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What is bank overdraft? How to use overdraft in business?


Bank Overdraft: What is bank overdraft?

How to use overdraft in business?

Advantages and Disadvantages of Overdraft

What is the meaning of bank overdraft, its utility and type, limit, facility in business (Overdraft account or cash credit Meaning, Facility, Limit, Loan, Interest Rate, Calculator in Hindi)

Overdraft, as the name itself suggests, is an overdraft. Banks provide overdraft facility to their customers. According to this facility, you can withdraw more money than the amount deposited in your bank. It has a different process and certain conditions of the bank have to be followed, only then you can take full advantage of the overdraft facility of the bank. Let us know in detail how one can get bank overdraft and who can get overdraft.

What is bank overdraft

Bank Overdraft Facility: It is a financial facility provided by banks to their customers. In this, even if there is no money in the customer's account, he can take money from the bank. Banks fix an overdraft limit for their customers. The limit depends on the records of the customer with the bank.

Taking advantage of the overdraft facility of the bank is similar to taking a loan from the bank but in this you do not have to pay in installments. Also, you are given the facility of overdraft without security and guarantee. Overdrafts are also given with security and guarantee, which are called secured overdrafts. In such a situation, the lenders (banks or NBFCs) can sell your properties to recover the loan, so that the banks are not harmed. And remain the responsibility of the customer. The bank charges interest on the money that is withdrawn from the overdraft account.

What is bank overdraft? (What is Bank Overdraft Meaning or definition?)

Overdraft is a facility provided by banks, according to which even if you have zero money in your account, you can withdraw money from your savings account or current account. This facility is given by almost every bank to its customer. Overdraft is a kind of short term loan, which the customer has to repay before a certain time limit. While taking an overdraft, the customers also have to pay some loan to the bank on the total amount taken.

Types of Bank Overdraft

Authorized overdrafts:  These types of overdrafts are fully planned. In authorized overdraft, there is already an agreement between the bank and the person, that the person can withdraw overdraft money from the bank within a certain limit. For this they have to pay some service fee and this fee can be paid daily, weekly or even monthly. Mainly authorized overdraft can be chosen as everything is organized in it. But sometimes it can be expensive too, so it is necessary to be careful with it.

Unauthorized overdrafts: There is no complete arrangement in such overdrafts and all these overdrafts are unplanned. In these overdrafts, if you withdraw the overdraft amount more than the agreement between the bank and you, then you are required to pay some charges on it later. In this, the amount of additional charges is very high, which makes this overdraft even more expensive.

In what form can overdraft be taken? 

In overdraft, if you fail to repay the loan amount on time, the lender has the right to auction your property. Information about the forms in which overdraft can be availed is given below –

Overdraft against House :– If you want to take an overdraft against your house, then it is possible. The amount of overdraft given on the house is 40- 50% of the amount of the existing house. Before giving an overdraft facility, the bank inspects your land and its value, as well as takes into account your credit history and repayment capacity and gives an overdraft accordingly.

Overdraft against FD/Super Saver :– If we want to take an overdraft against our fixed deposit, we can get an overdraft and this is a convenient and beneficial facility compared to an overdraft against a house. It is also easier for the lender to grant overdraft against Fixed Deposit as in that case the lender knows the borrower better. If an overdraft is taken against a fixed deposit, the rate of loan is lower.

Overdraft against insurance policy :– You can get overdraft on the basis of your insurance but in that case the amount of overdraft depends on the value of your insurance. If we pledge our insurance amount as contribution amount, then we can easily take overdraft on our insurance policy.

Overdraft against equity :– You can get overdraft against equity but this method is mostly adopted because equity depends on the market and its value in the market is not constant and keeps on changing. Along with this, banks give less amount for overdraft on equity.

Overdraft against monthly income :– You can also take an overdraft against your salary and this is also called a loan for some time. You can get two to three times more overdraft on your salary, but this limit is different for every bank. To avail this service, it is mandatory for you to open a salary account with that bank.

