Overdraft Facility

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Overdraft facility is another kind of facility usually offered by Banks against a Fixed Deposit which is called secured Overdraft. Another kind of overdraft is an unsecured overdraft which is offered by Banks without any security or fixed deposit.

Such facilities are taken by people who are expecting a higher return of profit on the amount borrowed from Banks as the Bank charges a percentage higher than the interest rate offered. Eg: If a customer has deposited AED 100,000 at an interest rate of 2.5% and has requested the Bank for an overdraft facility, the Bank charges 2% over and above the interest rate paid to customer. So the interest that will be charged to customers on the overdraft facility will be 4.5% p.a.

Individuals or companies expecting a return of 7-8% generally goes for such facilities or people who are in urgent need of money but does not want to liquidate their fixed deposit avail these facilities. If a fixed deposit is uplifted, the Bank would charge an amount for such liquidation explained in details in my previous article about fixed deposits.

Unsecured overdrafts are risky for Banks as they do not guarantee repayments, in case of a secured overdraft if the customer fails to repay the amount, Bank has the right to setoff the outstanding against the fixed deposit held as generally the amount of overdraft is less than or equal to the amount of fixed deposit which also earns interest.

This facility is provided directly in the customers account and can be withdrawn using the channels provided by the Bank and can be used to send remittances as well.