Overdraft facility allows the customer to withdraw the money even if the amount to be withdrawn is in excess of the credit balance available. This facilitates the customer to honor the payment to be made to the party though the account may not have sufficient balance. The maximum overdraft limit is sanctioned by the bank and is agreed upon by the customer. The excess amount withdrawn is charged interest upon and must be settled by the customer on demand from the bank.
Based on the security provided to the bank, a certain limit is fixed to the extent of which the customer is allowed drawing. The securities which are preferred by the banks or lending institutes.
Over Draft against Pledge of securities :
A customer offers a kind of collateral security in terms of shares or mutual fund units or bonds to the bank or lending institute to obtain overdraft facility. The bank can sell or liquidate these securities to cover up the overdrawn amount and the interest thereon if a customer fails to settle the obligation.
Overdraft Against Insurance Policy :
Insurance Policy is another type of security against which Overdraft facility can be obtained. The bank or lending institute determines the actual amount of premium paid and the amount on maturity to set the Overdraft limit. In case of the death of customer the overdrawn amount is recovered from the claim settlement from the Insurance Company.
Overdraft against Property :
Property can also be mortgaged with the bank or lending institute to get overdraft facility. Properties generally have appreciating value in the market and hence are preferred as securities. On defaulting on the settlement of overdrawn amount the bank or lending institute may sell the property to recover the overdrawn amount with interest thereon and balance, if any, is returned to the customer.
Overdraft against Receivables :
Any kind of authenticated receivables like Bills Receivable, Rent Receivables can be the taken as security for the overdrafts. The proceeds of all receivables are routed through the overdraft account and immediately settled against the overdrawn amount. However drawings can be allowed against fresh receivables. Thus the amount of receivables remains as a continuing security for all drawings. The bank or lending institute ensures that no other loan or obligation is availed by the customer using the same receivables. The amount of receivables and the time required to honor or materialize the receivables are the key factors to determine the limit of overdraft.
Overdraft against Stock ;
Traders and manufacturers prefer availing the CASH CREDIT facility against the stock. The value of the stock of goods is assessed by the bank or lending institute and against; the cash credit limit is sanctioned. The amount is gradually settled against the amount of sale of the stock. The value of stock is assessed by physically verification and from the purchase invoices and is ensured that it is fully paid for. The bank will fix a margin amount that has to be brought by the borrower.
Overdraft against Gold :
Gold can be immediately converted into cash and has always increasing value. This makes the gold one of the most preferred security to obtain the overdraft facility. Banks or lending institutes assess the cost of gold offered by the customer as security and determine the limit of overdraft. Once the gold is assessed by the bank or lending institute the overdraft the sanctioning process can be completed quickly.
Overdraft against Car:
Car is also a security accepted by the bank or the lending institute to provide overdraft/loan facility. In this case the amount of loan is determined from the purchase invoice and in case of used car the value of car is determined by the approved valuer appointed by the bank or lending institute to determine the limit of overdraft/loan. The car or vehicles have depreciating values and hence the loan amount is determined by keeping a margin as decided by the bank.
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