ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A haircut is a service. When you purchase a haircut, it’s not something you can hold, give to another person, or resell. “Pure” services are offerings that don’t have any tangible characteristics associated with them. Skydiving is an example of a pure service.

Detailed explanation-2: -In financial markets, a haircut refers to a reduction applied to the value of an asset. It is expressed as a percentage. For example, if an asset – such as holdings of a particular government bond – is worth €1 million but is given a haircut of 20%, it means it is treated as though it has a value of only €0.8 million.

Detailed explanation-3: -Specific to debt restructuring, a haircut is the reduction of outstanding interest payments or a portion of a bond payable that will not be repaid.

Detailed explanation-4: -When a bank takes a ‘haircut’, it means it accepts less than what was due in a particular loan account. 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 do this for accounts where chances of making a full recovery are bleak.

Detailed explanation-5: -Haircut in the stock market is meant to protect the interest of the lender in the event of a price fall. For example, if you pledge shares worth Rs. 10 lakhs, and if the lender gives you Rs. 9.50 lakhs and tomorrow if the stock falls by 20%, the lender is at a huge loss.