Differences between Overdraft and Cash Credit
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However, if going by the strict definitions, the two terms differ as follows:
1. Overdraft means the situation when you are permitted to withdraw funds from your account more than the balance you hold in your account. That is why it is called 'overdraft'. It is granted in your savings or current accounts because you have credit balances in these accounts. So, if you need excess funds, the bank may permit you to overdraw it up to a certain limit. Cash Credit is a kind of loan facility for which separate account is opened.
2. As you can understand from the above point, an overdraft facility is temporary in nature for say 15 days or 30 days because it is allowed in a deposit account (Savings/Current) whereas a Cash Credit facility is permanent in nature granted perpetually and renewed every year because it is allowed as a loan in a separate account.
3. A cash credit facility is secured by assets of the business such as stocks, debtors, receivables, current assets, fixed assets, immovable property etc. whereas an overdraft facility is secured by more liquid assets such as FDRs, NSCs, KVPs, Gold ornaments, Insurance policies, shares & debentures, bonds, corporate deposits etc.
4. An overdraft account is generally a deposit account and will turn into negative (debit) only when you overdraw the account whereas a cash credit account is mostly in negative. You don't hold your own balance in that account. Whenever you start utilizing the account, the balance will dip into negative. It is another matter that sometimes the account may turn into positive i.e. credit balance when you have excess funds. But CC account is not expected to remain in positive.
After going through the above, you must have understood that the working capital facility your clients enjoy is mostly a CC limit. Still, the bankers use both the terms for same type of facility. So, just enjoy whatever it is called.
I hope I have been reasonably clear in expressing myself and it will be helpful for my friends in having an enhanced understanding of the two terms. Any further query from anyone is always welcome.
CA Mahesh Bansal
9716263569
Category : Banking | Comments : 1 | Hits : 2611
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Comments
SUMIT RANJAN
01-Sep-2016 , 11:24:46 amThx o lot sir for giving us a brief but to the clarity on this topic. Sometimes it is asked in interviews also.