What is an Overdraft Facility against Fixed Deposits?

What is overdraft against FD facility?

You can use your FDs in multiple ways to meet financial requirements during a difficult time. Overdraft against FD is one such facility. An overdraft is a credit given to the individual against his fixed deposit. A loan or an overdraft (OD) against an FD is one of the quickest ways to borrow from the bank. In overdraft facilities against fixed deposits, you can withdraw from 75 percent to 90 percent of the fixed deposit value. The bank charges interest only on the actual amount withdrawn from overdraft and not on the entire limit of overdraft. The interest rates charged are 1 or 2 percent above the fixed deposit rates on your fixed deposit investment.

Let us understand the concept of overdraft against FD with the help of an example. Let’s say you have an FD of Rs 1 lakh with HDFC Bank earning 7% interest, with a maturity of three years. The bank is providing an overdraft limit of 90 percent on this FD i.e. Rs 90,000 at a rate of 8% p.a. You withdraw Rs 10,000 from the OD account, use it for 20 days, and then deposit the money back into the OD account. The bank will calculate interest on Rs 10,000 only for the period of 20 days which could work out to be Rs 43.

So, an OD against FD can be used as a regular liquidity instrument to meet a short-term requirement.

• It’s important to note, you cannot prematurely close the bank FD unless the overdraft against bank FD is repaid in full.
• The overdraft limit against fixed deposit (FD) and interest rates vary from bank to bank.
• Banks do not provide overdraft facilities against tax-saving fixed deposits as well as on recurring deposits.

When should you opt for overdraft against FD?

An overdraft against the FD facility is generally used for short-term needs or medical emergencies in the family. Suppose you have a financial crunch due to job loss or a cut in salary, then overdraft against FD is a recommended option to meet immediate financial needs or medical emergency in your family. This is available at a lower interest rate as compared to personal loans and pre-approved loans against credit cards. Overdraft facility against fixed deposits if used wisely can help you tackle your short-term financing needs smartly without liquidating the fixed deposit investment before maturity and paying the premature penalty.

Which banks offer an overdraft facility on fixed deposits?

Some public sector banks and private banks which include State Bank of India (SBI), HDFC Bank, YES Bank, etc. are providing overdraft facilities against Fixed Deposits online and from their bank branches.

Benefits of Overdraft Against FD

1. Overdraft against FD is available at a lower interest rate as compared to personal loans and pre-approved loans against credit cards.
2. You can use the fixed deposit overdraft facility wisely to meet your short-term needs.
3. The advantage of taking an OD against an FD is that you are charged interest only on the amount utilized from the OD, and the interest is calculated daily.
4. Another advantage of overdraft is that you don’t need to worry about monthly EMI obligations. You get the flexibility to deposit the outstanding amount at your convenience.
5. If your liquidity requirement is temporary, such as due to delay in salary, delay in payment, etc., then an OD against FD can prove to be one of the best borrowing tools.

A Word of Caution

You should have a disciplined approach while opting for an overdraft facility against FD. This is because many people misuse the funds as they are easy to withdraw against FD. Do not use the funds for speculative activities such as investing in equities as it may backfire and you suffer losses. If you lose in volatile equity markets, then you may have to settle the overdraft availed with interest payable from the invested amount in FD and will remain with a very small amount from the principal.