Overdraft Facility for Business in India: How OD Limits Work

An overdraft (OD) facility is one of the most flexible credit products a business can hold. It lets you draw more than your current account balance, up to a pre-approved limit, and pay interest only on the amount you actually use. For businesses with uneven cash flows, it is often more practical and cost-effective than a term loan.

Here is how OD facilities work in India, what they cost, and how to get one.

What Is an Overdraft Facility?

An overdraft is a revolving credit line attached to your current or savings account. The bank approves a limit (say, Rs 25 lakh) and you can draw up to that amount at any time. As long as your account is within the limit, you are not in default. You pay interest daily on the exact amount by which your account is overdrawn.

RBI classifies OD facilities as fund-based working capital finance. They are reviewed annually and renewed based on your account behavior and business performance.

Types of Overdraft Facilities

• OD against property (LAP-OD): Secured against residential or commercial property. Offers the highest limits at the lowest rates (8 to 14% per annum).
• OD against fixed deposit: Secured against your FD. Rate is typically FD rate plus 1 to 2%. Very quick to process.
• OD against shares/MFs: Secured against your equity portfolio or mutual fund holdings. Available at most private banks.
• Unsecured OD (business OD): Based on current account transactions and business financials. Higher rate (14 to 22% per annum) but no collateral needed.

Interest Rates

OD Type	Bank	Rate (per annum)
OD against property	SBI / HDFC / ICICI	8.50% to 13.50%
OD against FD	All major banks	FD rate + 1% to 2%
Unsecured Business OD	HDFC / Axis / Kotak	14.00% to 22.00%

Eligibility

• All business entities with an active current account.
• Minimum 1 to 2 years of banking relationship with the lender preferred for unsecured OD.
• Audited financials and ITR required for unsecured OD above Rs 10 lakh.
• For secured OD: relevant collateral (property, FD, shares) with clear title.
• CIBIL score above 700 for unsecured OD; lower threshold acceptable for secured variants.

Documents Required

• Current account statement for the last 6 to 12 months
• Business registration documents
• GST returns for the last 6 months
• Financial statements for the last 1 to 2 years (for unsecured OD)
• Property documents, FD receipts, or demat statement (for secured OD)
• KYC of the business owner

Application Process

1. Start with your current bank. Banks are most comfortable offering OD to existing current account holders with a strong banking track record. 12 to 24 months of clean account history is a powerful credential.
2. For secured OD, get property or FD valuation done. The bank will send a technical officer to value the property. FD-based OD is processed in 1 to 2 days.
3. Submit your financial documents. CA-certified financials and up-to-date GST returns speed up the process significantly.
4. Bank sets the limit and activates the OD. Once approved, the limit shows up on your net banking. You can draw against it any time.
5. Review and renew annually. Banks require annual renewal of OD limits. Submit updated financials each year to maintain or increase the limit.

How to Use OD Efficiently

• Only use the OD for genuine short-term cash flow gaps, not for long-term funding needs. Term loans are cheaper for that purpose.
• Ensure the OD balance is not continuously at the maximum limit. Banks interpret a perpetually maxed-out OD as a sign of financial stress and may reduce the limit at renewal.
• Pay down the OD balance whenever you receive customer payments. This reduces your daily interest burden.

FAQ

Is interest on an overdraft facility charged monthly or daily?

Interest is calculated daily on the outstanding OD balance and typically debited to your account monthly. Since it is calculated on the actual amount used each day, your monthly charge can vary based on how much you draw and for how long.

Can I convert my OD facility to a term loan?

Yes. If you find that you are consistently using the full OD limit and repaying over 12 to 24 months, converting it to a term loan at a fixed rate may be cheaper overall. Discuss this with your relationship manager.

What happens if I exceed my approved OD limit?

Transactions that would take your account beyond the approved limit are typically rejected, similar to a bounced cheque. Some banks may allow a small temporary overdrawing (beyond limit OD) with a penal rate. Repeated limit breaches can negatively affect your credit profile.