Office Hours: Mon:Sat 9:00 AM - 6:00 PM
Office Hours: Mon:Sat 9:00 AM - 6:00 PM
What is an Overdraft Facility

Overdraft Facility – Meaning, Features, and Advantages

What is Overdraft Facility?

An OD facility is a financial arrangement between a bank and a customer, that allows the customer to withdraw more money than is currently available in their account. Almost every bank or financial institution in India provides an overdraft facility to its customers. The bank decides the loan amount and interest rate criteria. Let’s learn what an overdraft facility entails and how Terkar Capital assists in the OD application process.

As the name suggests, the bank gives OD facilities to borrowers.  It is to withdraw money more than the balance available in their bank account to overcome working capital requirements. OD is a short-term loan that must be repaid as determined by the bank. It can be available 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.

OD Facility Example

To effectively manage your money, it is critical to understand the concept of an overdraft. So, let’s simplify using the example below:

PQR Private Ltd, a company with a current account at XYZ Ltd Bank, has a credit balance of Rs 750 Lacs. The company needs to make a payment of Rs 820 Lacs to one of its vendors. After analyzing the expenses, the company realizes that it needs additional cash to make the payment.

Hence, the company approaches its banker and applies for an overdraft of up to Rs 850 Lacs. The banker approves the application at a reasonable ROI. Thus, the company can now use the overdraft amount as and when required and will pay interest on the amount used above the credit balance.

Overdraft (OD) Terms

The terms of a loan may vary depending on the borrower’s profile, repayment capacity, relationship with the banker, financial history etc.

Features of OD Facility

  1. The overdraft facility helps in the effective working capital management of the company. It solves the immediate cash crunch. Also, It gives flexible repayment options to the current account holders.
  2. The credit limit depends upon the relationship of the borrower with his banker and also his credit score.
  3. Generally, the credit period is 12 months. Thus, the borrower has to renew the facility according to their requirements.
  4. The interest is 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. However, the borrower can pay as and when he is available with cash but before the end of the credit period.

How to Maximize Your Overdraft Facility?

The OD facilities can be a helpful way to manage your finances, but it’s important to use them wisely, as they can be expensive. Here are some tips for maximizing your overdraft facility and avoiding unnecessary fees:

  • Only use your overdraft facility for short-term expenses.
  • Make sure you have a plan to repay your overdraft as soon as possible.
  • Shop around for the best overdraft deal.
  • Consider using a credit card instead of an overdraft facility.
  • Be aware of the fees associated with overdrafts.

Learn more about the dropline overdraft facility here.

Overdraft facility at Terkar Capital

Terkar Capital is a financial institution that is known for providing OD facilities to its customers with ease. With Terkar Capital, borrowers can easily apply for overdraft facilities based on their needs and eligibility.

# Particulars

OD Facility

Min Amount (Rs. INR)

25 Lacs

Max Amount (Rs. INR) (No capping)

Rs. 100 cr +

ROI

Repo Rate Linked

Tenure

Revolving

An overdraft is a helpful financial tool in times of need. However, it is important to understand its meaning and potential risks. We believe this blog provides an in-depth explanation of overdraft’s meaning, its usage, and how it works. Overall, this article provides a helpful overview of the concept of overdraft meaning in the context of Indian banking.

FAQs

1. What are the eligibility criteria for an OD facility?

There are no set criteria for eligibility. 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.

2. What is the procedure for obtaining an OD facility?

A borrower applies for an OD facility. The bank checks their credit score, relationship with the bank, earnings, and eligibility. If approved, the OD is sanctioned.

3. Who can avail of the OD facility?

Current and savings account holders can get an overdraft facility from their bank, depending on their relationship with their banker. Individuals, self-employed professionals, and enterprises can be borrowers.

4. Is there any requirement for collateral?

Collateral depends on the borrower’s availability and whether they have it. Interest rates are comparatively higher for unsecured loans.

5. Who offers the overdraft facility?

Almost all banks provide OD facilities to their saving and current account holders. Nowadays, financial institutions also provide such a facility.

6. 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.

Leave a Reply