OVERDRAFT

An Overdraft (OD) is a short-term credit facility provided by banks that allows a borrower to withdraw funds from their current account in excess of the actual balance available, up to a pre-sanctioned credit limit. This facility is widely used by businesses, professionals, and even individuals to manage short-term liquidity mismatches and ensure continuity of operations. Unlike a regular loan where the entire sanctioned amount is disbursed upfront, an overdraft allows the borrower to draw funds as and when required and pay interest only on the utilized amount, making it a highly flexible financing option.

Key Features of Overdraft Facility

  • To cover temporary cash flow mismatches and working capital needs.
  • To manage urgent payments such as vendor dues, salaries, or statutory obligations.
  • To provide a financial cushion during delays in receivables or seasonal fluctuations in business.
  • Revolving Credit: The overdraft limit can be used, repaid, and reused within the sanctioned tenure.
  • Short-Term Tenure: Typically sanctioned for 12 months, subject to annual review and renewal.
  • Flexible Repayment: No fixed EMI; repayment is made by depositing funds into the overdraft account.

Available to business entities, self-employed professionals, and individuals with a stable credit history.

Assessment factors include:

  • Turnover and profitability of the business.
  • Average monthly bank transactions and account conduct.
  • Credit score (CIBIL) and repayment track record.
  • Submission of CMA data (for business overdrafts) in case of higher limits.
  • Secured Overdraft: Backed by collateral such as fixed deposits, property mortgage, LIC policies, or shares.
  • Unsecured Overdraft: Sanctioned based on the borrower’s creditworthiness, generally for smaller limits with higher interest rates.
  • Overdraft Against Salary Account (Personal OD): Offered to salaried individuals based on monthly income and employer’s profile.
  • Business Overdraft: Tailored for enterprises to meet short-term working capital requirements.
  • Banks often secure overdrafts by way of mortgage, hypothecation of stock/receivables, pledge of securities, or lien on fixed deposits.
  • For unsecured overdrafts, stricter eligibility norms and higher interest rates apply.
  • Interest is charged only on the utilized amount and not on the entire sanctioned limit.
  • Rates are linked to Repo Rate, MCLR, or External Benchmark Lending Rate (EBLR) as per RBI guidelines.
  • Additional charges may include processing fees, renewal charges, inspection charges, and penal interest on overdue amounts.
  • Overdraft facilities are governed by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949.
  • NBFC overdraft products are regulated under RBI Master Directions for NBFCs.
  • In case of default, recovery proceedings may be initiated under the SARFAESI Act, 2002, the Insolvency and Bankruptcy Code (IBC), 2016, or through Debt Recovery Tribunals (DRTs).
  • For companies, overdraft balances must be disclosed in financial statements as per the Companies Act, 2013, and Schedule III.

Our Firm’s Advisory in Overdraft Facilities

We provide end-to-end consultancy and support for availing and managing overdraft facilities, including:

Evaluating eligibility, preparing CMA data, and assisting in overdraft limit applications.

Drafting and reviewing loan agreements, collateral documentation, and security creation

Helping clients secure favorable interest rates, collateral terms, and flexible repayment conditions.

Assisting in annual renewals, limit enhancements, and compliance with bank inspections

Advisory in cases of default, restructuring under RBI frameworks, and representation in SARFAESI / IBC / DRT proceedings

Supporting clients in handling defaults, restructuring under RBI frameworks, and representation in DRT/IBC proceedings