What is an Overdraft Facility?
Overdraft Facility is a financial instrument in which you can withdraw money from your savings or current account, even if your account balance is zero. This feature is provided by almost every financial institution, including banks and NBFCs.
Overdraft facility is a type of short-term loan to be repaid in defined tenure, as required by the financial institutions. Lenders shall levy the interest rates that the borrower needs to repay, as per the bank’s terms and conditions. In the case of Overdraft, the type of interest rates offered by the lenders are both fixed and not floating.
Applying for an Overdraft Facility
As aforementioned, borrowing through instant overdraft is just like borrowing a loan from the bank or NBFC. Some customers are pre-entitled to avail an overdraft facility by the lender while some have to take approval. When the pre-entitled customers withdraw extra money from their account, their account balance becomes negative and the overdraft facility is activated automatically. The customers who require the lender’s approval to avail the temporary overdraft facility have to submit their request to their lender either in writing or through the official website. Unsecured overdraft taken against a bank account is considered unsecured overdraft while the overdraft where the collateral is pledged is considered secured overdraft.
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Features of Overdraft Facility
- Approved Credit Limit: Overdraft is awarded over a predetermined limit. This limit can be different for each borrower
- Interest Rate: The interest rate is charged on the amount of overdraft used. It is calculated on 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 month-end and then interest will be calculated on the new principal
- 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. Also, you need not repay the Overdraft amount in EMIs. You can repay the borrowed amount cumulatively
- Repayment is not done through EMIs: Repay the overdraft whenever you have the 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, then you will have to fulfil that demand
- 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 credit score
- Joint borrowers are allowed on Overdraft: 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 a default occurs
- Workings: Please note that your account may not automatically go into overdraft when you write a cheque. There are chances that your cheque is dishonoured instead of going into overdraft and then a dishonour charge may be levied on your account
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How does an Overdraft facility work?
If you get an overdraft account sanctioned from the bank then you will receive the requested overdraft amount just like you receive a loan amount from the bank. If you are pre-approved for the overdraft facility, whenever you need funds, you can withdraw from your bank account and it will go into overdraft. You can overdraw funds through your account up to an agreed limit. By utilizing the overdraft facility you basically increase the outstanding on your bank account; when you deposit funds, the outstanding decreases. From the time you borrowed until you repaid, you will be charged interest by your bank.
In an overdraft, you can repay money to the lender, fully or partially both, whenever you want to. After repaying whenever you have money, you can again withdraw money from your account as per your need until the limit of the overdraft is reached.
When a borrower uses the overdraft facility through his/her bank account, the bank doesn’t have collateral against it. However, if the borrower takes an overdraft against his/her assets as collateral then it is a secured overdraft. These assets can be the funds in your account and even your house, insurance policies, fixed deposits (FDs), shares, bonds etc. Also, note that the interest rates charged and overdraft amounts sanctioned by banks vary depending on the collateral.
Interest on the overdraft amount is calculated daily because the overdraft amount is not repaid as per a set schedule. The borrowed amount can be repaid without prior intimation by the borrower. Just depositing funds in your bank account reduces your outstanding balance and thus reduces your overdraft amount. So, the interest applicable to the borrowed amount needs to be calculated daily since the borrowed amount ledger can change daily.
As explained the overdraft facility is just a revolving short term credit facility. Avail this feature, if you need funds to overcome financial needs and repay them ASAP so that your interest pay-out doesn’t pile up.
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Types of Overdrafts
An overdraft facility can be granted 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. You shall be liable to pay the difference, if the collateral asset doesn’t cover the cost of the withdrawn amount in the overdraft. Below mentioned are various types of Overdrafts:
1. Overdraft 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. Overdraft funds are given against property as collateral are not disbursed immediately because of the same. The sanctioned overdraft amount is usually up to 40%-50% of the property’s worth. Your credit history and repayment capacity are also considered while granting overdraft against the house as collateral.
2. Overdraft Facility against Fixed Deposits
Getting the overdraft sanctioned against Fixed Deposits (FDs) and life 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 FD account is with the lender and the lender knows the customer much better. If you avail an overdraft against your fixed deposit, then you are eligible for a higher percentage of sanctioned amounts, approx. 75%. The interest rate charged is also less if you keep FD as collateral. Usually, banks charge 2% more interest than the interest you are earning from the said fixed deposit if you keep the FD as collateral.
3. Overdraft against Insurance Policy
If you keep your insurance policy as your overdraft collateral then the sanctioned amount depends upon the surrender value of your insurance policy. The Loan to Value of the insurance policy is greater than the LTV of Fixed Deposits, i.e. you get more money sanctioned from the bank if you keep your insurance policy as collateral rather than when you keep your FD of the same amount as collateral.
4. Overdraft against Equity
Equity is not preferred as an option for collateral however it is possible to attain an overdraft facility through it. The reason being 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 less.
5. Overdraft against Salary
Banks offer overdraft for the salaried individuals against the salary too. You can get an overdraft limit up to 2-3 times your salary but that may vary from bank to bank. To avail such an overdraft you need to have a salary account with the said bank. Such a facility is also called a short-term loan facility. Bank overdraft balance sheet is the primary source for banks to sanction borrowing limits.
