haircut finance example: Reserve Bank of India Index To RBI Circulars

inclusion in tier

The ICAAP should from an integral part of the management and decision-making culture of a bank. This integration could range from using the ICAAP to internally allocate capital to various business units, to having it play a role in the individual credit decision process and pricing of products or more general business decisions such as expansion plans and budgets. The integration would also mean that ICAAP should enable the bank management to assess, on an ongoing basis, the risks that are inherent in their activities and material to the institution. This requirement would also apply to the foreign banks which have a branch presence in India and their ICAAP should cover their Indian operations only. It is, therefore, only appropriate that the banks make their own assessment of their various risk exposures, through a well-defined internal process, and maintain an adequate capital cushion for such risks.


5.9.4 For the purpose of ascertaining compliance with the absolute threshold, exposure would mean sanctioned limit or the actual outstanding, whichever is higher, for all fund based and non-fund based facilities, including all forms of off-balance sheet exposures. In the case of term loans and EMI based facilities, where there is no scope for redrawing any portion of the sanctioned amounts, exposure shall mean the actual outstanding. Claims on Primary Dealers shall be risk weighted in a manner similar to claims on corporates. 4.4.5 Securitisation exposures, as specified in paragraph 5.16.2, shall be deducted from regulatory capital and the deduction must be made 50 per cent from Tier 1 and 50 per cent from Tier 2, except where expressly provided otherwise.

What is Margin in Share Market?

That could deal with at least some of the current risk aversion among bankers. The new Bank Boards Bureau headed by Vinod Rai is ideally placed to craft such a model contract between lenders and defaulters. The problem is that few bankers will be ready to sign on such a settlement. I was recently told of a loan settlement that involved a large steel company. The chief executive of the lead banker was on board, but the officer actually handling the loan refused to sign on the dotted line. The defaulting borrower can always seek bankruptcy protection , in which case all bets are off.

  • Rediscounting of documentary bills discounted by other banks andbills discounted by banks which have been accepted by another bank will be treated as a funded claim on a bank.
  • Ii) Banks must closely monitor securities and foreign exchange transactions that have failed, starting from the day they fail for producing management information that facilitates action on a timely basis.
  • However, supervisors need to perform a more comprehensive assessment of capital adequacy that considers risks specific to a bank, conducting analyses that go beyond minimum regulatory capital requirements.
  • Vii) Potential future exposures should be based on effective rather than apparent notional amounts.
  • Sometimes, the client’s relationship with the brokerage also comes into play.

India’s general insurers are looking to set up a larger marine insurance pool to cover the risks of transporting crude oil, edible oil, project machinery and fertiliser from the war-torn Russia-Ukraine region. This is expected to facilitate trade as the West ratchets up sanctions on Russia. “It’s a razor in spoon shape,” wrote an individual with a laughing emoticon. The video that captures a father giving his son a haircut, that too with a spoon was shared on Instagram. You can enter the details regarding your trade and calculate your haircut percentage. Choosing a brokerage house that meets your needs can be difficult as different brokerages offer different benefits to traders.

What do you mean by Margin Pledge and how does it work?

When an exchange or lender considers the value of assets as collateral of the loan, they take a lower value. For example, equity might have 50% haircut but gold may have only 10% haircut value and debt may also have just 20% haircut value. Haircut in stock market is all about the type of asset that you present as collateral. For example, equity might have a 50% haircut but gold may have only 10% haircut value and debt may also have just 20% haircut value. Haircut in the stock market is all about the type of asset that you present as collateral. Most significantly, the structure of these two entities reveals the potential for egregious conduct in the name of “recovering” value from the sale of these junk assets.

However, if five business days after the second contractual payment / delivery date the second leg has not yet effectively taken place, the bank that has made the first payment leg will deduct from capital the full amount of the value transferred plus replacement cost, if any. This treatment will apply until the second payment / delivery leg is effectively made. 5.12.3 For the purpose of defining the secured portion of the NPA, eligible collateral will be the same as recognised for credit risk mitigation purposes (paragraphs 7.3.5). Hence, other forms of collateral like land, buildings, plant, machinery, current assets, etc. will not be reckoned while computing the secured portion of NPAs for capital adequacy purposes. If the claim is unrated and exceeds the limits laid down in para 5.8.2 above, the applicable risk weight will be 150 per cent.

