Overdraft

An overdraft lets you take out more money than you have in your account, for a short time, when something urgent comes up.

The booklet defines it as "a facility available to bank customers wherein they can take a short term loan from bank to meet their urgent requirements with promise to pay back the same amount in the timelines agreed between the bank and the customer."

Three words matter:

• Short term. It is not meant for buying a house or a car.
• Urgent. It is for emergencies, such as a hospital bill.
• Agreed timelines. You promise to repay by a date agreed with the bank.

It is still a loan. The money you take becomes a liability, something you owe.

Overdraft in the Pradhan Mantri Jan Dhan Yojana (Chapter 9). PMJDY, launched in August 2014 for financial inclusion, gives account holders:

• Zero balance account, with no minimum balance mandated
• RuPay debit card
• Accidental insurance cover and a life cover (subject to conditions)
• Overdraft facility up to a certain amount, available against one account per household
• Mobile banking, interest on deposits, Direct Benefit Transfer, and access to pension and insurance products

The booklet does not state the overdraft amount; it says "up to a certain amount". One household cannot claim it on several accounts.

Why it is borrowing (Chapter 8). Borrowing is "an act of taking money and paying it back over a period", used when savings are inadequate. An overdraft is a short-term form of it.

The debt-trap warning (Chapter 8). Debt can be managed with discipline: do not buy more than you can afford, do not get lured into "WANT" items, and stop activities that result in debt. An overdraft taken for urgent needs and repaid on time fits those rules. One used every month to cover ordinary spending does not.

Your credit record (Chapter 8). Banks send loan repayment records to credit bureaus monthly, and lenders check your credit score first when you apply for a loan.

Names, amounts and the overdraft limit are illustrative.

Parvati, a daily-wage worker in Raichur, has a PMJDY account with a balance of Rs 1,200. Her mother is admitted to hospital and she has to pay Rs 6,000 for medicines today.

Using the overdraft. Her account carries an overdraft facility (it is the only one in her household). She withdraws Rs 6,000.

Balance before        = Rs 1,200
Withdrawn             = Rs 6,000
Amount overdrawn      = 6,000 − 1,200 = Rs 4,800

Rs 4,800 is now a short-term loan she owes the bank.

Repaying it. She agrees with the bank to repay within two months. She deposits Rs 2,400 from each of her next two months' wages.

What not to do. Her husband also has a PMJDY account and asks for an overdraft on it too. The booklet says the facility is available against one account per household, so the household gets it on one account only.

Because Parvati repays on time, her record stays clean when she later applies for a small loan.

Chapter 9 (Government Schemes for Various Savings and Investment Options) lists the overdraft among PMJDY facilities and defines it in a footnote; Chapter 8 (Borrowing-Related Products) covers borrowing and avoiding a debt trap. Expect: "which facility under PMJDY is available against one account per household?" (overdraft) and the definition (short-term loan for urgent needs, repaid within agreed timelines).

• An overdraft is a loan, not free money and not your own savings.
• It is short term and for urgent requirements.
• Under PMJDY it is limited to one account per household, and only "up to a certain amount".
• Zero balance does not mean a free cheque book. PMJDY account holders must meet minimum balance criteria to get a cheque book.
• Repayment is within the timeline agreed between the bank and the customer.