An overdraft facility allows customers to withdraw money from their accounts. It works like an approved loan where the interest is charged only on the amount used. It can be used to resolve short-term cash flow issues.
It is a type of extension of the monetary limit offered by banks. 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.
What are the Features of an Overdraft Facility?
- An overdraft account is a facility that can be availed by maintaining a savings or current bank account.
- The age criteria are 18 years and maximum up to 65 years.
- Both salary and savings account holders get this offering from private banks.
- The credit limit is decided on the customer relationship with the bank.
- The interest rate of an overdraft loan is calculated on the amount used
- Based on the customer’s account value, repayment history, or credit score money extension is granted.
- The repayment tenure is decided by the bank and it has full authority over the account and its use.
- The customers can repay the overdraft loan cumulatively.
- There are no prepayment charges on using the overdraft facility.
- As per the RBI regulations, current accounts and cash credit accounts are eligible for a maximum of Rs. 50,000 per week
What are the Types of Overdraft Facility & Eligibility?
1. Overdraft against Salary
Salary accounts opened by the businesses for their employees are eligible for this facility. The minimum requirement for availing overdraft facility in a salary account is to have regular monthly salary credit by the company and the company is on the approval list of the bank.
2. Overdraft on Savings Account
All the savings accounts opened under Pradhan Mantri Jan Dhan Yojna are eligible for an overdraft of Rs. 5,000 or 4 times monthly accent balance (whichever is lower). The accounts must be competently operated for 6 months to avail this 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 Aadhaar card. This is another compulsory criterion to avail the facility.
3. Overdraft against Time Deposits
Time deposits, such as fixed deposits are also eligible for an overdraft facility. However, not every bank provides this facility. SBI offers an overdraft facility against time deposits. 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.
Interest Rate on Overdraft Facility
The interest rate of an overdraft loan is calculated on the amount of overdraft used. The amount is calculated daily and billed at the month-end. In the failure of payment of overdraft limit on time, the penalty is added to the principal amount. The interest rate on overdraft facilities offered by private and public sector banks shall vary from lender to lender and depends on the required loan amount, repayment tenure, and relationship with the respective bank or financial institution.
Benefits of Bank Overdraft
- Interest rate is charged only on the utilized amount
- Overdraft is a Short-term borrowing that is revised every year
- Helps in managing the cash flow of business
- Helps to meet urgent cash crunch requirements
- No collateral or security is required by the bank
- Less paperwork is required for credit sanctioning
- Short-term borrowing