What is overdraft (od) account?

What is Overdraft (od) account?

An Overdraft (popularly known as ‘OD’) account simply means the money withdrawn once your bank account balance is below zero and goes into negative balance. It literally means that the client of the bank has exhausted all the positive balance and has effectively loaned money from banks. An overdraft is a temporary facility(usually 1 year) where you can overdraw your bank account up to certain limit as approved by banks. Note that overdraft is not a permanent source of finance and banks can demand repayment immediately.

 How do banks approve Overdraft limits facility?

For the salaried individual customers, banks look at the regularity of salary being credited to the salary account with the bank, his/her monthly liabilities, cash in-flows and cash out-flows and only they meet the bank’s credit policies, do they approve the OD limit usually a percentage of the salary like 50%.

For Corporate clients, the banks look at the length of relationship with the bank, the cash in-flows and cash out-flows, their requirement and many other factors. Once the client satisfies the requirements, the banks approve them an Overdraft limit for their short-term financial needs.

 What is the tenor of the overdraft limit?

Usually overdraft limits are subject to review every year. Banks may decide to enhance the limit if the client performs well in the current limit. If the client has not had a good history with the banks, they might reject to renew the limit.

What are the benefits of overdraft account clients to the banks?

-Banks calculate interest on daily basis for the overdraft usage. Hence, it turns out to be a good profit-making loan for banks.

-Most of the times, overdraft facilities are secured against the fixed deposits. Hence, there is less risk.

-It is a good tool for the rotation of funds.

What are the advantages of overdraft account to clients?

–Flexibility: By having an overdraft account, a client need not worry about the exhaustion of the cash balance in bank account. This is especially useful in case of need of emergency funds. For example: Your account balance is NIL and you urgently require funds for medical emergency. If you have an overdraft line with the bank already approved, you need not worry. You can withdraw cash from the ATM or through cheque.

-For Corporates, an overdraft line will be beneficial for short-term capital requirement like payment of invoices, payment of salaries and so on.

What are the disadvantages of overdraft account?

–Interest rates and charges: Overdraft accounts have much higher interest rates than term loans. For long-term borrowings, OD is not suitable. Plus there are charges to overdraft account when approved.

–Cancellation: Unless it is mentioned in the terms and conditions of the agreement, banks can withdraw the overdraft facility at any time.

–Pledge of securities: Banks usually approve overdraft limit against a fixed deposits. This becomes a problem for cash strapped companies.

How to apply for OD facility?

You can approach any bank branch and contact the financial advisors. Most of the banks also have call centres. Call them to obtain information.