Understanding Overdraft Facility in Current Account

Cash crunch is not uncommon in businesses. Thanks to overdraft facility in current accounts, you can tackle such emergencies without getting into high-interest debt. An overdraft facility in a current account is one of the most convenient financial tools that provides short-term liquidity without the hassle of applying for a loan. In this comprehensive guide, we will explore what an overdraft facility is, its features, benefits, eligibility, charges, and best practices for using it.

What is an Overdraft Facility in a Current Account?

An overdraft facility is a credit arrangement that allows account holders to withdraw more money than they have in their current account, up to a pre-approved limit. It acts as a financial safety net to cover short-term cash flow gaps or unexpected expenses.

The overdraft limit is determined by the bank, based on factors such as the account holder’s creditworthiness, account history, and income.

Features of Overdraft Facility

1. Flexibility

   You can withdraw funds as needed, up to the limit, and repay at your convenience.

    

2. Interest on Used Amount

   Interest is charged only on the amount used, not the entire overdraft limit.

    

3. Short-Term Solution

   Ideal for bridging temporary cash flow gaps.

    

4. Customisable Limits

   Banks set the overdraft limit based on your financial profile and account activity.

    

5. No Collateral (For Some Accounts)

   Many banks offer unsecured overdraft facilities, especially for salary accounts or accounts with steady income inflows.

    

Benefits of Overdraft Facility

1. Quick Access to Funds

   No need to wait for loan approvals during financial emergencies.

    

2. Cost-Effective

   Interest is levied only on the withdrawn amount, making it cheaper than traditional loans.

    

3. Convenient Repayment

   Repay when funds are available without strict EMIs.

    

4. Improves Liquidity

   Helps businesses maintain operations during revenue fluctuations.

    

5. Better Financial Planning

   Supports timely payments, avoiding penalties or missed opportunities.

    

Types of Overdraft Facilities

1. Secured Overdraft

   Backed by collateral such as fixed deposits (FDs), property, or other financial assets.

    

2. Unsecured Overdraft

   Does not require collateral but depends on the borrower’s credit score and account history.

    

3. Overdraft Against Salary

   Offered to salaried individuals with a steady income.

    

4. Business Overdraft

   Tailored for businesses to manage working capital and operational expenses.

    

Interest Rates and Charges

Interest rates for overdraft facilities typically range between 10% to 20% p.a. but vary depending on the bank and whether the overdraft is secured or unsecured. Other charges may include:

• Processing Fees
• Renewal Fees
• Late Payment Penalties