What is Overdraft Facility? What Are the features of OD?
Almost every bank or financial institution in India provides an overdraft facility to its customers. The loan amount and interest rate criteria are decided by banks which may differ and shall depend on the borrower’s profile, repayment capacity, relationship with the banker, and also the financial history. As the name suggests, the overdraft is a facility given by the bank to borrowers to withdraw money more than the balance available in their bank account to overcome working capital requirements. This is a type of short-term loan that has to be repaid in defined tenure as required by the banks or can be availed even if the account balance is zero. Such a facility is available in both secured and unsecured ways. The borrower can be individuals, self-employed professionals, etc.
Example
Suppose “PQR Private Ltd” is a company that has its current account with “XYZ Ltd Bank”, wherein they have a credit balance of Rs.750 Lacs. Furthermore, the company wants to make a payment of to one of its vendors of Rs. 820. After analyzing the expenses, the company will need extra cash over the credit balance to make the said payment. The company approaches its banker and makes an application for Overdraft up to Rs. 850 Lacs, which is granted by the banker at a reasonable ROI. Now the company can use the amount of Overdraft as and when required and pay interest on the amount used above the credit balance.
Features of OD
1. The overdraft facility helps in the effective working capital management of the company. It solves the immediate cash crunch and gives flexible repayment options to the current account holders.
2. The credit limit totally depends upon the relationship of the borrower with his banker and also his credit score.
3. Generally, the credit period is for 12 months and the borrower has to renew the facility according to their requirements.
4. The interest will be charged only on the extra amount used other than the credit balance of the bank account which varies as per the amount of the Overdraft.
5. The repayment of the OD is not done through EMIs, but the borrower can pay as and when he is available with cash but before the end of the credit period.
FAQs
What is the eligibility for obtaining OD?
There are no fixed criteria for eligibility, and it varies from lender to lender. But factors like the borrower’s age, credit score, earning/turnover, and relationship with a banker are considered majorly.
What is the procedure for obtaining OD?
Once the borrower applies for an OD facility from the bank, they will check the borrower's credit score and relationship with the bank and accept or reject the request accordingly. Also, the amount of OD should match the earnings and overall eligibility. The OD will only get sanctioned after checking the authenticity of the borrower.
Who can avail of the OD facility?
The current as well as saving account holders of respective banks can avail of this facility depending upon their relationship with their banker. The borrower can be individuals, self-employed professionals, enterprises, etc. in case of an overdraft facility.
Is there any requirement for collateral?
The collateral depends upon the availability of the borrower, whether he possesses collateral or not. If the borrower does not have collateral, the ROI in such a situation will be higher than in the secured one.
Who offers the OD facility?
Almost all banks provide OD facilities to their saving and current account holders. Nowadays, financial institutions also provide such a facility.
What is the rate of interest on OD?
The ROI depends upon a number of factors and varies according to the banks or financial institutions.
How long can the bank account be overdrawn?
The time duration of the overdraft depends upon the agreement between the banker and the borrower. Generally, the facility is provided for 12 months and has to be renewed at maturity.
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