Unexpected expenses or temporary cash flow shortages can disrupt financial stability and create challenges in managing everyday expenses. Overdraft facilities, offered under Bank Accounts, provide a valuable safety net by allowing account holders to withdraw funds that exceed their available balance up to a fixed limit. Let us understand the concept of overdraft facility better through this guide.

How do overdraft facilities work?

An overdraft facility is a financial arrangement provided by banks that allows account holders to withdraw funds from their Current Account, even if the account balance is insufficient. When a transaction exceeds the available balance, the bank covers the shortfall by extending credit to the account holder. Overdrafts are subject to prearranged limits, interest charges, and other fees laid down by the bank.

Overdraft facility benefits

Flexible finances

Overdraft facilities provide account holders immediate access to funds when needed, offering flexibility to cover unexpected expenses or handle temporary cash flows. This flexibility can be valuable during emergencies or unforeseen circumstances.

No returned payments

Overdrafts allow accountholders to avoid the inconvenience and potential penalties associated with returned payments, like bounced cheques or declined electronic transactions. By covering transactions that would be rejected otherwise due to insufficient funds, overdraft facilities ensure smooth and uninterrupted banking operations.


Overdraft facilities offer convenience and peace of mind by removing the need to maintain a large balance in the account to cover occasional shortfalls. Account holders can handle their finances more efficiently without constantly worrying about maintaining a specific balance.

Associated considerations and charges

While overdraft facilities provide valuable benefits, you need to understand certain factors and related fees:

Interest charges

Banks typically charge interest on the amount borrowed through an overdraft facility, calculated on the outstanding balance and the overdraft duration. The interest rates may vary between banks and the terms of the overdraft agreement.

Overdraft fees

Besides interest charges, banks may impose overdraft fees for each transaction that exceeds the available balance. These fees accumulate quickly, so be aware of the bank's fee structure and policies regarding overdrafts.

Credit checks and approval process

Banks may do a credit check and assess your creditworthiness before granting an overdraft facility. The approval process depends on factors such as income, credit history, and banking relationship.


You can consider overdraft facilities when you open a Bank Account. It offers a valuable lifeline for account holders facing temporary financial challenges or unexpected expenses. By providing immediate access to funds beyond the available balance, overdrafts enhance financial flexibility and convenience. However, you need to use this feature responsibly, considering the associated costs and risks.