Haircut Loan Against Shares

A haircut is the value of an asset below its market value when it is used as collateral for a loan. When an exchange or lender considers the value of assets (equity, shares, gold, debt securities) as collateral for a loan, it is called a haircut.

It is a difference between the actual value of the asset and the value recognised by the lender.

A haircut is a percentage by which the market value of your pledged shares is reduced to calculate the loan value. The haircut is applied because the lender or the exchange cannot give credit for the entire value of the asset.

For example:

The market value of asset XYZ is Rs. 800 and the limit you have received for it is Rs. 600, which means that the haircut is 25% ((800-600)/800 *100)).

Features of Haircut Loan

• The haircut value is different for different assets, depending on the risk associated with each asset.
• It is imposed to protect the interests of the lender when the borrower fails to repay the loan.
• The haircut value changes depending on the market situation, liquidity and asset volatility.

Answered on 2023-11-03