Overdraft means allowing the customer to draw cheques over and above credit balance in his account. Overdraft is usually allowed to Current Account Customers and in exceptional cases SB A/c holders are also allowed to overdraw their account. The high rate of interest is charged on the daily debit balance of overdraft account. There are two types of overdraft accounts are prevalent in Banks i.e. (i) Temporary overdraft or clean overdraft (ii) Secured overdraft. Temporary overdrafts are allowed purely on the personal credit of the party and for the party to meet some urgent commitments on rare occasions. Allowing a customer to draw against his cheques sent in clearing also falls under this category. Secured overdraft is allowed up to a certain limit against some tangible security like bank deposits, LIC policies, National Saving Certificates, shares and other similar assets. Secured overdraft is most popular with traders as lesser operating cost, simple application and document formalities are involved in this facility.
The Cash Credit Limits are sanctioned by the banks to meet the working capital requirements of their customers which will be reviewed and renewed on the annual basis. Cash Credit is a running account just like a current account where the borrower is allowed to draw funds with debit balance up to a drawing power fixed by the bank based on the current assets like raw materials, semi-finished goods, finished goods and book debts etc., held or the sanctioned limit whichever is low. The level of limit for the facility will depend upon on the nature of current assets less suitable margin, within the overall permissible bank finance. The limits are renewed or enhanced/reduced based on assessment of customer’s actual working capital requirement. Customer has to submit periodic Stock statements to the bank for arriving drawing power which will be normally once in a month. In some cases customers, mainly traders find it difficult to maintain the stock register and submitting periodic stock statements. For such customers also OCC facility is provided by banks against pledge of gold jewellary, assignment of Life policies, or against security of customer’s deposit in the same bank. When prime security is jewels, life policies, NSCs or bank deposits there is no need to submit periodic stock statements. The cash credit facility against stocks is extended by the banks in two different methods viz. Open Cash Credit (OCC) and Key Cash Credit (KCC). The CC limit against hypothecation of stocks and receivables is called Open Cash Credit and CC limit sanctioned against goods pledged by the borrower is called Key Cash Credit.
Related articles: (Category- Loans and Advances)
- Difference between first charge and second charge
- Difference between Prime and Collateral security
- Meaning of fixed charge, floating charge, and crystallization of charge
- Difference between Open Cash Credit and Key Cash Credit facilities
- Difference between Leasing finance and Hire-Purchase finance
- Difference between loans and advances in bank finances
- Difference between Demand Bills Purchase and Usance Bills Discount
