Fixing of interest rate of OD and CC

1. Fixing Interest Rates of
Overdraft and
Cash Credit.
-By S . Prathyusha
LLM (Banking & Finance)
NLU, JODHPUR

2. Contents:-
 Introduction and Definition
 Types of Interest Rate
 Reasons for Interest Rate change, Factors affecting
Interest Rates
 Overdraft and Cash Credit
 Interest Rate on Overdraft
 Example
 Interest Rate on Cash Credit

3. INTRODUCTION
Interest Rates
An interest rate is the cost of borrowing money or the
return for investing money .
For example :A bank charges interest on amounts loaned
out or on the balance of an overdrawn bank account
An interest rate vary depending on the type and provider
of borrowing.

4. Definition of Interest Rate
 In any case , as in the case of profit, interest is
treated in different ways by different specialists.
 Interest is the price the borrowers must pay to
lenders to obtain the use of money for a period of
time
In India, interest rate decisions are taken by the
Reserve Bank of India’s Central Board of Directors.

5. Types of Interest rates
 The prime rate is the best known rate of the various
interest rates that are utilized. This non fluctuating rate
is the one employed by the banks when it makes short
term loans by large borrowers like the corporations.
 Other important interest rates that are used in making
capital investment decisions include
Discount Rate
Treasury Bill Rate
Treasury Bond Rate
Corporate Bond Rate

6. Reasons for Interest Rate change
 The increase in supply, combined with diminished
demand, forces rates downward. The exact opposite
occurs during an economic boom.
 During a recession, fewer people are looking for new
mortgages or loans for their start-up businesses.
Eager to increase lending, banks put their money "on
sale" by dropping the rate
 When demand is weak, lenders charge less to part
with their cash; when demand is strong, they're able
to boost the fee

7. Overdraft and Cash Credit
Overdraft
Cash Credit
 The word overdraft
means the act of
overdrawing from a Bank
account.
 In other words, the
account holder
withdraws more money
from a Bank Account
than has been deposited
in it.
 This account is the primary
method in which Banks lend
money against the security 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be withdrawn from this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.

8. Interest rate on overdraft
 Interest on amount overdrawn will be charged at the
rate of (AS PER BANK)%p.a. over the weighted
average of the interest rates applicable to the linked
fixed deposits, subject to a maximum of the Bank’s
Prime Lending Rate, as may be declared by the Bank
from time to time.
 The interest on the overdraft is calculated on the
daily outstanding balance from the date of overdraft
at the above specified interest rate till such date that
the overdraft inclusive of interest/charges is repaid.

9. EXAMPLE:-
Illustration of weighted average.
If one fixed deposit (D1) is for `400,000 at 4%
(R1) interest and one deposit (D2) for `100,000
at 6% (R2) interest rate,
then the OD interest rate will be 6.4%
(Weighted Average** + 2%).
**Weighted Average
= [D1*R1% + D2*R2%]/(D1 + D2)
= [(`400,000*4%) +
(`100,000*6%)]/(`400,000 + `100,000)
= 4.4%

10. Interest Rate on Cash Credit
 Interest on CC account is charged on daily
closing balance by the banks.so you just need to
apply the ROI application on the closing balance.
Make a report on Excel and at the end of the day just
put the closing balance in the sheet from your online
banking statement.
 Daily closing balance * rate of interest /
36500

11. Thank You…..