Thursday, 5 May 2011

OVERDRAFT AGAINST FIXED DEPOSIT

In order to manage short term liquidity requirement I have found that taking overdraft against  Fixed Deposit is an efficient tool .
If one is holding a Fixed deposit with a bank than with very minimum paper work you can get an overdraft account opened . Most of the Private Banks charge you extra 2% pa for the funds used and Nationalised Bank charge between 1%to 2% pa . Supposedly you have booked a fixed deposit at 8%pa interest with a bank than at 10% pa interest they will open an overdraft account .
Over Draft Limit set is between 85% to 90%  of the Fixed Deposit amount .
If you have Rs 100000 as deposit with the bank you would get Rs85000 to Rs90000 as limit set (you can negotiate with your bank for the OD limit that can be set) .
I find it usefull in a way that I have liquidity with me all the time  if there is any emergency there is no need to rush to bank to liquidate the FD .

This is how I have used my OD account at times .
If i want to apply for any IPO through ASBA this OD account
becomes an efficient medium for creating liquidity .I transfer funds from my OD account to my saving account and apply in IPO through ASBA . I will be incurring an extra cost of 2% p a for the number  days there is a debit balance in OD account but for the same period I earn 4% pa in my saving account for the number of days IPO allotment is declared .As in case of ASBA there is freeze on the amount for which i have applied for shares ,money is there in my account I am not losing any interest . If I am allotted shares than that much money would be debited from my saving account and remaining money i transfer it back to my OD account .
This is one of the ways I have found utility in OD account  . In my personal experience I have observed that once FD is liquidity it usually takes more time to remake the same FD but putting back money in OD account is more disciplined .
This is my view one can use it as per his financial requirements .

2 comments:

  1. say i have an FD of 1 cr and I want to buy a property for around 80 lacs. Then will buying that property on Over draft on my FD in that bank be useful?

    i will have to pay 2% higher interest on that borrowed money.

    so is that the right way?

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  2. If it is a long term investment where funds are not expected to come back in a defined time frame it is better to liqidate Fd.
    Thanks for posting and my applogies for delay in response.

    ReplyDelete