What is an Overdraft (OD) Facility?
An Overdraft (OD) is a revolving credit facility that allows a business or individual to withdraw more than the balance available in their bank account — up to a pre-sanctioned limit. Interest is charged only on the amount actually utilised, calculated daily, making it a flexible and cost-efficient working capital tool.
OD facilities are extremely popular among business owners because they can draw funds when needed and repay when cash flows improve — without locking into a fixed EMI structure.
OD vs Cash Credit — Key Differences
| Feature | Cash Credit (CC) | Overdraft (OD) |
|---|---|---|
| Security | Stock + Book Debts (primary) | Property / FD / Shares / Clean |
| Primarily Used By | Manufacturing & trading businesses | Professionals, businesses, salaried individuals |
| Limit Basis | MPBF (Tandon method) from CMA | LTV of asset OR MPBF / cash flows |
| Drawing Power | Varies monthly with stock & debtors | Fixed limit; no drawing power variation |
| Interest | On utilised amount daily | On utilised amount daily |
| CMA Required | Always (above ₹1 crore) | Depends on type of OD |
| Review | Annual renewal with updated CMA | Annual review (if business OD) |
Types of Overdraft Facilities
OD Against Property (LAP-OD)
Secured by residential or commercial property. Limit = 50–75% of property value. Popular for business working capital. CMA is required for amounts above ₹1 crore for commercial use.
OD Against Fixed Deposits
Limit = 85–90% of FD value. No CMA required — purely collateral-based. Available in hours. Ideal for short-term liquidity needs.
Business OD / Clean OD
Unsecured OD based on the business's cash flow and banking relationship. CMA Data is mandatory. Typically available to businesses with a strong track record of 2+ years with the bank.
OD Against Shares / Mutual Funds
Limit = 50–70% of portfolio value. No CMA. Purely collateral-backed. Subject to margin calls if the portfolio value drops.
Salary OD
For salaried individuals, typically 2–3 months of net salary. No CMA required. Based on employment and salary documentation.
When is CMA Required for OD?
CMA Data is required when the OD is being sought for business working capital purposes and the amount exceeds ₹1 crore. Specifically:
- Business OD / Clean OD — always requires CMA
- LAP-OD for business use above ₹1 crore — CMA typically required alongside property documents
- LAP-OD for personal use — CMA not required; property + income proof sufficient
- OD against FD, shares, or salary — CMA not required
MPBF Calculation for OD
For business OD, banks calculate the MPBF (Maximum Permissible Bank Finance) exactly as they do for Cash Credit — using the Tandon Committee Method 1 or Method 2. The assessed MPBF sets the ceiling for the OD limit, regardless of the property value offered as collateral.
The MPBF formula (Method 1): MPBF = 75% of (Current Assets − Current Liabilities excluding bank borrowings)
The MPBF formula (Method 2): MPBF = 75% of Current Assets − Current Liabilities excluding bank borrowings
Method 2 is more commonly used by banks for working capital assessment. The resulting MPBF represents the maximum bank finance the business can draw — whether as CC or OD.
How the Bank Assesses a Business OD Application
The credit officer evaluates a business OD application by looking at:
| Parameter | What the Bank Checks | Benchmark |
|---|---|---|
| MPBF | Maximum justified bank finance from CMA | OD ≤ MPBF |
| Current Ratio | Current Assets ÷ Current Liabilities | ≥ 1.17 (Method 2 norm) |
| TOL/TNW | Total Outside Liabilities ÷ Tangible Net Worth | ≤ 4:1 |
| Bank Account Conduct | Average utilisation, return cheques, turnover | Active account, no returns |
| Revenue Trend | 2-year growth in turnover | Stable or growing |
| Net Profit / Net Cash Accrual | Profitability and cash generation | Positive in all years |
| Property/Collateral Value | Current market value from approved valuer | LTV norms (50–75%) |
Documents Required for Business OD Application
- CMA Data — 2 years historical + 2 years projected (in RBI 6-form format)
- Audited financials — Balance Sheet + P&L for last 2 years
- ITR for last 2–3 years (business + personal)
- GST returns — GSTR-3B for last 12 months (to validate turnover)
- Bank statements — 12 months of existing banking accounts
- For LAP-OD: Property documents — title deed, EC, property tax receipts, approved plan
- Valuation report from bank-approved valuer (for LAP-OD)
- Business KYC — PAN, GST certificate, Udyam registration, partnership deed / MOA
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