What is Drop line Overdraft Facility:

Dropline Overdraft is a loan product in the form of Overdraft allowed in the Business Current account maintained by the Business entities, Professionals, Self-employed etc. by giving a prefixed limit as per the assessment of the credit worthiness of the prospective borrower by the Lender.

The overdraft facility which is termed as Drop line Overdraft, then is utilized by the Current account holder as per the requirement of their commercial activities, on daily, monthly quarterly etc. basis not breaching the Original Drop line Overdraft Limit sanctioned by the Banks and Lending Institutions.

The withdrawal of Drop Line Overdraft facility gradually start reducing after expiry of every month till the end of the period with in which the loan should be repaid as per the characteristic of this Drop line Overdraft facility. A simple example would clear the modalities of such Drop Line Overdraft Facility.

Say For Example, an amount 25,00,000 lacs has been approved by the lenders to be extinguished over a period of 72 months and this Credit limit is transferred to the Current account of the Borrower at any particular month.

Month/yr. Limit Sanctioned Month wise withdrawal limit Balance Limit

June /22     25,00,000/-          July -25,00,000/72=34,722        August’ 22=    

25,00,000-34,722=24,65,278      24,30,556/-

& likewise….

Remember, The monthly unit of  reduction in limit from overdraft amount ( in this case Rs 34,722) remains uniform, but the eligible amount  of Withdrawal shall be gradually  reduced  month wise till the completion of  72 months as enumerated for Drop line Overdraft.

 

Interest Calculation Drop Line Overdraft Facility

Example: The borrower has been sanctioned an Amount of 25 lacs for 72 months as Drop Line Overdraft facility.

So every month the account holders Drop Line Overdraft facility would be reduced by the amount calculated as: 2500000/72=34722.

 1^st Month say June 22 the Drop Line Overdraft is Rs 25, 00,000, 2^nd month July = 2500000-34722=2465278 as so on….. & in the 72th Month the Drop Line Overdraft Limit would be Zero & shall be completely extinguished.

The Formula for Drop Line Overdraft Interest calculation.

M= OB*ROI % =X/D

Where M= Monthly Interest accrued & to be paid by the borrower in the Drop line Overdraft a/c.

OB = Outstanding balance in the OD a/c in any particular day which is the NET of Debit & Credit amount.

ROI = rate of Interest in percent.

X= outcome of such calculation

D= No of days in a year taken as 365 days. 

Using the formula we calculate the monthly interest to be paid by the a/c holder availing Drop line overdraft Facility.

For the month of June 2022 Drop Line Limit is 25 lacs

Calendar days       Outstanding EOD Balance    ROI %      Amount / 365= Interest

                                        Net of Dr, & Cr

                                          In lacs             in ‘000     

1^st                                       – 7.00+1.70  =    –  5.30    * 10.5     =55650 /365 =Rs 152.50         

2nd                                    – 13.70+7.00 =    -12.00   * 10.5   = 126000/365= Rs 365.00

3rd                                     – 4.45 +7.60 =    – 8.85      * 10.5   =    92925/365 = Rs 255.00

4th                                     -16.70 +3.25 = – 22.30      * 10.5   = 234150/365 =  Rs 642.00

5th                                      – 7.27 +4.87 = – 24.70      * 10.5     = 259350/365 = Rs 710.00

6th                                      – 2.10   +9.32 = -16.48      * 10.5     = 173040/365 = Rs 474.00

7^{th( Holiday)}              -16.48   +  0  = -16.48    * 10.5     = 173040/365 = Rs 474.00

Total Interest for the 1^st week                                                  = Rs 3072.00 

Understating the pattern of credit intake of the borrower using Drop Line Overdraft facility,

let us take week wise indicative Interest accrual to arrive at the monthly Interest obligation.

1^St week = 3072/- 2^nd Week 3870/- 3^rd week 2175/- 4^th week + 2 days 3127/-

= 12244/- for 30days month.

Every month from July onwards, The Drop line credit facility would be reduced by Rs 34722

From the Drop Line Overdraft balance of the preceding month till the end of 72th month.

Interest Calculation of Overdraft Facility

 The Formula is

M_i   =  P x R x D/ _{Td  = X/ Yx100}

_{Where Mi = Monthly Interest Obligation.}

 _{P= Product, which is ∑ daily debit balance x days}

_{R = Rate Of Interest,}

_{D= no of days in a month}

_{Td= No of days in a year}

_{X= Amount arrived after applying the formula, to be divided by Yx100}

_{Y=no of months in a year}

_{In overdraft facility the interest is calculated on Summation of daily product of the outstanding balances. Let us examine the case. Considering the constituent is allowed an overdraft in their Current a/c =10 lacs @ 12.5% interest p.a (Interest in OD a/cs is always higher than the interest charged in Drop Line Overdraft Facility)}

                 _{WEEK ( 30 DAYS)}

      _{Figures all in lacs & in debit Balance}

_{1                                2                              3                4           2days} 

