Bank Overdraft: Understanding latest Dynamics and Principles
Bank overdraft is a leading practice in banking that has brought succor to sudden financial challenges of persons and business organizations as the case may be.
This aspect of financial services has been well utilized by majority who knows its importance in combating immediate and urgent financial stress.
What exactly is Bank overdraft?
For the benefit of readers who may not have come across this: Bank overdraft is a kind of financial leverage/advantage a bank or financial institution offers its current and corporate account holders to access fund which will enable them surmount their immediate financial challenges.
The said amount given as overdraft is higher than the prevalent balance in the customer’s account as at the time of issuance. Over draft however comes with certain charges as the benefit is not totally free. It however avails the customer an opportunity to pay back in the future at his own pace.
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For a customer to access a bank overdraft, he must have a sound financial turn over with the bank over time to win a trust, otherwise certified as goodwill in business. In essence, bank will grant an overdraft to a customer who by every implication has the ability to pay back.
Example: Say Donatus & co Ltd has a corporate account with Wonder Enterprise bank Plc, by business relationship the owner of this company Mr Donatus has been in active business with Wonder Enterprise bank for some time now. During the cause of business Mr Donatus has continuously maintained a good financial turn over with the bank, and possibly has a fix deposit to the sum of N100 million with the bank.
The relationship has been sound, Mr Donatus suddenly gets in need of N150 million to pay his merchant in China who needed the money before he can release his goods to Nigeria.
Mr Donatus approaches the bank with a request to avail him a bank overdraft of N150 million which he will settle thereafter. The bank kindly made provision for his demand of the said overdraft being that from financial outlay and cash flow, he has the ability to pay back.
BANK OVERDRAFT REQUIREMENTS
To every bank business activities, there has been procedures and policies put in place to provide orderliness, sequence as well checkmate irregularities in process making. The following are requirements a customer should meet to access bank overdraft:
- The customer should have a current or corporate account with the bank.
- He should have run the account actively for at least six months before application.
- During the period of this six months, his financial outlay and turn over should justify that he’s capable of managing the amount he sought to have in overdraft.
- There should be a collateral in place to the tune of at least 150% of the bank overdraft.
- He writes an application and submit through the relationship officer who in turn presents the business to the branch Manager. If the Manager confirms Ok and all parameters in place, the relationship officer goes ahead to process the facility.
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RESPONSIBILITY OF THE BANK BEFORE GRANTING A BANK OVERDRAFT
- Credit risk management search (CRMS), it is the duty of the bank to do a credit risk management search on the customer, this is to ensure the customer in question is not defaulting overdraft or owing any other bank in like manner. In a situation where the customer owes any other bank, the request for bank overdraft will be turned down.
CHARGES/FEE ON BANK OVERDRAFT
Be good to understand that the bank is in the business of making money, thus nothing goes for free. Have it at the back of your mind that the bank will charge certain percentage on overdraft as follow:
- The bank will charge 1% management fee.
- 25% processing fee. This could vary according to banks, however a bit expensive than ordinary loan. https://www.skyebankng.com
BANK OVERDRAFT LIMIT
Apparently, there’s no limit to how much a customer can access in bank overdraft, it’s however dependent as a function of his turn over with the bank. So the higher the turn over, the higher the overdraft. That is to say limit is directly proportional to the customer’s turn over.
ADVANTAGES OF BANK OVERDRAFT
- Interest is only charged on amount overdrawn not on the limit of overdraft
- There’s no repayment schedule, you pay at your own pace.
- Access is quick and hassle free with minimal documentation.
DISADVANTAGES OF BANK OVERDRAFT
- It normally comes with an interest charge higher than bank loan.
- The bank can change or withdraw the limit at any time, this usually occur when the borrower’s finance goes bad or shows sign of poor performance.
- Bank can request for repayment of overdraft at any time.
Using bank overdraft is a choice, depending on your financial constraints. It is however worthy of note that overdraft is far expensive to manage than ordinary bank loan. It should be used for immediate financial budget than long term. Forward your inquiries using the comment box below, it’s your turn now.
Raphael is a seasoned and dynamic writer, with interest in Banking, personal finance, entrepreneurial development. A councillor and motivational speaker.