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It is a type of credit limit sanctioned by lending institutions so that you can overdraw the money from your bank account. The interest rate is charged only on the utilized amount from the sanctioned loan amount limit with a repayment tenure of up to 12 months, which can be renewed.
To know more about Overdraft facility, its meaning, types, features, eligibility criteria, documents required and much more, read on the below article.
What is an Overdraft Facility?
Overdraft facility offers a credit line for respite against temporary cash flow problems. The funds can be withdrawn multiple times, as per the assigned credit limit. It is a type of short-term loan to be repaid in defined tenure, which is usually 12 months that can be renewed periodically for continued usage.
The interest rate is charged only on the utilized amount from the total sanctioned credit limit. Suppose, if your overdraft limit is set at Rs. 1 lakh and you utilize only Rs. 40,000 then the interest rate is applicable only on the sum utilized (Rs. 40,000) and not on total sanctioned limit of Rs. 1 lakh. The overdraft limit can also be extended, based on your creditworthiness, financial profile and existing relationship with the respective bank or NBFC.
However, if you are finding difficulty is availing OD facility due to any reason, you can compare and apply from various unsecured business loans on Paisabazaar at interest rates starting from 14.99% p.a. to meet your short-term financial goals or working capital requirements.
Also Read: Compare Business Loan Interest Rates of Banks/NBFCs
Types of Overdraft Facilities
An overdraft facility can be issued to a borrower on a secured or unsecured basis. Secured overdraft is one where you pledge collateral (asset). If you are unable to repay your overdraft then the lender can sell off your assets to recover whatever they can. Let’s find out various types of Overdrafts that you may choose to meet your short-term business requirements:
Against Property
Overdraft facility is offered against your house as collateral. Overdraft is also offered to home loan customers who are looking for funds to settle their existing home loan repayments. Before approving the house as collateral, the assessment, valuation and survey of the property are done. OD funds are offered against property, as collateral are not disbursed immediately because of the same.
Against Fixed Deposit
Getting the overdraft sanctioned against Fixed Deposits (FDs) and insurance policies as collateral is easy in comparison to getting an overdraft sanctioned by keeping your home as collateral. One of the reasons is that property evaluation takes time. In any case, overdraft against FD is preferable for the lender too, as the customer’s fixed deposit account is already with the lender and the lender knows status. If you avail an overdraft against your fixed deposit, then you are eligible for a higher percentage of sanctioned credit limits.
Against Insurance Policy
If you keep your insurance policy as your overdraft’s collateral then the sanctioned amount depends upon the surrender value of your insurance policy. The Loan-to-Value (LTV) of the insurance policy is almost similar to the LTV of Fixed Deposits, i.e. you can get almost the same amount sanctioned, if you keep your insurance policy, instead of FD.
Against Salary
Banks offer overdrafts for the salaried individuals against their salaries too. You can get an overdraft limit of up to 2-3 times of your salary but shall vary from lender to lender. To avail such type of short-term overdraft you need to have a salary account with the respective bank. Bank overdraft balance sheets are the primary source for banks to sanction borrowing limits to its account holders.
Against Equity Shares or Mutual Funds
Equity is not preferred as an option for collateral/security; however, it is possible to attain an overdraft facility through it. The reason is that equity is dependent on the market and thus its value fluctuates. This is why the percentage sanctioned for overdraft against equity as collateral is comparatively less. Moreover, the LTV of equity shares is not much, as compared to FDs or Insurance policies.
Features of Overdraft Facility
Approved Credit Limit: Overdraft is issued over a predetermined limit and this limit shall vary from lender to lender.
Interest Rate: The interest rate is charged only on the amount of funds used. It is calculated on a daily basis and it is billed to the account at month-end. If you default on paying the overdraft as per the set schedule, the interest amount will be added to the principal amount at the month-end and then interest will be calculated on the new principal amount.
Nil Prepayment Charges: Whenever you want to prepay a loan, usually a prepayment charge is levied. However, this is not the case with the overdraft facility. When you repay the amount borrowed through overdraft you do not pay prepayment charges. In addition, you need not repay the Overdraft amount in EMIs and you can repay the borrowed amount, cumulatively.
Repayment is not done through EMIs: Repay your overdraft amount whenever you have the surplus money. You do not have to repay the overdraft amount like you repay a loan. You do not have to repay in Equated Monthly Instalments (EMIs). You can repay whatever amount you like whenever you like. However, if the lender demands a repayment charge, then you will have to pay the amount. In most of the cases the foreclosure and repayment charges are nil to nominal for bank account holders.
Minimum Monthly Payment: Overdraft has no minimum monthly repayment; however, the amount you owe should be within the overdraft limit. You should not delay overdraft repayment for long, as it affects your CIBIL score.
Joint Borrowers are allowed: If you take an overdraft jointly then you and your joint applicant are both, in effect, responsible for the entire debt. Irrespective of the proportion of overdraft borrowed, both the applicants are responsible for the timely repayment of the overdraft. This means that if one of the borrowers is unable to pay/defaults, then the other borrower has to pay the entire amount. In such a case, irrespective of the overdraft proportion of joint borrowers, all collaterals of each of the borrowers are at stake if any default occurs.
