Overdraft is a financial facility provided by banks that allows individuals or businesses to withdraw more money than what is available in their account, up to a pre-approved limit. It acts as a short-term credit option, helping users manage temporary cash flow shortages or urgent financial needs without taking a formal loan.

When a customer uses an overdraft, the bank charges interest only on the amount utilized and for the duration it remains overdrawn. This makes it more flexible compared to regular loans. The interest rate on an overdraft is typically higher than savings or fixed deposit returns but lower than credit card interest rates. Overdrafts can be secured against assets such as fixed deposits, insurance policies, or property, or they can be unsecured depending on the borrowerís credit profile and relationship with the bank.

For businesses, an overdraft is a crucial liquidity tool that ensures smooth operations during periods of delayed receivables or seasonal fluctuations in cash flow. Individuals may use it to meet short-term expenses, pay bills, or manage unforeseen emergencies. However, itís important to maintain financial discipline, as overuse can lead to high-interest costs and affect creditworthiness.

From a regulatory standpoint, overdrafts are governed by the Reserve Bank of India (RBI) and are offered under specific terms and conditions disclosed by banks. Borrowers should review the limit, interest rate, renewal terms, and penalty charges before availing of the facility. Using an overdraft responsibly can strengthen oneís credit history and enhance financial flexibility, but misuse can lead to debt accumulation and reduced eligibility for future credit.

In summary, an overdraft serves as a convenient and efficient financial cushion for managing short-term funding gaps, provided it is used prudently and within the approved limit.