Types of Overdraft Accounts

Different types of overdraft accounts have different eligibility criteria:

overdraft on salaried account

Overdraft facility can be available on the salary account opened by the companies for their employees. Its minimum qualification is that every month salary comes in the account.


  • Bank offers overdraft up to 3 times the current salary of the customer

  • This facility requires very little paperwork

  • Customer has to pay interest only on the amount utilized

  • Minimum salary limit for overdraft is Rs.15,000. 25,000 to Rs. Is. This type of overdraft does not require any security/guarantee

  • Some banks Rs.4 lakh. Provides overdraft amount up to

overdraft for savings account

All savings accounts opened under Pradhan Mantri Jan-Dhan Yojana up to Rs.5,000. Or 4 times the current balance (whichever is less) in the previous month as an overdraft. For this, the bank account should be active for 6 months and only one member of the family is eligible for this. This facility is given only to the earning member of the family, especially women. In this the account should be linked with Aadhaar card. The account holder should also have a second savings account to comply with RBI instructions. Minors and persons having KCC (Kisan Credit Card) are not eligible to take this scheme. Here an annual fee has to be paid for this facility. However, the interest rate cannot exceed the base rate by more than 2%. There is no processing fee for this facility. Another good example of an overdraft for a savings account is the Citibank Suvidha Savings Account. In this you will get 5 lakh rupees. Available in the form of overdraft. The bank decides the minimum EMI amount along with the interest rate. However, the customer can choose to increase the EMI amount at any point of time as per his/her convenience. This scheme does not include pre-payment fees.

Overdraft for Time Deposit

Time Deposit Overdraft can also be availed in lieu of Time Deposit like Fixed Deposit. However, not all banks provide this facility as it is subject to the policy of the bank only. SBI, one of the public sector banks in the country, offers overdraft facility for time deposits. All customers who have Single / Joint Time Deposit such as TDR / STDR and RD including NRI / NRO RFC with any branch of SBI can avail this facility. Customers can also apply for TDR and STDR overdraft through internet banking. The minimum amount of overdraft should be Rs.25,000. and a maximum of Rs.5 crores. it occurs. The overdraft amount cannot exceed 90% of the time deposit amount. The repayment period is determined according to the repayment capacity of the borrower and the amount of the overdraft. SBI does not levy any processing fee and pre-payment charges. This type of overdraft is also called secured overdraft.

How to apply for overdraft? (How to apply for overdraft?)

  • To take an overdraft, first of all you should have a current account with the bank from which you want to take the overdraft.

  • After this, overdraft banks do not give to anyone like this, rather you have to put some of your claims in the bank for overdraft, such as property etc., so that you return the overdraft money to the bank with the required loan within a certain time period. .

  • Some related documents like IT returns, proof of income etc. of the person applying for bank overdraft are also checked, as well as evaluation of the documents submitted by you in the bank. And only after all the documents are verified, the bank gives you approval for overdraft facility.

How does an Overdraft Account Work?

  • If you get an overdraft account approval from the bank, you can get the overdraft amount from that bank. And whenever you need money, the amount is sent directly to your bank account as an overdraft.

  • By taking an overdraft from the bank on your account, you keep increasing the balance in your account and as soon as you deposit money in your account, it is automatically deducted from your account, till the overdraft amount is completed. Does not happen and till that time the bank takes loan from you.

  • Interest is calculated everyday on whatever overdraft amount you have taken from your bank, because if the borrower deposits the amount in the bank, the bank without informing him can use that amount to reduce the overdraft amount taken by him. Can use in, so the amount of overdraft keeps decreasing. For this reason, the interest on the overdraft amount is calculated on a daily basis as the interest amount can change daily.

Overdraft Uses

As we all know that money can be needed anytime and if money is not available at that time, then many problems have to be faced. But with the facility of overdraft by banks, we can take money from the bank. Even if we have zero rupees in our account, we can take overdraft from the bank. The overdraft limit depends on our documents and past relationship with our bank. The bank takes the loan till we pay off the overdraft amount in full. In such a situation, overdraft is a very beneficial facility.

