Q. With reference to the term ‘Haircut’ in banking consider the following statements:
1.It refers to the lower-than-market value placed on an asset when it is being used as collateral for a loan.
2.Riskier assets receive lower haircuts.
3.It is a way to address Non-Performing Assets (NPAs) in the banking system.
Which of the statements given above are correct?

[A] 1 and 2 only

[B] 2 and 3 only

[C] 1 and 3 only

[D] 1, 2 and 3

Answer: C
Notes:

Explanation –

Statement 1 and 3 are correct. Haircut in banking refers to the lower-than-market value placed on an asset when it is being used as collateral for a loan. In the case of loan recovery, it is the difference between the actual dues from a borrower and the amount he settles with the bank. It is a way to address Non-Performing Assets (NPAs) in the banking system.

Statement 2 is incorrect. The size of the haircut is largely based on the risk of the underlying asset. Riskier assets receive larger haircuts.

Source: ForumIAS