Overdraft Account

If you apply for an overdraft and the bank/financial institution approves the request, a limit will be set on your account to the extent sanctioned, which will be available whenever you are in need of funds. When you withdraw the amount from the overdraft limit sanctioned to you, you will be creating a liability to that extent. If you make any deposits to the account, you will be reducing the limit to the extent of the deposit made and the amount will again be available for usage. Interest will be charged on the amount utilised and for the period utilised.

You can make part payments to the overdraft account with any part-prepayment charges. Instead, the amount paid back will be available for you and you can withdraw the amount again whenever there is a need. 

The overdraft facility can be secured or unsecured. If an overdraft facility is permitted in a current account without any security, it will be an unsecured facility. If an overdraft is permitted against security offered by you, as collateral, then the overdraft facility is a secured facility. An Overdraft facility can be given against a property, shares, insurance policies, bonds, etc. The overdraft limit fixed and the interest charged will vary according to the assets offered as collateral security.

The interest on overdraft facility is calculated on daily balance in the account. This is because the loan availed in the form of an overdraft is not paid in equated monthly instalments (EMIs) or as per a stipulated schedule. The amount can be paid as and when available and to the extent available. Every time a deposit is made into the account, the liability will decrease to that extent and the limit up to the extent of deposit made will be replenished.

The following are the five top Indian banks offering the overdraft facility:

• State Bank of India (SBI)
• Yes Bank
• Axis Bank
• ICICI Bank
• Punjab National Bank (PNB)

The following are the different types of Secured Overdraft facilities:

Overdraft Against Fixed Deposit

This is the most simple and quickest available overdraft facility. All you need to avail this facility is a fixed deposit of a bank/financial institution. An overdraft facility to the extent of 90% of the fixed deposit is provided. The rate of interest will be in the range of 1% to 2% above the rate of interest paid on the fixed deposit.

Even the lenders prefer to provide overdraft against the fixed deposit as they will have instant recourse to the fixed deposit in case the overdraft amount is not repaid. A lien in favour of the lending institution will be marked on the fixed deposit. The fixed deposit Receipt duly discharged will have to be submitted to the lending institution.

Overdraft Against LIC Policies

This is almost similar to overdraft against fixed deposit. The policy will be assigned in favour of the lending institution and the rights of the claim will be with the lending institution if the overdraft facility is not cleared within the maturity period of the policy.

The surrender value of the policy has to be obtained and the overdraft facility will be up to 95% of the surrender value of the policy. The overdraft facility can be closed within the maturity date of the policy. Else, maturity proceeds of the insurance policy will be first adjusted towards the balance in the overdraft account and the residual amount of the maturity proceeds, if any, will be credited to the bank account of the borrower.

Overdraft Against House Property

This facility is normally offered to customers with a Home Loan facility. This facility is provided to clear the existing Home Loan repayments or for any other personal needs. Loan up to 50% to 60% of the market value of the property will be given.

Overdraft Against Equity

Though overdraft facility against equity is permitted, it is not very popular since the lending institutions refrain from providing this facility due to the volatile nature of the equity. The value of the equity normally depends on the market and is not constant.

Overdraft Against Receivables

Cash flow deficit is a common challenge for small and upcoming businesses. This will be mainly due to the bill receivables. Generally, in these businesses, a credit period ranging from 30 to 90 days will be offered and the invoices will be paid likewise. Owing to this, the challenge of cash flow deficit is a common feature in small and upcoming businesses as they depend on these receivables.

To overcome this challenge, banks/financial institutions provide an overdraft facility to the extent of 60% to 75% of the receivables. The invoices that become payable within 30 to 60 days are considered as assets for financing by lending institutions. Accounts receivables or bills receivables are considered as sound collateral securities due to the nature of liquidity. These receivables will be converted into cash quicker than the other kinds of collateral securities. The overdraft limit so fixed can be utilised when in need and can be paid back when the receivables are realised. To accept the receivables as collateral security, they should be of high quality and the customers of the company should be of high reputation and commercial value.

