What is an overdraft facility in a Current Account ?

Are you short of funds in your Current Account and need to compensate your business requirements, but don’t know how to go about the same?

Let us find out how a Current Account with overdraft facility can assist you.

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 for an overdraft requirement.

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

You are permitted to withdraw the funds up till the specified limit. It is extended to the customer based on the Current Account value, repayment history, credit score, etc.

At times the bank considers this service as a short term credit facility which needs to be settled on or before the predetermined due date.

The interest rate for the overdraft facility will only be charged on the utilised amount and the time of use which could range from either a couple of days or a few weeks.

The bank decides the repayment structure and tenure, and it has full authority and control over the overdraft facility and its usage. The repayment of the overdraft facility for Current Account is not obligatory through an EMI – Equated Monthly Instalments. You can repay the amount as per your convenience of funds availability. However, if the bank demands a partial or full repayment due to unforeseen circumstances, then you have to meet that demand.

Current Account with overdraft facility is significantly an advantageous service offered by the banks. It aids the business owner in terms of cash flow to meet their daily working capital expenses. With the overdraft facility available through their Current Account, the account holder can settle the pending payments via cheques or pay-order in a trouble-free manner. This avoids a cheque dishonour and preserves the reputation of the business owner.

Every suitable service comes at a price, banks like HDFC Bank charge a certain annual fee of the overdraft facility for Current Account and other services that are part of it.

As per RBI guidelines, the overdraft limit provided by the banks to the account holders every week has increased from INR 50,000 to INR 1,00,000. It is not only for Current Accounts but also extended to cash credit and overdraft accounts.

Additionally, the RBI has maintained clean overdrafts for a small amount which are permitted at the discretion of the branch manager to the customers whose past dealings have been satisfactory. Banks may provide tailor-made schemes or services for every individual customer in this regard who maintains a Current Account with them.

Looking to open a Current Account? Get started here.

*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.