What are the features of overdraft 

1. Limit-

The overdraft limit may differ from customer to customer. This is decided on the basis of the customer's relationship with the bank.

2. No payment from EMI-

You cannot repay the overdraft in installments like a loan. You have to make this payment in cash at once. You can pay your overdraft amount whenever you want. But keep in mind that if the bank has asked you to pay, then you will have to pay soon.

3. No minimum monthly payment-

In this facility, you are not given the limit of minimum monthly payment. But still you should pay the overdraft in time, so that your credit score is not affected.

4. Interest Rates-

In this, the interest is charged on the overdraft amount utilized and not on the total overdraft limit. It is calculated on a daily basis and billed at the end of the month. If you pay every month and miss a month, the interest amount is added to the principal amount withdrawn at the end of the month. After that interest will be added on this amount.

5. Pre-payment Charges-

Prepayment charges are levied whenever you take a loan from banks, but this does not happen in overdraft. You can make full payment in one go whenever you want. 

6. Joint Overdraft-

If you want, you can also take a joint overdraft. In this, the co-applicant also has full responsibility regarding the payment. Even if the amount is in the use of only one person, but the responsibility will be considered as full of both the applicants. If the repayment is not done then the guarantee given to the banks is at stake.

What are the features of overdraft account 

  • Overdraft account is such a facility, which can be availed by keeping any bank account.

  • Now many private banks are providing this facility to salary account and savings account holders.

  • The overdraft limit you get is based on your account history, payment record or credit score.

  • It can also be considered as a short-term loan provided by the bank which needs to be repaid within a stipulated time

  • This is the interest charged on the loan or overdraft

  • This repayment period is decided by the bank and it has full rights to use the account

  • As per RBI rules, current account and cash credit account can have a maximum of Rs.50,000. Eligible for overdraft per week. However, this limit is not applicable for Personal Overdraft Account.

Overdraft is a very useful facility provided by the banks, as it helps the business in times of need of money. Businesses usually have to wait to receive the payment amount from their customers and many a times it gets delayed. Meanwhile, businessmen can withdraw money from their current overdraft facility when they need money. Any businessman can also give a check of his overdraft account for any kind of payment.

In today's banking system, many banks provide overdraft facility on basic savings and salary accounts. However, this facility is not provided to all people. Only those customers who make regular payments on time and have a good credit score can avail this facility. What's more, this overdraft facility comes with an annual fee and the customer can discontinue the service whenever he wants.

What is an overdraft for business? (Business Overdraft Facility)

Business overdraft is like a lifeline for businessmen. If the amount in a merchant's bank account ends, then he can take money for some time by using business overdraft. This facility is most beneficial for middle class traders.

Merchants can use this service only when their bank account balance is less and they need more amount for transactions. So in such a situation, the business overdraft facility by the bank proves to be useful for the customers and you can also repay it within the stipulated time. However, it is necessary to give some loan on this amount.

Overdraft Advantages and benefits

  • This process is easier than the process of taking a loan and is also flexible. For this only you have to open an overdraft account in the bank. Along with this, you can pay the overdraft amount anytime and from that time onwards the loan will stop on you.

  • The interest that is charged on the money taken through the overdraft facility of the bank, that interest is calculated everyday. If today you have deposited some money in the account, then the overdraft amount will be reduced and you will have to pay interest for the current amount and not for the entire amount.

What are the advantages and disadvantages of overdraft?

Following are the advantages and disadvantages of overdraft:



Helps in managing the cash flow of the business

higher interest rate

Meets the requirements of urgent cash crunch

Offered to bank account holders only

Interest is paid only on the amount utilized

Acceptance limit depends on the finances of the applicant

Short Term Loan – Limit varies every year

Money can be withdrawn at short-notice

less paperwork

Interest charges vary according to changes in interest rates

Banks are not required to give any guarantee

Not suitable for long term finance

use of cash in small portions

can be withdrawn on demand

What is overdraft loan?