The price of a haircut

Ensure you carefully evaluate your’s position in the market before you pledge them and use appropriate risk management techniques. Dhan has one feature for risk management known as Trader’s Controls which you can know more about by watching the video below. In the past, these shares were transferred to the broker’s account once the pledging was done. However, based on some fraudulent instances, the rules have changed to give protection to traders. However, you need to remember that this collateral margin comes with certain limitations based on the broker you have chosen.

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It is possible for an investor to make more profit with margin trading than in normal trading. The shares are kept as collateral with your broker who in turn lends you funds to trade in exchange. Now the pledged shares remain in your demat account unless you fail to abide by your contract as per SEBI’s new streamlined regulations. Once pledged, your shares are locked, which means you can not sell them unless you unpledged them. Ensure that you enquire about these aspects before pledging your shares. As a trader, you need to remember that if you exceed your collateral margin, you will have to pay a certain fee.

Ii) The haircut finance example eligible liquidity facilities will be exempted from deductions and treated as follows. I) The originator shall not provide any implicit support to investors in a securitisation transaction. Ii) Credit enhancements, including credit enhancing I/Os (net of the gain-on-sale that shall be deducted from Tier 1 as specified below) and cash collaterals, which are required to be deducted must be deducted 50 per cent from Tier 1 and 50 per cent from Tier 2. Ii) Current credit exposure is defined as the sum of the positive mark-to-market value of these contracts. The Current Exposure Method requires periodical calculation of the current credit exposure by marking these contracts to market, thus capturing the current credit exposure.

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There are no extra charges or interest on the margin you get from your broker. The laws supporting such reforms such as the securities law and competition law have encountered legal challenges for many years, even though these laws had a long history in India. This is not unusual given that the laws related to economic freedom are of recent origin and fundamental principles are yet to be settled. What is satisfying is that the emerging legal challenges are getting settled at a faster pace and once a challenge is settled, it rests for a longer period. It has also the potential to prevent growth of NPA in an account as a bank is entitled to invoke the Code at the earliest instance of default. For dealing with the existing NPAs, a bank has two broad choices, resolution and recovery.

Haircuts are Good, Farm Loan Defaults are Bad – the Two-Faced Treatment of Waivers

It remains to be seen what solution—or combination of solutions—is finally accepted. There are two related issues that are critical to the successful resolution of the bank problem. First, how will the initial losses from the clean-up be divided among bank shareholders, taxpayers and defaulting borrowers? Second, at what price will bad loans be taken off the books of the banks? These two questions have cropped up in many of the bank bailouts in other countries, from the Swedish bank rescue in 1991 to the US Troubled Asset Relief Programme in 2008. In the Indian context, the sovereign would back it, since the NPA problem is more acute in public sector banks.

C) A ‘gain-on-sale’ – any profit realised at the time of sale of the securitised assets to SPV. B) ‘Implicit support’ – the support provided by a bank to a securitisation in excess of its predetermined contractual obligation. B) instruments traded on futures and options exchanges which are subject to daily mark-to-market and margin payments.


With commercial banks posting weak numbers quarter after quarter, there have been serious efforts both by banks and RBI to address bad loans because stressed assets erode profitability. ‘Haircut’ is one of the options to address the problem of non-performing assets. Clearly, the move is aimed at cleaning up the balance sheets of public sector banks with the express purpose of making them presentable for sale.

After the 2008 crisis, Citibank created a subsidiary bad bank to free up capital that was locked up in provisioning for bad loans in the parent company. Aggregate amount of securitisation exposures retained or purchased broken down into a meaningful number of risk weight bands. Exposures that have been deducted entirely from Tier 1 capital, credit enhancing I/Os deducted from Total Capital, and other exposures deducted from total capital should be disclosed separately by type of underlying exposure type. General disclosures of credit risk provide market participants with a range of information about overall credit exposure and need not necessarily be based on information prepared for regulatory purposes. Disclosures on the capital assessment techniques give information on the specific nature of the exposures, the means of capital assessment and data to assess the reliability of the information disclosed. A bank choosing to conduct risk aggregation among various risk types or business lines should understand the challenges in such aggregation.

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