Overdraft

An overdraft facility allows individuals to withdraw funds from their savings or current accounts even if the account balance is zero. It serves as a short-term credit option provided by most banks and financial institutions. This facility comes with terms and conditions, including interest charges determined by the lender, which may be fixed or non-floating.

Applying for an Overdraft Facility

Obtaining an overdraft is akin to taking a loan. Some customers are pre-approved for this feature, while others must apply for it. Pre-approved customers can access overdraft funds automatically when their account balance turns negative. For others, approval is required, which can be requested in writing or online.

• Secured Overdraft: Requires collateral such as property, fixed deposits, or insurance policies.
• Unsecured Overdraft: Does not require collateral.

Key Features

1. Approved Credit Limit: The overdraft amount is predetermined and varies by borrower.
2. Interest Rate: Charged on the utilised amount, calculated daily, and billed monthly. Unpaid interest is compounded monthly.
3. No Prepayment Charges: Borrowers can repay without additional fees and are not bound by EMIs.
4. Flexible Repayment: Repayment can be done in any amount and at any time. However, prolonged delays may impact credit scores.
5. Joint Borrowers: Joint overdraft accounts hold both borrowers equally liable for repayment. Collateral risk is shared in case of defaults.
6. Operational Note: Writing a cheque may not always activate an overdraft and can result in cheque dishonour charges.

How It Works

Once approved, the overdraft facility allows borrowers to withdraw funds up to a specified limit, creating a negative account balance. Interest accrues daily on the borrowed amount until repayment. Deposits into the account reduce the outstanding balance and the applicable interest.

• Secured Overdraft: Backed by collateral like property or investments.
• Unsecured Overdraft: No collateral is required.

Types of Overdraft Facilities

1. Overdraft Against Property
   • Collateral: Home or property.
   • Loan Amount: 40–50% of the property’s value.
   • Factors: Credit history and repayment capacity are considered.
2. Overdraft Against Fixed Deposits
   • Collateral: FD with the lender.
   • Loan Amount: Up to 75% of the FD value.
   • Interest: Typically 2% above the FD’s interest rate.
3. Overdraft Against Insurance Policies
   • Collateral: Life insurance policies.
   • Loan Amount: Based on the policy's surrender value.
   • Benefits: Higher loan-to-value ratio compared to FDs.
4. Overdraft Against Equity
   • Collateral: Stocks or equity.
   • Limitation: Lower approval limits due to market volatility.
5. Overdraft Against Salary
   • Eligibility: Salaried individuals with a salary account in the bank.
   • Loan Amount: 2–3 times the monthly salary.

Comparison: Term Loan vs. Overdraft

Who Can Avail the Overdraft Facility?

This facility is available to a wide range of individuals, including:

• Savings or current account holders
• Salaried professionals
• Business owners
• Chartered accountants
• Doctors
• Bank employees

By understanding and leveraging the overdraft facility, borrowers can manage short-term financial obligations effectively while maintaining repayment flexibility.