Business Overdraft Facility – Interest Rates & Charges
The interest rates charged by banks and NBFCs on overdraft facilities shall vary and significantly depend on various factors, such as the type of overdraft, bank’s policies, account holder’s creditworthiness, and whether the overdraft is secured or unsecured.
Eligibility Criteria
Business overdraft facilities often have additional criteria, as compared to personal ODs. Find below the basic eligibility requirements for businesses by the lenders:
- Business Type: Businesses must be registered legal entities, such as sole proprietorship, partnership firms, Limited Liability Partnerships (LLPs), companies or organizations.
- Business Vintage: Shall be defined by the lender, usually minimum 3 years
- Annual Revenue and Profitability: Depends on the size and risk profile of the business
- Business Credit Score: Business should maintain healthy credit profile and ratings
- Collateral/Security: Banks shall require business assets, such as property, inventory, accounts receivables, goods & raw materials, machinery or equipment as collateral/security.
Overdraft Facility from leading banks – 2025
HDFC Bank Overdraft for Salary Plus
| Highlights | |
| Interest Rate | 15% – 18% p.a. (For Salary Pus) |
| Loan Amount | 3 times of salary |
| Loan Amount Limit | Rs. 25,000 – Rs. 1.25 lakh |
| Repayment Tenure | 12 months, can be renewed |
| Limit Processing Charges | Up to Rs. 1,999 |
| Foreclosure / Prepayment Charges | Nil |
| Overdraft Value | Can not increase 90% of time deposit |
| Renewal Charges | Nil |
Note: Interest rate of 24% p.a. will be levied on the amount utilized above the Operating Limit of overdraft facility.
Overdraft from State Bank of India (SBI)
SBI offers an Overdraft (OD) account against your existing NRE / NRO deposit through internet banking. Overdraft limit is not allowed to be changed by the customer. Below are the key features and highlights:
- TDR/eTDR – 75% of the face value of deposit
- STDR/eSTDR – 90% of the face value of deposit
| Highlights | |
| Interest Rate | 1% above the relative time deposit rate |
| Loan Amount | Up to 90% of the value of Time Deposit |
| Loan Amount Limit | Min. Rs. 25,000 – Max. Rs. 5 crore |
| Collateral/Security | Security Lien on underlying Time Deposit |
Axis Bank – 24×7 Flexi Credit Overdraft
| Highlights | |
| Interest Rate | 16% – 19% p.a. |
| Loan Amount Limit | Up to Rs. 5 lakh |
| Foreclosure / Prepayment charges | Nil |
| Documentation | Nil |
| EMI options | No fixed EMIs |
Kotak Mahindra Bank – Overdraft
| Highlights | |
| Interest Rate | 13.50% p.a. onwards |
| Loan Amount Limit | Rs. 1 lakh – Rs. 20 lakh |
| Repayment Tenure | Up to 72 months |
| CIBIL score | Minimum 730 or above |
Documents Required
The documents required for an overdraft facility can vary depending on the type of overdraft (personal or business) and whether it is secured or unsecured. Find below the general documents required by banks/NBFCs offering Overdraft facilities:
- Proof of Identity: PAN card, Aadhaar card, Driving license, or Passport
- Proof of Address: Utility bills (Gas, Water, Electricity), Voter ID, or Ration Card
- Proof of Income: Bank statements, salary slips, income tax returns, etc.
- Bank Statements: Recent bank statements (Last 3-6 months) from your primary bank account
- Business-Related Documents (if applicable): GST registration, business profile, Udyam Registration Certificate, etc.
- Other Documents: Depending on the type of overdraft (e.g., overdraft against property, against fixed deposits), additional documents may be required, such as property documents, insurance details, or collateral agreements
How to Apply for an Overdraft Facility? (Step-by-Step Guide)
Find below the step-by-step guide to apply for an Overdraft facility online for offline as per your convenience:
Step 1: Know the type of overdraft you want to avail, such as Secured (backed by FD, shares, salary, etc.) or Unsecured with higher interest rates
Step 2: Check your eligibility as per the respective bank’s criteria considering various factors, such as requirement of current or savings account, good credit score, income and employment stability, etc.
Step 3: Prepare all the require documents required by the lender.
Step 4: Visit the bank branch to apply by filling the application form, along with requested documents or applying it online via netbanking or mobile app.
Step 5: Wait for the bank’s verification, approval and sanctioning of overdraft limit.
Step 6: Once the limit is sanctioned and activated, you can overdraw your account up to the approved limit.
Business Loan vs Overdraft: Key Differences
| Business Loan | Overdraft |
| It’s a type of borrowed capital or funds | It’s a type of credit line facility |
| Interest rate is calculated on a monthly basis | Interest rate is calculated on a daily basis |
| Interest rate is charged over the loan amount | Interest rate is charged only on the utilized amount |
| Business loans can be availed to repay on time with added interest rates | Overdraft can be availed even if the account balance is zero |
| Business loans can be availed for short to medium term | Overdraft is availed for short-term |
| Rate of Interest can be both fixed or floating | Rate of interest is fixed for at least 12 months |
| Maintaining a current account is not a mandate | Compulsory to maintain a current account (Business purpose) |
| Repayment type is in form of EMIs | Repayment in cash or from bank deposits |