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Overdraft (OD) is a credit facility in which the money can be withdrawn from the current or savings account, even if the account balance is zero or even below.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

Overdraft Facility – Interest Rate

The interest rate offered by Bank on OD is calculated only on the withdrawn amount from the total sanctioned limit.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

• Overdraft is a credit facility that can be availed by maintaining any bank account (savings or current)
• Interest rate is charged only on the utilized amount from the total sanctioned limit
• Several Private Sector and Public Sector Banks offer this facility for both salary and savings account holders
• Money extension is granted on the basis of the customer’s account value, repayment history, or credit score
• Short-term credit is provided by the Bank and needs to be repaid within the stipulated time limit, usually 12 months or even lesser
• Credit amount or Overdraft attracts interest for the time of use which can be from a couple of days to a few weeks
• The repayment tenure is decided by the bank and it has complete authority over the account and its usage
• As per the RBI regulations, current accounts and cash credit accounts are eligible for a maximum of Rs. 50,000 Overdraft per week

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.

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

Comparison of Business Loan Interest Rates offered by Top Banks/NBFCs

Bank/NBFCs	Interest Rate
Axis Bank	10.75% p.a. onwards
Flexiloans	1% per month onwards
HDB Financial Services Ltd.	8% – 26% p.a.
HDFC Bank	10.75% – 25% p.a.
IDFC First Bank	10.50% p.a. onwards
Indifi	1.50% per month onwards
Kotak Mahindra Bank	16% – 26% p.a.
Lendingkart	12% – 27% p.a.
Mcapital	2% per month onwards
NeoGrowth Finance	15% – 40% p.a.
Tata Capital	12% p.a. onwards
UGRO Capital	9% – 36% p.a.

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 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.

FAQs

Q. How is OD interest calculated?

Ans. The Overdraft interest rate is calculated by the method of the average daily balance. In this method, Overdraft interest is calculated by considering the balance of a current account at the end of each day or tenure.

Q. What is the difference between an Overdraft and a term loan?

Ans. The main difference between an Overdraft and a bank loan is that in an Overdraft the interest rate is paid only on the utilized amount, whereas in a term loan you have to pay the interest rate on the whole amount.

Q. Is an Overdraft better or a personal loan?

Ans. Both are useful to overcome immediate cash crunch situations. A personal loan can be availed by any financial institution, however, an Overdraft can be only availed from the bank, wherein you have your existing current or savings account. The Overdraft amount depends on the balance in your current or savings account and your relationship with the bank. However, in a personal loan, the loan amount depends on your net salary if employed or turnover if self-employed.

Q. What is an Overdraft facility from SBI?

Ans. SBI offers Overdraft facilities against the FDs of their customers. Anyone having FDs with SBI under a single name can withdraw up to 90% of their FD amount. The money can be availed instantly online by the help of the YONO app without visiting a bank branch.

Q. What happens if I can’t pay my Overdraft?

Ans. If you are unable to repay the Overdraft amount on time, then the bank is liable to deduct the outstanding amount plus the interest rate from your current or savings account linked with the Bank.

Q. Does applying for Overdraft affect my credit score?

Ans. There is no major impact on your credit score if you apply for an Overdraft facility. It shall impact only if you exceed the borrowed limit or if you default in repaying the borrowed amount on time.

Q. Which type of account is a Bank Overdraft account?

Ans. The applicant’s savings or current account, both are considered by Banks before sanctioning an Overdraft limit.

Q. Is a bank Overdraft a current liability or a long-term liability?

Ans. As the repayment period of Overdraft is 12 months, it shall be considered as a current liability. An Overdraft can also be considered a short-term loan.