Overdraft Facility in India: Meaning, Types, Benefits & How to Apply

Ever run out of money just before your salary gets credited? Or faced an urgent bill you weren’t prepared for? That’s where an Overdraft Facility steps in as your financial backup. It allows you to borrow money from your bank account, even when your balance hits zero, and you only pay interest on the amount you use.

In this blog, let’s break down what an overdraft is, how it works, its benefits, types, and how you can apply for one easily in India.

What is an Overdraft Facility?

An Overdraft (OD) facility is a financial tool provided by banks that allows you to withdraw more money than what is available in your bank account, up to a pre-approved limit. This limit is usually based on your income, credit score, or collateral.

It works like a short-term loan, but with more flexibility. The best part? You only pay interest on the amount you use, not on the entire limit.

Why Choose an Overdraft Facility?

Now, let's explore the 5 ways an Overdraft Facility can be a powerful tool for managing your cash flow, both for individuals and businesses:

1. Bridging Temporary Cash Flow Gaps: Life throws curveballs. Unexpected expenses like a sudden medical bill, urgent home repairs, or critical car maintenance can leave you temporarily short on funds. An overdraft facility can act as a bridge, allowing you to meet these obligations without disrupting your regular financial commitments or resorting to more expensive loan options.
2. Smoothing Out Income Fluctuations: For businesses, especially those with seasonal income or clients with varying payment cycles, an overdraft facility can be invaluable. It helps in managing day-to-day operational expenses like salaries, vendor payments, and utility bills, even when income is temporarily low. This ensures smooth operations and prevents disruptions.
3. Taking Advantage of Immediate Opportunities: Sometimes, a great investment or business opportunity arises that requires immediate funds. An overdraft facility can provide quick access to the necessary capital, allowing you to seize the opportunity without waiting for long loan approval processes.
4. Avoiding Penalties and Late Fees: Missing payments due to temporary cash shortages can lead to hefty penalties and damage your credit score. An overdraft facility ensures that essential payments go through on time, preventing these unnecessary costs and maintaining a healthy financial record.
5. Flexibility and Convenience: Unlike traditional loans that often come with fixed repayment schedules, an overdraft facility offers greater flexibility. You can repay the overdrawn amount as and when funds become available, either in a lump sum or in smaller instalments. This convenience makes it a more adaptable solution for short-term financial needs.

How It Works: A Quick Example

Imagine you have ₹1,000 in your account but need to pay ₹1,500 for a car repair. With an overdraft limit of ₹1,000, the bank allows the payment to go through, leaving your account at -₹500. You’ve borrowed ₹500 through the overdraft, and interest applies only to this amount until you repay it. It’s like borrowing with the freedom to use and repay on your terms.

Pro Tip: Interest is charged daily on the overdrawn amount, so paying it back quickly can save you money.

Types of Overdraft Facilities: Find the Right Fit

Not all overdraft facilities are the same. Here’s a quick look at the main types:

• Personal Overdraft Facility: This service is available exclusively to customers holding either a savings or a current account. The limit is usually based on factors like income, credit history, and the relationship with the bank.
• Business Overdraft Facility: Designed for businesses, this type often comes with higher limits and can be tailored to the specific needs of the business, considering factors like turnover, cash flow projections, and creditworthiness.
• Secured Overdraft Facility: In this case, the overdraft limit is secured against an asset, such as a fixed deposit, property, or shares. This usually allows for a higher overdraft limit and potentially a lower Overdraft Facility Rate of Interest compared to unsecured options.
• Overdraft Facility on Fixed Deposit: This is a secured overdraft facility, with your fixed deposit serving as the guarantee. It's often easier to obtain as the bank already holds your funds. The Overdraft Facility Rate of Interest on fixed deposits is typically a few percentage points higher than the interest rate you earn on the deposit.

Did You Know? In India, overdrafts against fixed deposits are popular because FDs are a trusted savings tool, letting you access funds without breaking your deposit.

Understanding the Costs: Overdraft Facility Rate of Interest and Other Charges

While an overdraft facility offers significant benefits, it's crucial to be aware of the associated costs:

• Interest Rates: Interest is charged daily on the overdrawn amount. Rates vary by bank, facility type, and your credit profile. For example, secured overdrafts (8.5–12% p.a.) are cheaper than unsecured ones (11–17% p.a.).
  • Example: Overdrawing ₹10,000 at 12% p.a. costs ₹3.29 daily in interest.
• Processing Fees: Some banks charge a one-time fee when setting up or renewing the facility.
• Annual Maintenance Charges: You may pay a yearly fee, even if you don’t use the overdraft.
• Penalty Charges: Exceeding your limit or delaying repayment can trigger extra fees.

Pro Tip: Compare interest rates and fees across banks to find the most cost-effective option.

Eligibility & Documents Required for Overdraft Facility

To apply for an overdraft facility in India, you must meet the following criteria and submit the required documents:

Eligibility Criteria:

• Must be an Indian citizen
• Age between 21 to 65 years
• Should have a stable income source (salaried or self-employed)
• Good credit history (CIBIL score preferably above 700)
• Must have an active savings or current account with the bank

Documents Required:

• Identity Proof: Aadhaar, PAN Card, or Passport
• Address Proof: Aadhaar, utility bills, etc.
• Income Proof: Latest salary slips or ITR (for self-employed)
• Bank Statement: Last 6 months' account statement
• Collateral Documents (only for secured overdrafts): FD receipt, LIC policy, property papers, etc.

How to Apply for an Overdraft Facility?

