What is the Meaning of Bank Over Draft?

 

Bank Overdraft is a short-term credit facility provided by a bank that allows an account holder to withdraw more money than the actual balance available in their current/checking account, up to a pre-approved limit. It essentially acts as a flexible, short-term loan attached to a bank account, used to meet temporary cash shortfalls.

In simple terms: If you have ₹10,000 in your bank account but need to make a payment of ₹15,000, an overdraft facility allows you to withdraw the extra ₹5,000 (up to your sanctioned limit), even though your account balance is technically insufficient — the account simply goes into a negative balance.

Key characteristics:

1.    Pre-sanctioned limit – The bank sets a maximum overdraft limit based on the account holder's creditworthiness, relationship with the bank, turnover, or collateral offered

2.    Interest charged only on amount utilized – Unlike a term loan (where interest is charged on the full sanctioned amount), overdraft interest is charged only on the amount actually withdrawn/used, and only for the period it remains outstanding

3.    Flexible repayment – No fixed EMI schedule; the account holder can deposit money back into the account anytime to reduce or clear the overdrawn balance

4.    Revolving facility – Once repaid, the same limit becomes available again for future use (similar to a credit card)

5.    Linked to a current account – Typically available on current accounts (mainly used by businesses), though some banks offer overdraft facilities on savings accounts too, often against fixed deposits or other collateral

Types of Overdraft:

Type	Meaning
Secured Overdraft	Backed by collateral (fixed deposits, property, securities, inventory, etc.)
Unsecured/Clean Overdraft	No collateral required; based purely on the account holder's creditworthiness and banking relationship
Temporary Overdraft	A short-term, occasional overdraft allowed by the bank for a specific, immediate need (may not be pre-sanctioned)