Overdraft

An overdraft is a credit facility extended by a bank that allows an account holder to withdraw funds in excess of the available balance in their account — up to a pre-approved limit — effectively providing short-term, flexible credit on demand. Unlike a term loan with a fixed disbursement schedule and repayment timeline, an overdraft is a revolving credit facility where the borrower can draw down, repay, and redraw repeatedly within the sanctioned limit. Interest is charged only on the outstanding daily balance used, making it cost-efficient for borrowers who need short-term liquidity that fluctuates in amount and duration. In India, overdraft facilities are available against: fixed deposits (Loan Against FD — typically up to 90% of FD value at a small spread above the FD rate), securities (Loan Against Shares and Mutual Funds — with SEBI-regulated haircuts applied to collateral), salary accounts, and business current accounts. For equity investors in India, the Loan Against Securities (LAS) product — structured as an overdraft against pledged stocks and mutual fund units — provides liquidity without requiring the sale of investments. This is particularly valuable during market downturns when forced selling would crystallise losses — the overdraft facility allows investors to meet temporary cash needs while retaining their equity positions for eventual recovery.