Overdraft meaning:
Overdraft is a facility where an amount prefixed can be used by the user in excess of his/her or any firms available fund in the account maintained.
For example: In a particular account say an amount of Rs 50000/- is maintained as average balance. Then on the basis of the conduct of the account and other parameters as appraised by the lender an amount up to Rs 100000/- is allowed to be withdrawn by the person /entity maintaining such account. This amount of Rs 100000/- is considered overdraft.
Bank Overdraft:
Generally Banks allows overdraft facilities to their account holders to meet up the immediate cash liquidity requirement based on satisfactory conduct of the a/c without any adverse feature like antecedents of check bounce, maintenance of bellow average balance & very low turnover /deposit etc.
Bank Overdraft is a line of credit usually prearranged and approved by the Bank to avail the Overdraft facility to meet the contingencies of the account holder.
Bank also gives Overdraft in the salary account maintained by the corporates /firms of their employees where bank takes a more considerate views regarding amount of overdraft, rate of Interest, repayment period & terms etc. as the companies credentials are also taken into consideration for allowing such Overdraft with lenient T&C.
Overdraft interest:
Interest on Overdraft is charged on the basis of actual use of fund by the account holder. Interest on overdraft may range from 9.75 to 15% as would be decided by the bank.
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 his/her savings a/c =10 lacs @ 12.5% interest p.a (Interest in OD a/cs is always higher)
WEEKS (31DAYS) Figures all in lacs & amount 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 31days = ∑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.
Overdraft accounts means:
Overdraft account means a savings or current account where withdrawal is allowed over and above the available fund maintained by the account holder up to a certain limit as approved by the bank.
The Overdraft account can be operated like a regular account with deposit and withdrawal facility as per the maximum amount of debit allowed there at.
Overdraft V/S Drop Line Overdraft:
Drop line overdraft
This 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.
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.
Overdraft v/s Cash Credit:
A cash credit is a loan facility on revolving basis given to companies generally for one year in the beginning & renewable subject to satisfactory conduct of the a/c of the borrower year on year. Cash Credit Loan is the most important component of Working Capital finance. The cash credit loan can be given by a bank only, as the assessment of the sanctioned limit of the cash credit loan is based primarily on Stocks & Book debts of the companies in MSME sector.
In practice bank fund the capital invested in Stock & book debts to meet up the day to day cash requirement of the companies. The company, propose to avail the cash Credit loan facility should be engaged in Manufacturing / Trading /distribution of goods & merchandise establishing & exhibiting the physical stock, the value of which is reflected in their balance Sheet.
Overdraft as discussed is allowed to individual savings and current account holders as well as firms though with different terms & condition for meeting up short term payment obligations of the account holders. The overdraft is allowed on the basis of good conduct, vintage & personal credibility of the account holder as assessed by the bank. Unlike the Cash Credit, the end use of fund is not looked into by the bank in case of overdraft, where as in case of Cash Credit the use of fund is monitored by the bank.
Since Cash credit is a financing of the Working capital, the borrower need to submit periodic stock statements, list of book debts etc as desired by the bank. But in case of overdraft no such criteria to be fulfilled by the borrower. Usually the Rate of Interest is higher in case of Overdraft in comparison to Cash Credit Loan.
How to apply for Overdraft?
In some cases where salary account is maintained by the individuals Banks gives pre-approved overdraft without asking for any formal application but of course obtain a Overdraft sanction acceptance letter from the account holder.
For other cases formal application may be asked by the bank from the account holder along with other documents like KYC, Income proof, (IT Return) , business credentials , Business vintage etc.
Now a days, application for Overdraft on line is very well accepted by the banks where the prospective borrower is maintaining his/her banking relation to the satisfaction of the banker.
Which is the best bank for overdraft facility?
All commercial banks in private & public sector can give overdraft facility subject to the compliance of their internal circulars & guidelines In fact if the particular bank allows overdraft in the accounts of their constituents, the account holder should preferably avail such overdraft facility from the bank ,where he /she has established good relations with the them .
Some banks follows the practice that only their account holders with a certain minimum period of satisfactory relation can only avail overdraft facility unlike the salary account where availing overdraft facility is much easier than others.
Documents for overdraft:
For salary account holders no additional documents are required except may be copy of IT returns , salary slips, & company ID card, duly signed by the salary account holders to avail the overdraft .
For all other cases for overdraft facility documents like KYC, Income proof, ( IT Return) , business credentials , Business vintage etc are required along with photo or any other documents as would be asked by the Bank.
Overdraft processing fees:
SBI the largest bank in India charges NIL for their clean overdraft account & in other overdraft cases they charge up to 1.5 % of the overdraft amount. Other Banks also charges 1 to 3% maximum + GST on the overdraft given to their account holders.