The following are the features of an Overdraft Facility:

• Overdraft in an account is a pre-set limit which differs from borrower to borrower. The limit is set based on the type of security offered as collateral and if an unsecured facility is given, then it depends on the customer's profile, track record, and the relationship with the bank/financial institution.
• There is no repayment period fixed for the overdraft facility. The amount can be paid at any interval without any pre-payment charges. The amount ploughed back into the account will be available for usage again whenever required. The facility, however, will be reviewed every year and will be renewed if the transactions are satisfactory.
• There is no minimum amount payable concept for the overdraft facility. However, the withdrawals should be within the limit sanctioned. The interest applied to the account has to be serviced regularly as non-payment of interest will bring down the credit score. Since the interest applied is on the day-to-day balance in the account, it is recommended to deposit amounts into the account whenever possible to reduce the interest cost.
• The overdraft facility can be availed in joint names. Both the joint borrowers are equally responsible for the liability outstanding in the overdraft account.
• Interest is applied only to the extent of the amount utilised. So, if you want to make the best use of this advantage, there should be periodical credits also into the account to reduce the liability in order to reduce the interest cost.
• An overdrawing in the savings/current account is allowed only when there is a pre-approved limit set for the account. The concept of an overdraft should not be misunderstood for an automatic facility in the account.

All banks/financial institutions offer the overdraft facility.

Details of 5 Top Indian Banks providing this facility are given below:

SBI Overdraft Facility for POWER POS Current Account

Power POS Account is an exclusive account for customers who have availed the POS facility from the Bank. One of the special features of this account is the overdraft facility provided.

Features of the facility:

• Eligibility:
  • Current Account customer using the POS facility is eligible for this facility
  • The facility will be provided only after 6 months of installation of the POS terminal. The terminal should have performed satisfactorily.
  • Commitment charges for non-operation of the terminal should not have been levied for the past 6 months.
  • A volume of 1.25 Lakhs should have been generated in the last 6 months
• Quantum: Quantum will be 25% of the transaction amount for the last 6 months with a minimum quantum of 25,000 and a maximum quantum of 5 Lakhs will be provided.

SBI Overdraft Facility on Fixed Deposit

Features of the facility:

• Eligibility:
  • SBI customers holding TDor STDor RD either in a single name or in joint names can avail this facility.
  • Overdraft facility will be provided even on NRO/FCNRB/NRE/RFC accounts
  • Overdraft against the fixed deposits held in a single name can be availed online
• Quantum: 90% of the fixed deposit amount with a minimum of 25,000 and a maximum of 5 Crores.
• Interest: The interest charged will be 1% above the rate of interest of the fixed deposit against which the overdraft limit is provided.
• Repayment: Maximum repayment period is 5 years for overdraft facility availed through the branches and 3 years for the overdraft facility availed online.
• Processing charges: Nil
• Pre-payment charges: Nil

Yes Bank Smart Overdraft Facility

Yes Bank Smart Overdraft facility is a working capital facility provided for MSME owners who are into manufacturing as well as trading and for self-employed professionals like Chartered Accountants, Doctors, Lawyers, and Architects up to a limit of 1 Crore without a balance sheet.

Features of the facility:

• Eligibility:
  • MSMEs involved in manufacturing and trading activities
  • Self-employed professionals like Chartered Accountants, Doctors, Lawyers, and Architects
• Quantum: A minimum quantum of 20 Lakhs and a maximum quantum of 1 Crore is provided.
• Security: Collateral security of house property, LIC policies, or fixed deposit should be provided
• Interest: Interest charged at a competitive rate and depends on the customer's profile
• Processing charges: Nil

Benefits of the facility:

• No need for any income documents
• The assessment is made on the basis of the transactions of the customer
• A template with set parameters designed for the product which makes the processing simpler and faster.
• A revolving facility which does not involve a specific repayment schedule

Documents to be submitted:

• KYC documents for identity and address proof like Aadhaar Card, Voter's ID Card, PAN Card, Driving Licence, Passport, Utility Bills, etc., have to be submitted along with the prescribed application form.
• Bank account statement for the past 12 months if an existing customer of Yes Bank. If not an existing customer, bank account statement for the past 24 months has to be produced.
• Shop Establishment Certificate, Certificate of incorporation, Partnership Deed, etc., being proof of the existence of the business (vintage of the business).
• If there are any existing loans, then the repayment record and sanction letter of the loan account has to be provided.
• Statement of the net worth of the guarantors and promoters which should be self-attested
• 2 years IT Returns with income computation as well as acknowledgment
• Copy of title deeds of the property offered as security

YES GST-Overdraft Facility Against GST Returns

Yes Bank has recently launched YES GST being an overdraft facility provided for MSMEs up to a limit of 1 Crore against GST Returns. The MSMEs have to submit the GST Returns and should also provide collateral security of a property.

