Overdraft Account: OD Interest Rate, Features, Types & Benefits

Overdraft (OD) is a credit facility in which the money can be withdrawn from the current or savings account, even if the account balance is zero or even below.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.

The business loan interest rates offered by Bank on OD is calculated only on the withdrawn amount from the total sanctioned limit. It shall vary from lender to lender and depends on the required Overdraft amount, the account balance in your current or savings account, and your existing relationship with the respective Bank.

Features

OD can be used to meet working capital requirements and to meet business 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 accounts. This prevents cheque dishonor and maintains the reputation of the business, as well.

However, this facility is only offered to the existing bank account holders who maintain a good reputation in terms of repayment habits and good credit score. Moreover, the Overdraft facility requires a certain annual fee, and customers have the right to discontinue the service whenever they want.

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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:

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 Yojana 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 money up to 5 times of net monthly salary. The bank fixes the minimum business loan 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 from SBI

SBI offers 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 SBI 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 SBI 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. SBI does not charge any processing fees or prepayment charges as well. This type of Overdraft is also called a secured Overdraft.