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 The funds can be withdrawn multiple times, as per the assigned credit limit.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.

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:

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.

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.

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.

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.

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.

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.

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.

Business overdraft facilities often have additional criteria, as compared to personal ODs. Find below the basic eligibility requirements for businesses by the lenders:

Note: Interest rate of 24% p.a. will be levied on the amount utilized above the Operating Limit of overdraft facility.

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

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: