Overdraft means the act of overdrawing money from the bank account. Bank Overdraft is a facility provided by the bank to its customers withdraw money more than the amount he holds in his account. The overdraft limit sanctioned is predefined by the bank depending upon the securities pledged or repayment capacity of the Account holder. The drawing limit is specified by the bank or financial institution may vary from bank to bank and borrower to borrower. Interest is charged on the amount utilized not on the limit sanctioned. Amount withdrawn above the specified limit will be subject to additional charges. Overdraft Facility can be used for any purpose and not necessarily for business.
The overdraft are repayable on demand i.e. the bank has the right to call the money lent to the customer at short notice. Cheque book is provided to the account holder to operate these account.
Overdraft facility is allowed for a very short duration at times (Say a month or even for a week in some cases), but can be allowed for a period of up to 1 year.