Overdraft Against Fixed Deposit

An overdraft against fixed deposit is a secured credit facility offered by banks that allows depositors to borrow funds against the value of their fixed deposits (FDs). In the Indian banking and financial system, this facility is widely used by individuals, businesses, and institutions as a low-risk, short-term financing option. It enables borrowers to meet liquidity needs without prematurely breaking their fixed deposits, thereby preserving interest income while accessing credit.
This form of overdraft occupies an important position in India’s retail and small business finance landscape due to its simplicity, safety, and cost-effectiveness.

Concept and meaning of overdraft against fixed deposit

An overdraft against fixed deposit is a credit arrangement in which a bank grants an overdraft or loan facility by taking the borrower’s fixed deposit as collateral. The depositor retains ownership of the FD, which continues to earn interest, while the bank provides funds up to a specified percentage of the deposit value.
The overdraft operates as a revolving credit facility, allowing the borrower to withdraw funds as needed up to the sanctioned limit and repay them flexibly. Interest is charged only on the amount actually utilised, not on the full sanctioned limit.

Key features of the facility

Overdrafts against fixed deposits are characterised by high security and low credit risk. Since the loan is fully backed by a liquid financial asset, banks face minimal default risk. As a result, interest rates on such overdrafts are typically lower than those on unsecured loans or standard overdraft facilities.
Other key features include minimal documentation, quick processing, and flexible repayment. The credit limit is usually set as a percentage of the FD value, often ranging between 75 per cent and 90 per cent, depending on bank policy and deposit characteristics.

Regulatory and institutional framework in India

In India, overdrafts against fixed deposits are governed by banking norms prescribed by the Reserve Bank of India. While the RBI does not prescribe product-level terms, it sets overarching guidelines on secured lending, asset classification, income recognition, and customer protection.
Banks have discretion in determining eligibility, margins, interest rates, and operational procedures, subject to prudential norms. As these overdrafts are fully secured, they generally attract lower capital requirements compared to unsecured advances.

Role in banking operations

For banks, overdrafts against fixed deposits represent a low-risk lending product that enhances asset quality and income stability. Since the underlying deposit serves as collateral, recovery in the event of default is straightforward, often involving adjustment of the outstanding overdraft against the FD proceeds.
This facility also strengthens customer relationships by offering depositors flexibility and liquidity without sacrificing long-term savings. From a balance sheet perspective, it allows banks to deploy funds efficiently while retaining deposits.

Importance for individuals and businesses

For individuals, overdrafts against fixed deposits provide a convenient source of funds for emergencies, short-term expenses, or bridging cashflow gaps. They eliminate the need to prematurely close fixed deposits, which may result in loss of interest or penalties.
For businesses, especially micro, small and medium enterprises, this facility supports working capital management. It enables firms to meet operational expenses, manage seasonal fluctuations, or address temporary liquidity shortages while maintaining investment income on deposits.

Comparison with premature withdrawal of fixed deposits

Compared to premature withdrawal of fixed deposits, overdrafts offer significant advantages. Premature withdrawal often leads to reduced interest earnings and penalties, whereas an overdraft preserves the deposit and its contracted interest rate.
Although the borrower pays interest on the overdraft, the effective cost is often lower than the opportunity cost of breaking the deposit, particularly for high-value or long-tenor FDs.

Impact on the Indian economy

At a macroeconomic level, overdrafts against fixed deposits contribute to efficient liquidity utilisation within the banking system. They facilitate short-term credit flow without increasing systemic risk, as lending is backed by existing financial assets.
By supporting household and business liquidity, these facilities help smooth consumption and production cycles. They also encourage savings by enhancing the utility of fixed deposits, reinforcing financial intermediation and stability.

Risks and limitations

Despite their low-risk nature, overdrafts against fixed deposits have certain limitations. Credit limits are restricted to the value of the underlying deposit, making them unsuitable for large or long-term financing needs.
There is also an opportunity cost if interest rates on overdrafts significantly exceed FD interest rates. Borrowers must manage utilisation prudently to avoid prolonged interest accumulation.