What is overdraft and cash credit?

Overdraft is a facility which is available to current account holders mostly. In rare cases it can be provided to saving account holders. Let us understand this concept with the help of a situation. Suppose there is a person and he has a good relation with the bank and has good average balance in his current account from past 3-4 years and also maintained a good repo in the market so if sometimes he need more money than he actually has in his account then he can avail this overdraft facility. Banks will basically provide cash upto a certain limit, and this limit is decided by the bank and the customer and the customer can get this limit increased or decreased according the use. And this cash is provided for a period of few days only. But the interest charged on this credit is huge as compared to cash credit or other sources of credit because the bank has to keep some money in reserve so as in when the customer needs it, they can provide them.

Cash credit is another facility but to avail this facility the user has to open a new cash credit account separately. This credit works on collateral basically, to avail this credit customer provides inventories, receivables, or property as collateral and according the value of that collateral, bank will provide the customer with credit. But this credit should only be used for the business purpose only in contrast to overdraft where customer can use credit for any use.

This credit can be taken for a period upto 1 year. Interest rates charged is less than overdraft because bank knows exact how much they will give the customer based on the current value of collateral.