Overdraft

The main function of a bank is to accept deposit and make loans to their account holders.  The bank is providing interest to their depositors on their deposits.  It is a pure loss to provide the interest on the deposit but how the bank made it possible? 

The bank is utilizing the amount of the  deposit fund by lending to the needy customer of the bank and charge interest on utilized fund or amount.  There are so many modes of lending in which the borrower enjoying the facility of loans.

- One mode is when the borrower gets full loan amount at one time.  These types of loans is beneficial for purchasing the goods or giving the borrower and allow them to invest as their requirements. This type of lending is called RETAIL LENDING. - The other mode of lending is for the customers who does not want the full amount of loan at one time but they want their loan amount in day to day basis that is called COMMERCIAL LENDING where the trader require the loan money on daily basis to purchase the raw material or we can say for the requirement to fulfill their day to day requirements by the mode of  OVERDRAFT and CASH CREDIT.   This is the new idea in financial freedom

The importance of this new financial innovation was recognized by the philosopher David Hume who described as 'one of the most ingenious ideas that has been executed in commerce'

OVERDRAFT

Overdraft means when the bank allows to withdrawn from one's bank account but the available balance is not sufficient to meet with withdrawal amount. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged as higher interest rates decided by the bank.  It is not created as the right of  the customer it is an obligation of the bank towards their customer

Cash credit Account

This is a type of account in which the lender permits the borrower to enjoy the loan money like a primary account like their current account. Banks lend money in such type of account against the security of in the form of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called "limit" or "credit facility" in excess of the amount deposited in the account.

Cash Credits are, in theory, payable on demand. These are, therefore, counterpart  of demand deposits of the Bank.

It is very necessary to know how and when this type credit facility come in the banking system  so THE FIRST OVERDRAFT facility was given to the merchant William Hog in the year 1728 by the Royal Bank Of Scotland when he had a problems in balancing his books and signed an agreement with the newly established bank that allowed him to withdraw money from his empty account to pay his debts before he received his payments. He was thus the first recipient of cash credit from a bank in the world. Within decades, the advantages of this system, both for customers and banks, became apparent, and banks across the United Kingdom adopted this innovation into service. With the onset of industrialization, new businesses needed an easy form of credit to jump-start their activities, without having to take out loans on securities.

Overdrafts occur for  a variety of reasons. These may include:

• Intentional short-term loan - The account holders finds themselves short of money in their account but they have some deposit account in their name but not want to utilized that fund in their day to day business so the bank accept these deposits and grant loan with associated fees and cover the overdraft with their deposit.
• ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient availability of funds. The account holder may or may not be aware of this fact at the time of the withdrawal. If the ATM is unable to communicate with the cardholder's bank, it may automatically authorize a withdrawal based on limits preset by the authorizing network.
• Temporary Deposit Hold - A deposit made to the account can be placed on hold by the bank. This may be due to Regulation CC (which governs the placement of holds on deposited checks) or due to individual bank policies. The funds may not be immediately available and lead to overdraft fees.
• Unexpected electronic withdrawals - At some point in the past the account holder may have authorized electronic withdrawals by a business. This could occur in good faith of both parties if the electronic withdrawal in question is made legally possible by terms of the contract, such as the initiation of a recurring service following a free trial period. The debit could also have been made as a result of a wage garnishment, an offset claim for a taxing agency or a credit account or overdraft with another account with the same bank, or a direct-deposit chargeback in order to recover an overpayment.
• Merchant error - A merchant may improperly debit a customer's account due to human error. For example, a customer may authorize Rs 500 purchase which may post to the account for Rs 5000.00. The customer has the option to recover these funds through chargeback to the merchant.
• Chargeback to merchant - A merchant account could receive a chargeback because of making an improper credit or debit card charge to a customer or a customer making an unauthorized credit or debit card charge to someone else's account in order to "pay" for goods or services from the merchant. It is possible for the chargeback and associated fee to cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or debit from the merchant's account that received the chargeback.
• Authorization holds - When a customer makes a purchase using their debit card without using their PIN, the transaction is treated as a credit transaction. The funds are placed on hold in the customer's account reducing the customer's available balance. However the merchant doesn't receive the funds until they process the transaction batch for the period during which the customer's purchase was made. Banks do not hold these funds indefinitely, and so the bank may release the hold before the merchant collects the funds thus making these funds available again. If the customer spends these funds, then barring an interim deposit the account will overdraw when the merchant collects for the original purchase.
• Bank fees - The bank charges a fee unexpected to the account holder, creating a negative balance or leaving insufficient funds for a subsequent debit from the same account.
• Returned check deposit - The account holder deposits a check or money order and the deposited item is returned due to non-sufficient funds, a closed account, or being discovered to be counterfeit, stolen, altered, or forged. As a result of the check chargeback and associated fee, an overdraft results or a subsequent debit which was reliant on such funds causes one. This could be due to a deposited item that is known to be bad, or the customer could be a victim of a bad check or a counterfeit check scam. If the resulting overdraft is too large or cannot be covered in a short period of time, the bank could sue or even press criminal charges.
• Intentional Fraud - An ATM deposit with misrepresented funds is made or a check or money order known to be bad is deposited (see above) by the account holder, and enough money is debited before the fraud is discovered to result in an overdraft once the chargeback is made. The fraud could be perpetrated against one's own account, another person's account, or an account set up in another person's name by an identity thief.
• Bank Error - A check debit may post for an improper amount due to human or computer error, so an amount much larger than the maker intended may be removed from the account. Some bank errors can work to the account holder's detriment, but others could work to their benefit.
• Victimization - The account may have been a target of identity theft. This could occur as the result of demand-draft, ATM-card, or debit-card fraud, skimming, check forgery, an "account takeover," or phishing. The criminal act could cause an overdraft or cause a subsequent debit to cause one. The money or checks from an ATM deposit could also have been stolen or the envelope lost or stolen, in which case the victim is often denied a remedy.