Accounts

What is an overdraft facility in a Current Account ?

This blog explains the overdraft facility in a Current Account, detailing how it allows withdrawals beyond the account balance, its usage, repayment terms, benefits for cash flow management, and associated costs and RBI guidelines.

Synopsis:

  • An overdraft facility allows withdrawals even if the Current Account balance is zero, based on a predefined limit set by the bank.

  • This facility helps manage sudden financial needs and business exigencies.

  • Interest is charged only on the withdrawn amount and the duration of use.

  • Repayment is flexible, not necessarily through EMIs, but must meet bank requirements if requested.

  • The RBI has increased the weekly overdraft limit to ₹1,00,000, and banks may offer customised services based on individual account holders.

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Overview

Are you short of funds in your Current Account and need to compensate for your business requirements? Let us find out how a Current Account with an overdraft facility can assist you.

Definition and Functionality of Overdraft Facility in a Current Account

An overdraft facility in a Current Account allows you to withdraw from even though the balance is zero. It is a form of extension of a stipulated limit offered by banks; the said amount of funds is known as overdrawn. Depending on the relationship with the bank, an overdraft limit can be predefined as and when you contemplate an overdraft requirement.

This customised overdraft facility is unique and can be beneficial during a sudden or unplanned financial situation. It is mainly to carry out any business exigencies.

Usage and Repayment of Current Account Overdraft Facility

  • Withdrawal Limits: You are permitted to withdraw funds up to the specified limit. The limit is extended based on factors like Current Account value, repayment history, and credit score.

  • Interest Rates: Interest is charged only on the utilised amount and for the duration of use, which can range from a few days to weeks.

  • Repayment Structure: The repayment structure and tenure are decided by the bank. Repayment is not obligatory through Equated Monthly Instalments (EMIs); instead, you can repay the amount based on your fund availability. However, if the bank requires partial or full repayment due to unforeseen circumstances, you must comply.

Advantages for Business Owners

  • Cash Flow Management: The overdraft facility aids business owners with cash flow to meet daily working capital expenses.

  • Payment Settlement: It allows account holders to settle pending payments via cheques or pay orders without issues, preventing cheque dishonour and maintaining the business’s reputation.

Costs and RBI Guidelines

  • Fees: Banks like HDFC Bank charge an annual fee for the overdraft facility and other associated services.

  • RBI Guidelines: The RBI has increased the weekly overdraft limit from ₹50,000 to ₹1,00,000, applicable to Current Accounts, cash credit, and overdraft accounts. Additionally, clean overdrafts for small amounts are permitted at the branch manager’s discretion for customers with satisfactory past dealings.
     

Banks may provide tailor-made schemes or services for every individual customer in this regard who maintains a Current Account with them.

*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.

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