_{7.00         8.80         7.75         8.75         8.35}

_{6.45         9.70         5.25         7.60         5.65}

_{2.24         9.00         8.70         7.40}

_{3.50         8.75         6.25         3.95}

_{7.75         6.85         5.75         9.85}

_{6.30         5.45         6.85         7.35}

_{6.30         5.45         6.85         7.35}

 

_{39.54       54.00       47.40       52.25       14.00}

 

_{Total Product for 30 days = ∑39.54+54.00+47.40+52.25+14.00= 207.19 lacs}

_{Now applying the above formula we arrive at X}

_{2, 07, 00,000×12.5×30/365=21267123=X.}

_{Again, apply the formula X/Yx100}

_{21267123/1200=17,723 = Mi = the Monthly interest to be paid.}

_{Even if we consider ROI as 10.5 % for OVERDRAFT facility, like in the case of DROP LINE OVERDRAFT, then also the monthly interest comes to rs 14887/- which is higher than Rs 12224/- as calculated in Drop Line Overdraft with 25 lacs limit.}

Dropline Overdraft VS Overdraft:

Some remarkable difference between Drop line overdraft & Overdraft are:-

The Drop line Overdraft user need to follow a prescribed withdrawal pattern using fund with in the reduced permissible amount month wise and usually enjoys longer term to repay at least not less than 3 years & may be up to 15 years as the case may be.

Unlike Drop line Overdraft, the Overdraft facility allows the account holder, withdrawals, in the Current account in excess of the balance available there at.

This is a short term credit facility extended by the Banks to honor the various immediate payment obligation of the entities. This type of facility need to be repaid in full along with interest within a short span of time maximum up to one year from the date of allowing such facility or with in the financial year.

The Drop Line overdraft facility is a mixture of Term Loan & Overdraft facility, where there is a fixed tenure to repay the Overdraft facility without any recourse to replenish the limit by the repayment of amount reduced from the Limit month wise at any point of time by the borrower.

Taking the cue from the earlier example above, it is elaborated further like,

From June22 to Nov 22 the total amount reduced from the limit comes to  Rs 208332 (34722*6) cannot be paid back by the borrower to enhance the limit to Original 25 lacs. 

In overdraft facility the facility can be extended or may be revolved if the conduct of the borrower is satisfactory and well supported by any collateral securities like immovable properties etc.

The rate of Interest & the Term in Drop line Overdraft is fixed and generally charged lower than other loan like Term loan /Unsecured Overdraft /personal loan etc.

In overdraft facility the interest charged is always higher and as per the discretionary financial power of the Bank Manager/Authorities.

In Drop line Overdraft the end use is not monitored and can be used for business or acquiring of properties/ other purpose etc.

The Overdraft facility is extended to allow the account holder with good credibility & conduct for meeting the short term payment obligations for Statutory, Overhead expenditure like Electricity bill & other emergency payment. 

The tenure of Drop line Overdraft facility may extend from one to more than ten years & may be up to fifteen years.

In Overdraft facility the outstanding amount in the OD a/c to be repaid with interest on demand and generally within one year maximum.

Dropline Overdraft without Security:

The Drop line overdraft facility without any collateral security may be considered by the banker to their high net worth PROFESSIONALS like CA, Doctors, etc. with satisfactory dealings with the bank. The account holders Business profile, vintage of business, overall business dealings are examined while extending the facility.

Dropline Overdraft with Security:

The drop line Overdraft facility backed by collateral security is also considered for higher limit or longer tenure for the banks valuable customers.

Say for example an a/c holder with good transaction record with the bank may be eligible for a Drop line credit of 10 lacs but if he/she is willing to offer a collateral security in the form of House /flat /Commercial properties etc. of substantial value then the Drop line Overdraft facility may be enhanced to say 25 lacs and the Term of repayment may be extended beyond 10 years & up to 15 years.

Dropline Overdraft Interest Rate:

The interest rate for unsecured Drop line overdraft facility may be in the range of 11 to 16 % depending upon the internal assessment of the Bank about the Account holder.

For Drop line Overdraft supported by Collateral securities the rate Of Interest is generally pegged within 11 %. Starting from 9.5 %.

Business entities: Sole proprietorship, Partnership & PVT Ltd Cos.

Self-employed professionals: Doctors, CAs,

The Income of the Professionals should be minimum 1.5 lacs per month

For Business the minimum turnover should preferably be not less than 1 cr p.a.

Business Entities with excellent business conduct with bank running their business for more than 3 years without receiving any Notices from ED, CBI, FEMA( RBI ) IT, Police Authorities for breach of Statutory compliances and other offences of serious nature.

Should maintain a High value Current account without any history of Cheque Dishonor or any adverse antecedents.

Which Bank Provide Drop Line Overdraft Facility.

The Banks in Private Sector extend the Drop line Overdraft facilities as of now.

They are, Axis, ICICI, HDFC, Deutsche Bank, Kotak Mahindra etc. IDFC.

NBFCs Providing Drop line Overdraft Faculties are: Bajaj Finserv, Tata Capital, Lending cart etc.