Overdraft is a financial facility, through which you can withdraw money from your bank account even when there is no money in it. This is called 'overdraft'. An overdraft limit is fixed for each customer, depending on his relationship with the bank. The customer can withdraw money only up to the prescribed limit. The bank charges interest on the money that is withdrawn in the form of overdraft.

Interest Rates on Overdraft Loan

The interest rate on overdraft loan facility offered by private and public sector banks varies for applicants and depends on the loan amount required, repayment tenure and relationship with the concerned bank or financial institution.


Overdraft facility is like a lifeline facility provided by the banks. You can take money from the bank even if you have less or zero money. This facility is most beneficial for the traders. Therefore, if you want to take this facility, you can definitely take it.

Related Questions (FAQs)

People also ask

Question. What is an overdraft account?

Answer: An overdraft is an extension of credit from a lending institution when the account reaches zero. An overdraft allows the account holder to continue withdrawing money even when there are no funds in the account or insufficient funds to cover the amount of the withdrawal.

Question. What is OD limit?

Answer: This limit depends on the collateral you have pledged with the bank for this facility. In the case of salary and FD, the bank limit is more. For example, if you have an FD of Rs 2 lakh in the bank, then the bank can set a limit of Rs 1.60 lakh (80%) for overdraft.

Question. What is the difference between overdraft loan and term loan?

Answer: Tenure of credit: The amount drawn from an overdraft credit facility is for a shorter tenure as compared to a personal loan. The tenure of a personal loan can go up to 20-25 years, depending on the loan amount while the tenure of an overdraft is much shorter as it carries a higher rate of interest.

Question. How is the bank limit made?


  • Generally, two types of loans are accepted by banks, term loan and credit loan.

  • Credit loan is called limit.

  • Under Credit Loan-

  • A limit of withdrawal is fixed. ,

  • After withdrawing the amount whenever the amount is re-deposited and after that it can be withdrawn again whenever it is desired.

Question. How to get overdraft in Jan Dhan account?

Answer: The maximum age limit for overdraft facility in this account is 65 years. To avail the overdraft facility, your Jan Dhan account should be at least 6 months old. If this does not happen, only overdraft of up to Rs 2 thousand is available.

Question. How is interest calculated on overdraft?

Answer: The overdraft interest rate is calculated by the average daily balance method in which the overdraft interest is calculated by considering the balance in a current account at the end of each day or period.

Question. What is overdraft in banking?

Answer: A bank overdraft is a credit line in which the bank provides a limit that can be drawn on even when your bank account balance is below zero.

Question. What is the difference between bank overdraft and bank loan?

Answer: The main difference between bank overdraft and bank loan is that in overdraft the interest rate is paid only on the amount utilized whereas in bank loan you have to pay the interest rate on the entire amount.

Question. What is the interest rate on SBI overdraft?

Answer: The interest on overdraft varies from bank to bank and depends on the applicant's relationship with the bank and his/her financial stability.

Question. Which is better overdraft or personal loan?

Answer: Both are useful to overcome situations of urgent cash crunch. Personal loan can be availed from any lending institution, however overdraft can be availed only from the bank in which you have your existing current or savings account. The interest rate paid on a personal loan is on the total amount, but in case of an overdraft, the interest rate is paid only on the amount utilised.

Question. How do I repay my overdraft loan?

Answer: You can repay your overdraft by getting a 0% money transfer card and transferring funds from your credit card to your current account. You can pay as per your convenience in the form of EMI or lump sum amount by fixing a tenure or ahead of schedule from any bank.

Question. What if I can't pay my overdraft?

Ans: If you are unable to repay the overdraft amount on time, the balance and interest rate may be deducted from your current or savings account with the bank.

Question. Does applying for overdraft affect credit score?

Answer: There is no major impact on your credit score if you apply for overdraft facility. If you default in repaying the amount on time or if you exceed the prescribed limit then it will affect your CIBIL score.

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