A Comprehensive Explanation
An overdraft facility, commonly known as OD, is a financial offering provided by various banks, and other banking institutions that enables their borrowers to access additional funds beyond their available balance in both the savings as well as current accounts.
It functions as a line of credit fund, allowing individuals or businesses to withdraw more money than they have in their savings accounts. This borrowed amount attracts interest, similar to any type of loan, but solely on the utilized portion rather than the entire approved limit.
Key Features of Overdraft Facility:
1. Approved Credit Limit: Banks will determine an overdraft limit for each borrower, which may vary depending on individual circumstances and their financial stability.
2. Interest Rate: The bank charges interest on an overdraft loan only on the amount the borrower withdraws, offering flexibility and cost-effectiveness
3. No Repayment Charges: Unlike any other traditional loans, there are generally no additional charges for repaying the overdraft amount.
4. Flexible Repayment Options: Borrowers can repay the borrowed funds at their convenience, without following any fixed repayment schedules. However, some lenders may impose a deadline for specific repayment terms
Benefits of Overdraft Facility:
1. Quick Access to Funds: Overdrafts offer a swift and hassle-free solution for short-term financial needs, with minimal paperwork and approval processes.
2. Flexibility: Borrowers have the freedom to utilize funds as needed, making it an adaptable financing option.
3. Cost-Efficiency: Interest is only charged on the utilized portion of the overdraft, reducing overall borrowing costs.
4. Emergency Financing: Overdrafts provide a valuable resource for managing unforeseen expenses or covering cash flow gaps, especially beneficial for small businesses.
Understanding Overdraft Limits:
The overdraft limit represents the highest credit amount provided by a bank to its clients. It’s established considering several elements such as the borrower’s financial status, credit record, and rapport with the bank. These limits can differ among financial entities, customized to suit each client’s situation.
Types of Overdraft Facilities
Banks offer a variety of overdraft accounts with distinct eligibility criteria, outlined below:
1. Overdraft against Salary
This type of overdraft is available to those individuals who have salary accounts established by their employers. The account must receive regular monthly salary deposits from an approved company.
Features:
– Banks extend overdraft amounts of up to three times the customer’s current salary.
– Minimal documentation and easy repayment options are offered.
– Interest rate is charged only on the utilized amount, and borrowers can repay at their convenience without pre-closure and hidden charges.
– Minimum salary requirements range from Rs. 15,000 to Rs. 1.25 lakh, depending on the bank.
– No collateral or security is required.
– Depending on the salary, some banks may offer overdraft amounts of up to Rs. 4 lakh overdraft.
2. Overdraft on Savings Account
This is a new concept that has relatively gained popularity, particularly with accounts opened under the Pradhan Mantri Jan Dhan Yojana, supported by the government. The eligible accounts can access an overdraft of Rs. 5,000 or four times the monthly account balance (whichever is lower) after 6 months of satisfactory operation.
Only one family member is eligible in this scheme, preferably the earning woman, and the account must be linked to their Aadhar card. The other important points to consider are the additional compliance with RBI directives, renewal fees, and a maximum interest rate of 2% above the base rate that may apply.
3. Overdraft against Time Deposits (FD)
Some banks offer overdraft facilities against time deposits like fixed deposits, however, the availability of this scheme solely depends on individual bank policies.
These overdraft options are used to expand financial needs and offer flexibility and convenience to their customers based on their specific requirements and circumstances.