Overdraft (OD) and Cash Credit (CC) accounts are financial instruments provided by banks to individuals and businesses to meet short-term liquidity needs. Both are types of working capital finance, but they differ slightly in their structure and usage.
1. Definition and Purpose
- Overdraft (OD):
- A facility where a customer can withdraw more money than what is available in their bank account, up to a pre-approved limit.
- Primarily designed for short-term personal or business liquidity needs.
- Often linked to a savings or current account.
- Cash Credit (CC):
- A working capital loan granted to businesses to fund daily operations like purchasing raw materials, paying wages, etc.
- Typically associated with a separate loan account, not directly linked to the primary bank account.
2. Eligibility
- Overdraft:
- Salaried individuals, self-employed professionals, and businesses.
- Requires a strong credit history or collateral, such as fixed deposits or property.
- Often extended to existing customers with a significant banking relationship.
- Cash Credit:
- Businesses with consistent turnover and a good track record.
- Requires submission of financial statements, stock statements, and sales records to assess the working capital needs.
3. Limit and Security
- Overdraft:
- Limit depends on factors like account history, income, or collateral value.
- Secured or unsecured, depending on the terms of the bank.
- Cash Credit:
- Limit is based on the working capital cycle and is often secured by hypothecation of stock, receivables, or other assets.
- Renewal is usually required annually, with periodic submission of business performance details.
4. Interest Rates and Charges
- Overdraft:
- Interest is charged only on the utilized amount, not the entire approved limit.
- Rates are slightly higher compared to regular loans and vary depending on whether the facility is secured or unsecured.
- Includes other charges like processing fees and renewal fees.
- Cash Credit:
- Interest is calculated on the daily closing balance of the account.
- Rates are linked to the Marginal Cost of Funds-based Lending Rate (MCLR) and are often slightly lower than overdraft rates.
- Additional charges include documentation fees, inspection charges, and renewal fees.
5. Tenure
- Overdraft:
- Usually sanctioned for a year, with the option of renewal.
- Flexibility to repay and reborrow within the limit during the tenure.
- Cash Credit:
- Typically renewed annually based on the performance and requirements of the business.
- Meant for ongoing operational needs rather than long-term financing.
6. Usage
- Overdraft:
- Used for personal expenses, emergency cash needs, or minor business cash flow gaps.
- Provides flexibility without having to liquidate investments.
- Cash Credit:
- Specifically for funding the working capital cycle of businesses, like managing inventory and receivables.
- Not intended for capital expenditures or fixed asset purchases.
7. Documentation
- Overdraft:
- Identity and address proof.
- Income proof for individuals and financial statements for businesses.
- Collateral documents (if secured).
- Cash Credit:
- Detailed project report or business plan.
- Financial statements, including balance sheet, profit & loss account, and cash flow statements.
- Stock and receivable statements for periodic review.
8. Key Benefits
- Overdraft:
- Quick access to funds for emergencies or temporary needs.
- Interest is charged only on the utilized amount, providing cost efficiency.
- Flexibility to use and repay as per convenience.
- Cash Credit:
- Essential for businesses to maintain a steady working capital cycle.
- Helps businesses avoid liquidity crises and keep operations running smoothly.
- Easier renewal process if the business demonstrates consistent performance.
9. Risks and Challenges
- Overdraft:
- Risk of over-borrowing if not managed prudently, leading to high-interest costs.
- May affect credit score if repayments are delayed.
- Cash Credit:
- Over-utilization of the limit can lead to financial stress.
- Requires periodic submission of stock and receivables data, increasing administrative burden.
Comparison Table: Overdraft vs. Cash Credit
| Aspect | Overdraft (OD) | Cash Credit (CC) |
|---|---|---|
| Purpose | Personal/Business Liquidity | Business Working Capital |
| Tenure | 1 Year (Renewable) | 1 Year (Renewable) |
| Interest | On utilized amount | On daily balance |
| Security | Optional (Secured/Unsecured) | Typically secured |
| Associated Account | Savings/Current Account | Separate Loan Account |