Distinction between Bank Overdraft and Cash Credit

The distinction between Overdraft and Cash Credit is very subtle and relates to the operation of the account.

In the case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the value of the commodities/debts pledged by the account holder with the Bank.

Overdraft, on the other hand, is allowed against a host of other securities including financial instruments like shares, units of mutual funds, surrender value of LIC policy and debentures etc.

Now the differences between these two are discussed below;

Points of DifferenceOverdraftCash Credit
DefinitionA loan made to a customer with a current account at a bank or building society, in which the account is allowed to go into debit usually up to a specified limit.A cash credit is an arrangement by which the customer; is allowed to borrow money up to a certain limit.
DurationOD is always provided for a short term or period.Though it is a short term loan, sometimes it is provided for mid-term of periods.
Process for WithdrawalsThe borrower is permitted to draw and repay any number of times provided the total amount overdrawn does not exceed the agreed amountThe loan amount can be withdrawn by the borrower at once or when required.
Nature of WithdrawalsOverdraft is withdrawn only when the borrower needs more money than the amount available in his/her account.The borrower need not draw the sanctioned amount at once but draw the sum when required.
GuaranteeThis is granted against securities.Cash credit is provided against pledge of hypothecation of goods.
Bank AccountOverdraft is allowed for or provided to the current account holders of the bank.A new bank account is created for sanctioning cash credit.
Loan AmountThe amount for OD is limited to an agreed extent for the current account holders.Cash credit is granted to a borrower to a certain’-limit based on the security and need of the customer.
RepaymentThe borrower is permitted to repay any number of times.The loan may be repaid in installments or at the expiry of a certain period.

At a glance, these are the distinctions between Bank Overdraft and Cash Credit.

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