The full form of OD in banking is Overdraft. An overdraft is a financial facility offered by banks that allows customers to withdraw more money than what is available in their bank account, up to a certain approved limit. It is one of the most popular short-term credit options for individuals, businesses, and self-employed professionals who need emergency funds or working capital support.
What Is an Overdraft (OD)?
An overdraft is a credit facility linked to a bank account. When a customer uses more money than their account balance, the bank covers the extra amount and charges interest only on the amount utilized. This makes OD a flexible borrowing tool compared to personal loans or credit cards.
The overdraft limit is decided by the bank based on factors like income, credit score, relationship with the bank, and account type. For businesses, the limit is usually based on turnover, financial statements, and business history.
Types of Overdraft Facilities
Banks offer different types of overdraft facilities to meet specific customer needs:
- Personal Overdraft: Linked to a savings or salary account.
- Business Overdraft: Designed for business accounts to support working capital and cash flow.
- Overdraft Against FD (Fixed Deposit): Customers can get an OD up to 90% of their FD value at low interest rates.
- Property Overdraft: Offered against residential or commercial property.
- Security-Based Overdraft: Given against shares, insurance policies, or bonds.
Each type has different requirements, interest rates, and flexibility depending on the collateral and customer profile.
Key Features of OD in Banking
- Interest Only on Used Amount: Unlike loans where interest is charged on the full amount, OD interest is calculated only on the utilized portion.
- Flexible Withdrawals and Repayments: Customers can repay anytime and reuse the limit as needed.
- No Fixed EMI: OD does not require EMIs; only interest must be paid periodically.
- Short-Term Credit: Ideal for handling sudden expenses, cash flow gaps, or business emergencies.
Benefits of an Overdraft Facility
Overdrafts offer several advantages:
- Provides instant liquidity
- Helps manage unexpected financial needs
- Encourages business continuity
- Offers lower interest rates compared to credit cards
- Comes with the convenience of withdrawing funds anytime
Conclusion
OD, or Overdraft, is a practical and flexible banking facility that helps individuals and businesses manage short-term financial requirements. With its easy accessibility, interest-on-use benefit, and multiple types, OD remains an essential financial tool in the Indian banking system.