What is Overdraft Facility? Types, Features and Benefits

The Buyt Desk

Banks offer a credit facility by allowing withdrawals from savings or current accounts whose balance is zero. Let us understand its features, types and benefits.

Overdraft is a credit facility offered by banks. Here the customer can withdraw the money from the savings or current account, even when the account has zero balance or is negative. It is a type of extension of the credit limit on your account with an overdrawing limit pre-sanctioned. There is no standard overdraft limit set. But the limit depends on the customer’s balance sheet, credit history and relationship with the bank. So each customer has a different overdrawn limit and they can overdraw money only up to this set limit. Only the money over withdrawn interest is charged by the bank but not on the sanctioned limit. The interest rate is renewed every year.

What is the Interest charged on Overdraft?

The bank charges interest on the amount overdrawn from the customer’s account. If the customer doesn’t overdraw from the sanctioned limit, no interest will be charged. The sanctioned limit, the customer’s relationship with the bank and the account (current or saving) balance decide the interest rate. The interest rate is decided by the bank and every bank has its own interest rate.

What are the Features of Overdraft (OD)?

• Overdraft is a credit facility availed on savings or current any bank account

• Interest is charged on the OD until it is repaid.

• Interest is not charged on the total sanctioned limit but only on the withdrawn amount

• Both salary and savings account holders can avail of OD in Private and Public Sector Banks

• OD limit is sanctioned based on the customer’s account value, relationship with the bank and repayment history /credit score

• Banks offer short-term credit usually for 12 months or lesser

• The OD tenure is decided by the bank

• RBI rules allow CC (cash credit) and current accounts OD of Rs 50000 per week

• Customers can discontinue the OD facility anytime

Why take OD?

Business owners can use the Overdraft facility for cash flow and meet working capital requirements. When clients delay their payments, the OD facility can be used to make business payments. Payments can be made even when there are no funds in the current account. When an account has an OD facility, there will be no cheque bounce or tarnishing business reputation. To avail Overdraft facility, one should have an account in that bank and should have a good reputation with the bank while having a good credit score. OD charges an annual fee from customers.

Benefits of OD

• Eases business cash flow

• Caters to emergency cash crunch

• Interest is charged only on the withdrawn amount and is not sanctioned

• Short notice withdrawal is allowed

• Banks do not need collateral for OD

Drawbacks of OD

• The interest rate is high

• Only bank account holders can avail of OD

• The sanctioned OD limit depends on the customer’s financials and credit score

• Short-term borrowing and is revised every year

• Not a long-term finance

What are the types of OD?

1. OD against Salary – Salary accounts opened by employers can avail overdraft facility. The only criteria are that the salary has to be credited regularly by the employer and the employer should be on the bank’s approval list. Below are a few features of OD on salary account –

• Customers should have a minimum salary as specified by the bank usually between Rs 15000 to Rs 25000

• OD limit is 3 times the current salary

• Few banks also offer OD up to 4 lakh

• Minimal documentation needed

• Easy repay available with the flexibility to repay the amount anytime

• Have to pay interest only on the utilized amount

• No pre-closure charges

• No security or collateral needed

2. OD on Savings Account – Savings account under Pradhan Mantri Jan Dhan Yojna can avail OD of Rs 5000 or 4 times monthly accent balance, whichever is lesser. This is backed by the government. Below are a few features of OD on Savings Account –

• Account should be operated for 6 months and linked with Aadhar

• Only one member in the family can avail of OD on Savings Account preferably women

• Only earning members can avail this

• In compliance with the RBI directive, the customer should have another savings account

• No eligibility for Minors and Kisan Credit Card (KCC) individuals

• It has renewal fees but no processing fee

• The interest rate has to be within 2% of the base rate

3. OD against Term Deposits – Not all banks provide OD against term deposits like fixed deposits (FD). This is also known as a secured Overdraft. Below are a few features of OD against Term Deposits –

• Single or joint Term deposit account holders are eligible

• No processing fees or prepayment fees

• OD limit can be anywhere between Rs 25000 to Rs 5 crore and below 90% of FD value

• The interest rate is 1% over the FD interest rate