Bank Financing -- Overdraft Limit i.e. OD Limit........(Series 2)

Meaning of Overdraft Limit:

Overdraft (abbreviated as OD) Limit is a short term loan based on “Pay on Demand” concept. OD limit fulfills the short term requirement of funds for business concern as well as individual concern. In OD Limit, Bank or Financial Institution (known as lender) provide the facility to withdraw excess amount up to the OD Limit sanctioned by them.  In this situation the account is said to be "overdrawn". Therefore, OD account can have debit as well as credit balance also.

Lender transfers the sanctioned amount into OD Account from which borrower can withdraw funds as per its business as well as personal requirements. Therefore, under such financing scheme borrower is liable to pay interest only on the amount he has utilized on average basis during the month.

Security and margin for OD Limit: - Borrower is required to provide Security such as Residential/ Commercial property for availing OD limit. Lender shall provide the OD limit after deducting margin on the value of security i.e. 40% or 50% which may vary from lender to lender.

Apart from above mentioned security, lender also takes personal guarantee of the borrower and guarantor.

Calculation of Eligibility: - The amount of loan shall be calculated on the basis of Last two or three year income as shown in the Income tax return of the borrower or value of security after deducting margin, whichever is lower.

Benefits of OD Limit as compared to other forms of working capital financing :-

•      In OD limit borrower is not required to route its business transaction through the OD limit account       maintained with the lender.
•    Borrower shall not be required to submit stock, debtor and creditor statement to lender on monthly     basis.
•     In case of Cash credit arrangement of financing, lender will calculate drawing power limit (also             known as DP limit). Borrower is allowed to withdraw lower of DP limit or sanctioned amount             whearas in case of OD limit borrower is allowed to withdraw full amount of limit sanctioned as per      his  requirement.

n    In my next blog I shall write about difference between CC and OD limit.

For any queries you may drop a mail on aashish@akvassociate.com

CA  Aashish Gupta 

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