Overdraft (OD)

Overdraft (OD) is a credit facility in which the money can be withdrawn from the current or savings account, even if the account balance is zero or even below. Overdraft facility is a type of extension of the credit limit offered by the banks. The sanctioned limit is said to be ‘overdrawn’.

An authorized Overdraft limit is assigned for each customer depending on their relationship with the Bank. The customer can withdraw money up to the assigned limit. Banks charge interest rates only on the utilized amount from the total sanctioned limit and are renewed every 12 months.

What is an Overdraft Facility?

An overdraft facility is a financial arrangement between a bank and a customer, that allows the customer to withdraw more money than is currently available in their account. Almost every bank or financial institution in India provides an overdraft facility to its customers. The bank decides the loan amount and interest rate criteria. Let’s learn what an overdraft facility entails and how Terkar Capital simplifies the application process.

As the name suggests, the bank gives overdraft facilities to borrowers. It is to withdraw money more than the balance available in their bank account to overcome working capital requirements. OD is a short-term loan that must be repaid as determined by the bank. It can be available even if the account balance is zero. Such a facility is available in both secured and unsecured ways. The borrower can be individuals, self-employed professionals, etc.

OD Facility Example- To effectively manage your money, it is critical to understand the concept of an overdraft. So, let’s simplify using the example below:

PQR Private Ltd, a company with a current account at XYZ Ltd Bank, has a credit balance of Rs 750 Lacs. The company needs to make a payment of Rs 820 Lacs to one of its vendors. After analyzing the expenses, the company realizes that it needs additional cash to make the payment.

Hence, the company approaches its banker and applies for an overdraft of up to Rs 850 Lacs. The banker approves the application at a reasonable ROI. Thus, the company can now use the overdraft amount as and when required and will pay interest on the amount used above the credit balance.

Overdraft (OD) Terms

The terms of a loan may vary depending on the borrower’s profile, repayment capacity, relationship with the banker, financial history etc.

Features of OD Facility

The overdraft facility helps in the effective working capital management of the company. It solves the immediate cash crunch. Also, It gives flexible repayment options to the current account holders.
The credit limit depends upon the relationship of the borrower with his banker and also his credit score.
Generally, the credit period is 12 months. Thus, the borrower has to renew the facility according to their requirements.
The interest is charged only on the extra amount used. Other than the credit balance of the bank account which varies as per the amount of the Overdraft.
The repayment of the OD is not done through EMIs. However, the borrower can pay as and when he is available with cash but before the end of the credit period.

Pros & Cons of an Overdraft Facility

Advantages	Disadvantages
Helps in managing business cash flow	Higher interest rate
Fulfills urgent cash crunch requirements	Offered only to bank account holders
Interest is paid only on the utilized amount	The sanctioned limit depends upon the applicant’s financials
Can be withdrawn at short notice	Short-term borrowing – revises every year
No collateral required by banks	Not suitable for long-term finance

Types of Overdraft (OD)

Banks offer different types of Overdraft accounts that have diverse eligibility criteria, some of those are mentioned below:

1. OD against Salary

Salary accounts opened by the businesses for their employees are eligible for this facility. The minimum requirement to avail Overdraft facility in a salary account is to have a regular monthly salary credited by the company and the company should be on the approval list of the bank.

Features:

Banks offer Overdraft amount up to 3 times the current salary of the customer
The facility is offered at minimal documentation and an easy-repay feature
Customers are required to pay interest only on the utilized amount with the flexibility to repay the amount anytime without pre-closure charges
The minimum salary limit varies from Rs. 15,000 to Rs. 1.25 lakh according to specific banks
This type of Overdraft does not require any security or collateral
Some banks even offer Overdraft amounts of up to Rs. 4 lakh, depending upon the salary

2. OD on Savings Account

Despite being a relatively new concept in the country, Overdraft on saving accounts has become quite popular due to being backed by the government. All the savings accounts opened under Pradhan Mantri Jan Dhan Yojna are eligible for an Overdraft of Rs. 5,000 or 4 times the monthly accent balance (whichever is lower). The accounts must be satisfactorily operated for a period of 6 months to avail this facility and only one member of a family is eligible for it. The facility is granted to the earning member of the family, preferably women. The account must be linked with an Aadhar card.

The account holder must have another savings account for compliance with the RBI directive as well. Minors and KCC (Kisan Credit Card) individuals are not eligible for the scheme. There is also a renewal fee associated with the facility. However, the interest rate cannot exceed 2% above the base rate. This facility does not attract any processing fee.

Another good example of Overdraft on a saving account is Citibank Suvidha Savings Account. This is a form of instant cash credit that allows you to get instant mocashney up to 5 times of net monthly salary. The bank fixes the minimum EMI amount along with the interest rate. However, the customer can choose to increase the amount of EMI at his/her convenience at any time. This scheme does not include a prepayment fee.

3. OD against Time Deposits (FD)

Time deposits, such as fixed deposits are also eligible for Overdraft facilities. However, not every bank provides this facility as this is subject to the bank’s policy only.

OD against Time Deposits

An Overdraft facility against time deposits. All the customers having single/joint time deposits such as TDR/STDR and RD including NRE/NRO/RFC in any of the branches are eligible for this facility. Customers can also apply through Internet banking for TDR and STDR Overdrafts.

With Nil processing fee and prepayment charges from Loan Against Time Deposit, the minimum amount Overdraft is kept at Rs. 25,000 whereas the maximum amount is Rs. 5 crores. The value of the Overdraft cannot exceed 90% of the value of the time deposit. The interest rate is kept at 1% above the relative time deposit rate. The repayment period is scheduled as per the repayment capacity of the borrower and the amount of Overdraft. Moreover, the repayment period for TDR and STDR ranges from 3 years to 5 years does not charge any processing fees or prepayment charges as well. This type of Overdraft is also called a secured Overdraft.

Maximizing Your Overdraft Facility

The OD facilities can be a helpful way to manage your finances, but it’s important to use them wisely, as they can be expensive.

Here are some tips for maximizing your overdraft facility and avoiding unnecessary fees:

Only use your overdraft facility for short-term expenses.
Make sure you have a plan to repay your overdraft as soon as possible.
Shop around for the best overdraft deal.
Consider using a credit card instead of an overdraft facility.
Be aware of the fees associated with overdrafts.

FAQs

What are the eligibility criteria for an OD facility?

There are no set criteria for eligibility. It varies from lender to lender. But factors like the borrower’s age, credit score, earning/turnover, and relationship with a banker are considered majorly.

What is the procedure for obtaining an overdraft facility?

A borrower applies for an OD facility. The bank checks their credit score, relationship with the bank, earnings, and eligibility. If approved, the OD is sanctioned.

How long can the bank account be overdrawn?

The time duration of the overdraft depends upon the agreement between the banker and the borrower. Generally, the facility is provided for 12 months and has to be renewed at maturity.

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