Overdraft is a facility offered to retail clients with credit card features such as billing date, minimum payment, and pay by date, penal interest and late fee for late payment. It is same as a short term loan which should be repaid with the interest. Sometimes, customers have to submit collaterals with the banks in order to secure overdraft loans.
Key terms for Overdraft
Interest: The normal interest is applied to the Overdraft accounts as well. It depends on the bank. It varies to each and every bank. The penal interest will applied in case the customer fails to pay the interest on time. The interest can be paid in monthly basis, quarterly, half-yearly, yearly basis.
Sanction Limit: The sanction limit is amount given to the customer as a loan which he cannot exceed. This limit is calculated according to the collateral value submitted by the customer to the bank.
Drawing power: The amount which the customer can withdraw from the sanction limit set by the bank.
Example: Suppose a customer approaches the bank for a loan and lodges his house as the collateral to obtain the same. Bank determine the sanction limit as 5,00,000 after evaluation the collateral but the set the drawing power as 90%. He can withdraw only 4,50,000 using overdraft facility even though his sanction limit is 5,00,000.
Types of Overdraft
Revolving OD: The money which is given to you by the bank as loan can be utilized any number of times.
Example: if your drawing power is USD 100,000, you have withdrawn amount USD 50,000 out of it. Now the available balance in your account is USD 50,000. Later you repay your entire loan of USD 50,000 which now makes the available balance as USD 100,000. You can utilize the full amount USD 100,000.
Non Revolving OD: This is opposite to the revolving OD. Once the money is utilized from the limit, even though you repay it into the account, you cannot utilize the money again.
Example: if your drawing power is USD 100,000, you have withdrawn amount USD 50,000 out of it. Now the available balance in your account is USD 50,000. Later you repay the amount USD 50,000 which now makes the available balance as USD 100,000. But you can utilize only the remaining amount of USD 50,000. You cannot use the money you have deposited
Temporary overdraft (TOD): A Temporary Overdraft (TOD) is an advance made by the bank to a customer to meet the customer’s immediate requirements. It is for a short period, generally not backed by a formal sanction. Sometimes, Temporary Overdraft is granted during cash withdrawal for esteemed customers when they don’t have sufficient balance in their account. At that time, Temporary Overdraft is granted automatically by the banks up to a certain limit.
Example: While cash withdrawal the customer passes the cheque on 1, 00,000 but there is unavailability of 10,000. At this time either the system will automatically grant 10,000 as Temporary Overdraft to the customer or the bank manager will grant the Temporary Overdraft.
Collaterals for Overdraft
There are different types of collaterals like houses, machineries, land, vehicle, mutual funds, deposits etc.