8 Differences Between Term Loan and 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|
|Term loan can be availed to repay on time with added interest rates||Overdraft can be availed even if the account balance is zero|
|Loans can be repaid in long-term||Overdraft is availed for short-term|
|The rate of Interest is fixed or floating||The rate of interest is fixed for at least 12 months|
|Maintain a current account is not a mandate||Compulsory to maintain current account|
|Repayment type is in form of EMIs||Repayment in cash or from bank deposits|
Overdraft Facilities offered by financial institutions can be availed by savings or current account holders, salaried individuals, chartered accountants, business owners, doctors, bank employees, etc.
Overdraft from Leading Banks
HDFC Overdraft – 2021
|Interest Rate||15% onwards|
|Loan Amount||3 times of salary|
|Loan Amount Limit||Rs. 25,000 – Rs. 1.25 lakh|
|Repayment Tenure||12 months, can be renewed|
|Processing Fee||Rs. 999 + taxes|
|Penal Interest||2% per month over payable interest|
|Renewal Charges||Rs. 250 + taxes at time of renewal|
Tata Capital Overdraft
Tata Capital Overdraft – 2021
|Interest Rate||13.50% onwards|
|Age Criteria||Min. 22 years and Max. 58 years|
|Loan Amount||Min. Rs. 2 lakh & Max. Rs. 25 lakh|
|Repayment Tenure||From 12 months to 60 months|
|Processing Fee||Up to 3% of the loan amount|
|Penal Interest||3% per month over payable interest|
|Foreclosure Charges||4.5% on the Dropped down limit amount + GST|
|Cancellation charges||2% of the loan amount or Rs. 5750, whichever is higher|
SBI Overdraft Against Time Deposit – 2021
|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|
Note: All the above-mentioned interest rates, fees and charges are subject to change and depend on the sole discretion of the Bank, NBFC and RBI. GST and service tax shall be levied extra on the mentioned charges.
FAQs on Overdraft Facility
Q1. Which bank provides an overdraft facility?
Ans: Almost every public or private sector banks in India provide overdraft facility to its customers. However, the minimum and maximum loan amount, interest rate and repayment tenure set by banks may differ and shall depend on the applicant’s profile, financial history and repayment capacity.
Q2. Can I withdraw money from overdraft?
Ans. Yes, Overdraft is a credit facility that allows borrowers to utilize money in portions from the total sanctioned limit.
Q3. What happens if I can’t pay my overdraft?
Ans. If you are unable to pay the outstanding overdraft amount, then the bank has the right to deduct the balance from your existing savings or current account.
Q4. How long can a bank account be overdrawn?
Ans. The time duration of a bank account to be overdrawn is defined by the bank itself and depends on the relationship of borrowers with the respective bank.
Q5. What is the treatment of a bank overdraft on a balance sheet?
Ans. A bank overdraft is as same as a bank account that can have a negative balance, up to the sanctioned overdraft limit.
If your bank account has Rs.10 lakh in the bank and you withdraw Rs.12 lakh for business purposes, an overdraft loan is a by default loan for the extra Rs. 2 lakh. By withdrawing Rs. 12 lakh from your bank account, the balance will be zero and further even negative. Banks will charge an interest rate on an extra amount borrowed of Rs. 2 lakh.
Q6. Who can offer Overdraft?
Ans. An overdraft can be offered by most of the financial institutions and some of the leading banks include SBI, HDFC Bank, Axis Bank, ICICI Bank, Punjab National Bank, etc.
|How to get an overdraft facility in HDFC Bank?|
|What is an overdraft facility in ICICI Bank?|
|What is the overdraft facility in SBI?|
Q7. What is a salary overdraft from a bank?
Ans: Salary Overdraft is an overdraft feature that is extended against the salary account of the account holders. This facility enables the salaried account holders to withdraw amounts or issue cheques even if their account balance is zero. Salary Overdraft facility is a type of short term personal loan offered only to salaried people or employees who hold salary accounts.
Q8. Who can avail overdraft facility?
Ans: Overdraft facility can be availed by the borrower on a secured or unsecured basis. The borrower can be individuals, self-employed professionals, enterprises, etc. in case of an overdraft facility. If it is a salaried overdraft, then it cannot be used for business purposes and can be availed only by salaried employees.
Q9. What is a salary overdraft from a bank?
Ans. Salary overdraft is an overdraft facility sanctioned against salary account for only selected salary account-holders of the respective bank. These account holders have an additional advantage of issuing cheques for exceeding the amount from which is maintained in their present account.
Q10. Can the Overdraft facility be availed through Internet Banking?
Ans. Yes, most of the banks offer this facility online as well, however, you need to check online or on their mobile app for your respective bank.
Q11. Who is eligible for the Overdraft facility?
Ans. Applicants that already have existing savings or current accounts with the bank are eligible for an overdraft facility. The minimum tenure of an operational account shall be defined by the bank.
Q12. How many salary credits are required in my existing account to qualify for Overdraft?
Ans. There are no minimum salary criteria to qualify but salary should be regular on a monthly basis by the company. The company transferring salary should be listed with the bank.
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