An overdraft occurs when there isn’t enough money in an account to cover a transaction or withdrawal, but the bank allows the transaction anyway. Essentially, it’s an extension of credit from the financial institution that is granted when an account reaches zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal.
Basically, an overdraft means that the bank allows customers to borrow a set amount of money. The overdraft allows the customer to continue paying bills even when there is insufficient money.
Features of an Overdraft Facility
- Overdraft Account is a facility that can be availed by maintaining any bank account (savings or current)
- The minimum age criteria are 18 years and maximum up to 65 years for bank account holders
- Several private sector banks are offering this facility for both salary and savings account holders
- The money extension is granted on the basis of the customer’s account value, repayment history, or credit score
- It is short-term credit provided by the bank that needs to be paid within the stipulated time limit, usually 12 months or even lesser
Types of Overdraft Facility
Banks offer different types of overdraft accounts that have diverse eligibility criteria, some of those are mentioned below:
1. Overdraft against Salary
Salary accounts opened by the businesses for their employees are eligible for this facility. The minimum requirement to avail overdraft facility in a salary account is to have a regular monthly salary credited by the company and the company should be on the approval list of the bank.
- Banks offer overdraft up to 3 times the current salary of the customer
- The facility is offered at minimal documentation and easy-repay feature
- Customers are required to pay interest only on the utilized amount with the flexibility to repay the amount anytime without pre-closure charges
- The minimum salary limit varies from Rs. 15,000 to Rs. 25,000 according to specific banks
- This type of overdraft does not require any security or collateral
- Some banks even offer overdraft amounts of up to Rs. 4 lakh
2. Overdraft on Savings Account
Despite being a relatively new concept in the country, overdraft on saving accounts has become quite popular due to being backed by the government. All the savings accounts opened under Pradhan Mantri Jan Dhan Yojna are eligible for an overdraft of Rs. 5,000 or 4 times monthly accent balance (whichever is lower). The accounts must be satisfactorily operated for a period of 6 months to avail this facility and only one member of a family is eligible for it. The facility is granted to the earning member of the family, preferably women. The account must be linked with an Aadhar card.
3. Overdraft against Time Deposits
Time deposits, such as fixed deposits are also eligible for overdraft facilities. However, not every bank provides this facility as this is subject to the bank’s policy only. SBI offers an overdraft facility against time deposits. All the customers having single/joint time deposits such as TDR/STDR and RD including NRE/NRO/RFC in any of the SBI branches are eligible for this facility. Customers can also apply through Internet banking for TDR and STDR overdrafts.
With Nil processing fee for SBI Loan Against Time Deposit, the minimum amount overdraft is kept at Rs. 25,000 whereas the maximum amount is Rs. 5 crore. The value of the overdraft cannot exceed 90% of the value of the time deposit. The interest rate is kept at 1% above the relative time deposit rate. The repayment period is scheduled as per the repayment capacity of the borrower and the amount of overdraft.
Benefits of Bank Overdraft:
- Interest rate is charged only on the utilized amount
- Overdraft is a Short-term borrowing that is revised every year
- Cash flow management becomes convenient
- Helps to meet urgent cash crunch requirements
- No collateral or security is required by the bank
- Less paperwork is required for credit sanctioning