Axis Bank Overdraft Facility

Axis Bank offers Overdraft facility against the security of property, Fixed Deposits, LIC Policies, etc.

Features of the facility:

• Eligibility:
  • The business establishment should have been in the existing business for the past 3 years and should have been making a profit of a minimum of 3 Lakhs for the last 2 years.
  • The minimum turnover should be 30 Lakhs and the maximum turnover up to 10 Crores.
  • The residence or the office should be self-owned
  • In the case of rented accommodation, the applicant should have been residing in the present accommodation at least for 2 years and the office should have been in the present premises for at least 4 years.
  • In the case of salaried individuals, the minimum annual salary required is 2.50 Lakhs for the last 2 years as reflected in the Income Tax Returns.
• Quantum: The quantum provided will in the range of 10 Lakhs to 3 Crores
• Interest: The interest at 11.50% onwards and will be charged only on the amount utilised
• Processing charges: Processing charges up to 1.25% of the overdraft limit along with the applicable interest, will be collected.
• Pre-closure charges: Pre-closure charges at 2% of the outstanding balance will be collected
• Penal interest: Penal charges at 2% over and above the normal rate of interest will be charged in the case of delayed payment.
• Documents:
  • KYC documents like address proof and photo ID proof have to be submitted along with the duly filled application form.
  • Statement of bank account for the last 6 months
  • Proof of business
  • IT Returns for self-employed individuals/professionals along with balance sheet and profit & loss account, ITand Form 16 for salaried individuals.

Insta OD by ICICI Bank

Features of the facility:

• Eligibility:
  • Self-employed individuals and non-individuals like Proprietorship/Partnership firms, LLPs and Companies are eligible for this facility.
  • The present business should have been in existence for the past 3 years and profit-making for the past 2 years.
  • Current account in any bank for the past 12 months is mandatory
• Quantum: Overdraft limit up to 15 Lakhs will be provided
• Interest: Interest will be charged at a competitive rate only on the utilised amount
• Security: No collateral security required
• Processing charges: Nil
• Pre-closure charges: Nil
• Documents:
  • KYC documents along with duly filled application
  • Proof of age of the business
  • Partnership Deed
  • Certificate of Incorporation
  • Shop Establishment Certificate
  • Bank account statement for the last 12 months

Benefits of the facility:

The benefits of the facility are:

• You can apply for the facility online
• Minimal documentation and quick processing
• No processing charges, pre-payment, and pre-closure charges will be collected

Punjab National Bank Overdraft Facility to Housing Loan Borrowers

Overdraft facility will be given to Housing Loan Borrowers for personal needs.

Features of the facility:

• Purpose: The overdraft facility can be utilised for any personal requirement. There is no restriction on the end-use of the loan.
• Eligibility: Customers who have availed housing loan for construction/purchase of a house, repairs and renovations are eligible for the overdraft facility.
• Quantum: An amount up to 25% of the housing loan sanctioned with a minimum of 5 Lakhs and a maximum of 25 Lakhs will be provided. With the overdraft facility proposed to be sanctioned along with the housing loan already sanctioned, the margin should still be maintained at 25%, i.e., LTV should still be maintained at 75%.
• Interest: Interest will be charged at 11.90% on the amount utilised
• Repayment: The overdraft facility is a revolving facility and does not have a scheduled payment pattern. However, the interest has to be serviced regularly. If interest is not serviced for over 2 months continuously, the loan will be recalled.
• Processing fee: No processing fees will be charged. However, documentation charge of 450 will be collected.

The following is the difference between the Overdraft Facility and a Personal Loan: