An overdraft is an extension of limit granted by the financial institution to an individual. This extension is granted on the basis of one’s account value, repayment behaviour or credit score. This can be considered as a short-term credit provided by the bank that needs to be paid within the stipulated time limit. This credit or overdraft attracts interest for the time of use which can be from a couple of days to a few weeks. The time limit is determined by the bank and it has full authority over the account and its use.
Overdraft is a significantly useful service provided by the banks as it offers great aid to businesses in terms of cash flow. Businesses often have to wait for the payments from their clients and this results in delayed payments from their side as well. With the support of overdraft in their current accounts, businesses can sign cheques for their clients beyond the available funds in their account. This prevents cheque dishonour and maintains the reputations of the business as well.
In modern-day banking system, many banks provide overdraft facility in basic savings and salary accounts as well. This comes as a huge relief in situations where people might need money for covering necessary expenses. However, this facility is not offered to everyone. Only the customers having a good reputation in terms of repayment habits and good credit score are eligible for this facility. Moreover, the overdraft facility requires a certain annual fee and customers have the right to discontinue the service whenever they want.
Overdraft account is a facility that can be enabled in a specific bank account. Earlier, only mortgages, time deposits and current accounts were eligible for overdraft but several private sector banks are now offering this facility in salary accounts and savings account. As per the RBI regulations, current accounts and cash credit accounts are eligible for a maximum of Rs. 50,000 per week. However, this limit is not applicable to personal overdraft accounts.
Overdraft Account Eligibility:
Different Types of overdraft accounts have diverse eligibility criteria for the facility and some of those norms are mentioned here.
- Overdraft Against Salary: Salary accounts opened by the businesses for their employees are eligible for this facility. The minimum requirements for availing overdraft facility in a salary account are to have regular monthly salary credit by the company and the company being in the approval list of the bank. Banks offer overdraft up to 3 times of current salary of the customer. The facility is offered at minimal documentation and easy-repay feature. The customer is required to pay interest only on the utilised amount with the freedom to repay the amount anytime without preclosure charges. The minimum salary limit varies from Rs. 15,000 to Rs. 25,000 according to specific banks. This type of overdraft does not require any security or collateral. Some banks even offer overdraft amount of up to Rs. 4 lakh.
- Overdraft on Savings Account: Despite being a relatively new concept in the country, overdraft on saving account 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 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 seeded with Adhaar. This is another compulsory criterion to avail the facility.
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 to 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 saving account is Citibank Suvidha Savings Account. This is a form of instant cash credit which allows you to get instant money up to Rs. 5 lakh. The bank fixes the minimum EMI amount along with the interest rate. However, the customer can choose to increase the amount of EMI as per his/her convenience at any time. This scheme does not include a prepayment fee.
- Overdraft against Time Deposits: Time deposits such as fixed deposits are also eligible for overdraft. However, not every bank provides this facility as this is subject to bank’s policy only. The most prominent bank among the public sector banks in the country, SBI, offers 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 SBI branches are eligible for this facility. Customers can also apply through internet banking for TDR and STDR overdraft.
The minimum amount overdraft is kept at Rs. 25,000 whereas the maximum amount is Rs. 5 crore. The value of the overdraft cannot exceed 90% of the value of 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, repayment period for TDR and STDR ranges from 3 years to 5 years. SBI does not charge any processing fee and prepayment charges as well. This type of overdraft is also called secured overdraft.
- Overdraft against Mortgages: Overdraft against mortgages is also quite popular in the Indian financial system. Many banks offer overdraft against home loan to their customers as well. Overdraft against mortgages allows individuals to utilise the value of their assets whenever they want. The limit of overdraft is determined on the basis of current and future value of the asset. However, a big overdraft limit does not mean that the person can withdraw the whole amount in one go. The person has to inform the bank about the funds he/she wants to utilise and the time period as well. The person is then liable to pay the interest on the extracted amount for the time of use. This is another example of secured overdraft.