not vote.
• Essar Steel (2019) is the case on the CoC's commercial wisdom. Courts cannot rewrite the terms of an approved plan.
• The IBC gave 52.4% of bank recoveries in 2024-25, the largest of any channel [3].

Mains Points

• Are haircuts a sign of failure?
• Critics call this "haircut-driven resolution", pointing to about 33% recovery and 602 days average resolution time (June 2025) [2].
• But the right benchmark is liquidation value, and plans deliver over 170% of it (August 2025) [1].

• Delay itself destroys value. So the fix is more NCLT capacity and less litigation, not weaker creditor control.

• Haircuts, NPAs and the twin balance sheet problem:

• Resolving cases, even with haircuts, clears stressed loans from bank books.
• This helps bank capital (Basel III) and frees banks to lend again.

• The threat of losing the company has improved credit discipline [3].

• Fairness in who bears the haircut:

• Workers (beyond the protected 24 months), operational creditors (often MSMEs) and unsecured lenders rank low in the s.53 waterfall, so they take deeper haircuts.
• The 2026 floor for dissenting creditors [3] helps some, but equity (fairness) concerns remain. This is useful for GS-III answers on inclusive growth.

Related concepts

• Insolvency
• Bankruptcy
• Corporate Insolvency Resolution Process
• Committee of Creditors
• Resolution professional
• Liquidation waterfall
• Pre-packaged insolvency
• Financial and operational creditors
• Cross-border insolvency

Read more

• The Insolvency and Bankruptcy Code: CIRP, pre-packs and haircuts