Ready to get started? Follow these steps:

1. Contact Your Bank: Reach out to your bank, where you already have an account, to discuss overdraft options.
2. Explore Options: Ask about available facilities, eligibility, interest rates, and fees to find the best fit.
3. Complete the Application: Fill out the form, specifying your desired limit and financial details.
4. Submit Documents: Provide identity proof, income statements, bank statements, and collateral details (if secured).
5. Await Approval: The bank reviews your application and sets a limit if approved.
6. Start Using: Once activated, you can use the overdraft up to the sanctioned limit.

For secured overdrafts, the bank will also value your collateral.

Overdraft Facility in India: The Current Scenario

The Overdraft Facility in India is a widely offered and increasingly popular financial tool. Banks across the country, both public and private, provide various types of overdraft facilities tailored to different customer segments. The regulatory framework by the Reserve Bank of India (RBI) ensures that these facilities are offered responsibly and transparently.

The demand for overdraft facilities has grown, especially among small and medium-sized enterprises (SMES) looking for flexible working capital solutions. Individuals also find it useful for managing unforeseen expenses. The increasing awareness and accessibility of these facilities are making them an integral part of the Indian financial landscape.

Current Overdraft Rates in India 2025

Choosing the Best Overdraft Facility in India

Determining the Best Overdraft Facility in India depends on your individual or business needs and circumstances. Before making a decision, keep these important factors in mind while evaluating various choices:

• Interest Rates: Compare the Overdraft Facility Rate of Interest offered by different banks. Even a small difference in the interest rate can have a significant impact on the overall cost, especially if you anticipate using the facility frequently or for larger amounts.
• Fees and Charges: Look beyond the interest rate and consider all associated fees, such as processing fees, annual maintenance charges, and any potential penalty charges.
• Overdraft Limit: Assess whether the overdraft limit offered meets your potential needs. Different banks offer varying limits based on eligibility criteria.
• Flexibility and Repayment Terms: Understand the repayment terms and how flexible they are. Can you repay in instalments or only in a lump sum? Are there any prepayment penalties?
• Customer Service: A responsive and helpful customer service team can be crucial, especially if you have any queries or issues related to your overdraft facility.
• Eligibility Criteria: Ensure that you meet the eligibility criteria of the bank offering the facility.

It's always a good idea to compare offers from multiple banks before deciding to find the best overdraft facility in India that suits your specific requirements.

Secured Overdraft Facility: Leveraging Your Assets

As mentioned earlier, a Secured Overdraft Facility is backed by collateral. This can be a valuable option if you have assets like fixed deposits, property, or shares. Here's why it can be advantageous:

• Higher Overdraft Limits: Since the facility is secured, banks are generally willing to offer higher overdraft limits compared to unsecured options.
• Potentially Lower Interest Rates: The risk for the bank is lower with a secured overdraft, which can translate to a more favourable Overdraft Facility Rate of Interest.
• Easier Approval: If you have valuable assets, the approval process for a secured overdraft might be quicker and easier, even if your credit history isn't perfect.

However, it's crucial to understand the risks involved. If you fail to repay the overdrawn amount, the bank has the right to seize and sell the collateral to recover its dues.

Frequently Asked Questions (FAQS)

Q1. Is overdraft better than a personal loan?

Answer: It depends. An overdraft is better for short-term needs or fluctuating cash requirements since you only pay interest on what you use. Personal loans are better for larger, fixed expenses with longer repayment terms.

Q2. How is interest calculated on an overdraft?

Answer: Interest is charged daily on the overdrawn amount, not on the entire sanctioned limit. Rates vary by bank and the type of overdraft.

Q3. Can I get an overdraft without a salary account?

Answer: Yes, but it may depend on the bank. Some offer overdraft against FDS, LIC policies, or mutual funds even without a salary account.

Q4. What happens if I don’t repay my overdraft on time?

Answer: Delayed repayment can lead to penalty charges, increased interest, and damage to your credit score.

Q5. Can I apply for an overdraft facility online in India?

Answer: Yes, most major banks like SBI, HDFC, and ICICI offer online applications for overdraft through internet banking or mobile apps.

Concluding Thought

To conclude, an overdraft facility is a powerful and versatile financial tool that can significantly enhance your ability to manage cash flow effectively. Whether you're an individual dealing with unexpected expenses or a business navigating fluctuating income, it provides a flexible and convenient way to access funds when you need them most.

By understanding What is Overdraft Facility, how it works, the different types available (including the Overdraft Facility Loan and Overdraft Facility on Fixed Deposit), the associated costs like the Overdraft Facility Rate of Interest, the Eligibility for Overdraft Facility, and the process to Apply for Overdraft Facility, you can make an informed decision about whether it's the right financial solution for you. Some businessmen also choose to go for a loan against property to manage operational expenses.

While it offers numerous benefits, it's essential to use an overdraft facility responsibly. Keep a close eye on the outstanding balance and the interest accruing to avoid unnecessary costs. When used judiciously, an overdraft facility can be a valuable asset in maintaining financial stability and seizing opportunities. Always compare the options to find the best overdraft facility in India that aligns with your unique financial needs.

Author: Rajesh Mishra

Rajesh Mishra is a professional and multilingual writer with over 12+ years of versatile experience in content writing.

He has crafted compelling narratives across a diverse array of industries, including BFSI, fintech, IT, pharmaceuticals, e-commerce, education, fashion, and more. He is a commerce graduate from Mumbai University. His strong academic foundation and passion for storytelling enable him to engage audiences and deliver impactful content.

 

He is adept at transforming complex concepts into clear, relatable language, making his work accessible to both, industry professionals and everyday readers. He thrives in dynamic environments, leveraging his extensive knowledge to create articles, blogs, whitepapers, and marketing materials that resonate with target audiences. Driven by a commitment to excellence and a keen eye for detail, Rajesh Mishra continuously explores emerging trends and technologies, ensuring his content remains relevant and thought-provoking.