What is Overdraft Facility in Bank Accounts

An overdraft facility is a credit facility that allows you to withdraw more funds than what is currently available in your bank account up to a pre-approved limit. It is a type of short-term credit arrangement where interest is calculated only on the borrowed sum, not the entire sanctioned limit.

• Overdraft facility is an easily accessible line of credit wherein you can withdraw more funds than the available balance in your bank account.
• Interest on overdraft accounts is calculated only on the borrowed sum.
• Private and public-sector banks offer OD facilities against savings accounts, fixed deposits, property, insurance papers, salary accounts, and equity investments.

Overdraft facility in bank accounts offers the following features:

• The overdraft facility allows you to overdraw funds from your bank account up to a pre-approved credit limit.
• The approved overdraft limit is based on your creditworthiness, financial stability, typical account balance, and the bank’s policies.
• Interest is charged solely on the overdraft amount you withdraw from the sanctioned limit. It is applied for the time you borrow the funds and is calculated daily but billed monthly.
• Overdraft facility interest rates may increase if you default on timely repayment of the due amount.
• Unlike loans, overdraft facilities in bank accounts do not have the concept of prepayment or EMI payments. You can flexibly repay the overdraft amount as a lump sum or in parts, depending on your cash flow. Sometimes, lenders can grant extensions for borrowers based on their credit and repayment history.
• There is no minimum monthly repayment requirement for the OD facility. However, you should try to repay the sum as soon as possible to avoid impacting your credit score. 

Much like regular loans, your overdraft facility can be secured or unsecured. A secured overdraft facility is one that’s offered against collateral. Here’s a list of the common types of OD accounts:

Overdraft against salary

Companies open salary accounts on behalf of their employees. Employees can enjoy an overdraft facility on their salary accounts. OD limits can vary from bank to bank, but typically, employees can withdraw up to 2x their monthly salary.  

Overdraft against property

Alternatively, you can pledge your property to start a secured overdraft account with the bank. Depending on the lender you select, the sanctioned OD limit can vary from 40%-50% of the property’s value. Since this is a secured OD facility, most lenders offer lower interest rates and higher credit limits with such accounts.

Overdraft against savings account

Banks also offer overdraft facilities on certain savings accounts. For instance, Pradhan Mantri Jan Dhan Yojna accounts qualify for an overdraft of Rs. 5,000 or 4x of the minimum monthly balance (whichever is lower) if the account is operational for 6 months. Private banks also offer the OD facility with their regular savings accounts.

Overdraft against fixed deposit

Most banks offer overdraft facilities on fixed deposit accounts. Here, the bank typically sanctions up to 75% of the FD corpus as the OD limit. The interest charged on the overdrawn funds is 1%-2% higher than the applicable interest rate on the FD.  If you hold the FD account with the same bank, the process is expedited to ensure timely access to funds.

Overdraft against insurance

You can also submit your insurance papers as collateral to avail of a secured overdraft facility. In such cases, the OD limit is determined by the surrender value of your policy. Surrender value is the amount the insurance company is willing to pay if you terminate the policy before maturity.

Overdraft against equity investments

Some lenders also offer OD facilities on equity investments. Generally, the sanctioned limit on OD accounts with equity collateral is low since the value of equity investments is subject to market fluctuations.

Overdraft facilities were originally extended solely to current account holders to meet their immediate business expenses. However, currently, banks offer OD facilities on most saving and investment products like savings accounts, current accounts, salary accounts, and fixed deposit accounts. While the eligibility criteria for overdraft facilities may vary from one lender to the next, here’s a list of a few common eligibility parameters used by most lenders:

• The applicant must be an Indian citizen.
• The applicant must be 21-65 years of age.
• The applicant must have an existing account with the bank where she/he wants to opt for the OD facility.
• The applicant must meet the lender’s income criteria to qualify for an OD facility.
• The applicant must possess a good credit score to prove creditworthiness.

Apart from these criteria, banks may have specific rules regarding business requirements when OD facilities are extended to companies.

Generally, certain bank account holders are preapproved for an overdraft facility. Banks tend to offer pre-approved overdraft facilities to certain healthy bank accounts. If you are pre-approved for an OD facility, you can withdraw more funds than your account balance. However, if you are not pre-approved, you can approach your bank and apply for the same. Most banks now have a digital application process where the OD facility request is quickly reviewed and approved if you qualify. Forms for OD accounts may differ depending on the collateral you’re offering.

A personal loan is an unsecured loan with no end-use restrictions, while an OD account is a line of credit. When you take a personal loan, you need to repay it in EMIs, which is not the case for OD accounts. Interest is charged on the entire sanctioned sum for a personal loan, while the overdraft interest rate is charged solely on the overdrawn amount. Moreover, the interest on a personal loan is calculated on a monthly basis at a fixed or floating rate. For OD accounts, interest is calculated at a fixed rate on a daily basis. Additionally, personal loans come with foreclosure charges that apply if you repay the loan before the tenure ends. However, no such charges are applicable on OD prepayments. 

An overdraft facility is an efficient tool to manage your short-term cash requirements. By overdrawing your bank account, you can gain immediate access to funds and meet emergency needs instead of liquidating your assets. However, you should be careful when using OD accounts because overusing the facility without repaying dues can result in a debt pile-up.

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