Overdraft Facility in India
Almost every bank or financial institution in India provides an overdraft facility to its customers. Bank decides the loan amount and interest rate criteria. It may differ and shall depend on the borrower’s profile, repayment capacity, relationship with the banker, and also financial history. Let us understand what is an overdraft facility through this article.
As the name suggests, the bank gives overdraft facilities to borrowers. It is 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 within defined tenure as required by the banks. It can avail 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.
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 to one of its vendors of Rs 820 Lacs. After analyzing the expenses, the company will need extra cash over the credit balance to make the said payment. The company approaches their banker and makes an application for Overdraft up to Rs. 850 Lacs. That is granted by the banker at a reasonable ROI. Now the company can use the amount of Overdraft as and when required. It will pay interest on the amount used above the credit balance.
Features of OD
- 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.
- The credit limit totally depends upon the relationship of the borrower with his banker and also his credit score.
- Generally, the credit period is for 12 months. Thus, the borrower has to renew the facility according to their requirements.
- 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.
- 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.
1. What is an overdraft facility's eligibility?
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 overdraft facility?
The borrower applies for an OD facility from the bank. Thus, the bank 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 gets sanctioned after checking the authenticity of the borrower.
3. Who can avail the overdraft facility?
The current as well as saving account holders of respective banks can avail of this facility. It is depending upon the relationship with their banker. The borrower can be individuals, self-employed professionals, enterprises, etc. in case of an overdraft facility.
4. Is there any requirement of collateral?
The collateral depends upon the availability of the borrower. Whether the borrower 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.
5. Who offers the overdraft facility?
Almost all banks provide Overdraft facilities to their saving and current account holders. Nowadays, financial institutions also provide such a facility.
7. What is an Overdraft facility rate of interest?
The ROI depends upon a number of factors. And it varies according to the banks or financial institutions.
8. 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.
Understand what is an Overdraft facility at Terkar Capital
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