What Is a Bank Overdraft?

Commercial bank loans are classified into three types: current loans, term loans, and overdrafts. Bank overdraft refers to a form of lending that banks allow their depositors to exceed the balance of their deposits within the limits agreed in advance. The broad concept of bank overdraft also includes fiscal overdraft, that is, the financial department continues to issue checks within prescribed limits after the fiscal deposits have been used up, and the amount is advanced by the bank. Depositors shall pay interest on overdraft loans and have the obligation to repay at any time. Many Chinese engineering and construction companies abroad use such loans to meet the needs of working capital.

Bank overdraft

The feature of overdraft is that when the customer uses the overdraft limit, there is no need to bear the burden

1. Provided when overdrawn

Bank overdrafts, as a form of credit, are one of the direct causes of credit inflation in social and economic life and the chaos of money and financial markets.

If the bank relies on various deposits and savings that it originally absorbed to overdraw, that is, it does not change the amount of credit funds and reduces the original loan to achieve overdraft, this overdraft has a material basis and will not cause too much to the money market. Great influence. In fact, overdrafts often cause strains on bank credit funds and have to rely on increasing currency issuance to achieve overdraft payments. At this time, overdraft credit may disrupt the original credit balance and cause credit inflation.

In addition, overdraft credit may bring speculation. Because the borrower only needs to pay the principal and interest of the overdraft amount after the overdraft, when the interest rate of funds on the money market is higher than the overdraft rate, the borrower may use the overdraft amount to reinvest and obtain more profits. This not only caused chaos in the financial market, but also brought greater difficulties to the central bank and the state's control of the entire credit fund and financial market.

Therefore, government agencies and central banks in many countries have adopted various measures, such as stipulating the scope of overdrafts, determining the maximum limit of overdrafts, and raising the interest rate of overdrafts, to strictly limit overdraft behavior.