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 Difference||Overdraft||Cash Credit|
|Definition||A 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.|
|Duration||OD 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 Withdrawals||The borrower is permitted to draw and repay any number of times provided the total amount overdrawn does not exceed the agreed amount||The loan amount can be withdrawn by the borrower at once or when required.|
|Nature of Withdrawals||Overdraft is withdrawn only when the borrower needs more money than the amount available in his/her account.||The borrower need not draw the sanctioned amount at once but draw the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.|
|Guarantee||This is granted against securities.||Cash credit is provided against pledge of hypothecation of goods.|
|Bank Account||Overdraft is allowed for or provided to the current account holders of the bank.||A new bank account is created for sanctioning cash credit.|
|Loan Amount||The 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.|
|Repayment||The 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.