What Are The Characteristics Of An Overdraft?

An overdraft is a fluctuating or running account wherein a customer arranges with his bank to permit him to overdraw his account upto a fixed limit for a short period. When the overdraft facility is given against collateral security it is called secured over draft.  And when it is against personal security it is named as clean draft.

The granting of overdraft facility to a customer is advantageous to both the parties the customer and the bank. The customer is able to meet the working capital requirements of the business. The customer gets the facility to overdraw his account as and when the need arises upto the approved limit. Whenever the customer has surplus funds, he may pay such funds into the current account to reduce or even to settle overdraft balance. Since it is a running finance there are no restrictions on drawing more than once provided the total amount overdrawn does not exceed the agreed limit. The interest is charged only on the amount actually overdrawn. A cheques book is issued in an overdraft or running account.

The strength of a bank is primarily judged by the soundness of the advances. Since the overdraft facility is given to its customer for shorter period of time.