Cash Credit vs Overdraft: Key Differences, Examples, and RBI Guidelines
To run a successful business, you must always have sufficient funds to meet your operational expenses. In the event of a cash crunch, financial institutions provide financing choices to assist with your funding needs. Among these, cash credit and overdraft facilities are two of the most regularly used products. Though often confused, they are distinct instruments with different regulatory frameworks. In this blog, we define cash credit and overdraft differences to help you choose the right working capital tool.
What is a Cash Credit Account?
A cash credit (CC) loan is a sort of short-term lending offered by financial institutions to businesses to help them meet their working capital needs. Unlike traditional loans, it is a revolving credit facility linked to the value of a borrower's current assets.
How Does Cash Credit Work?
Cash credit is a type of working capital loan typically available for a 12-month tenure, subject to annual review. It allows businesses to withdraw funds in excess of their account balance up to a predetermined borrowing limit based on "drawing power." Interest is applicable only on the withdrawal amount, calculated on a daily reducing balance basis.
Factors Determining CC Eligibility in 2026:
- Stock & Debtors: Borrowing limit is tied to the value of inventory and receivables.
- Credit History: Minimum CIBIL MSME Rank (CMR) or equivalent score.
- Primary Security: Typically requires hypothecation of current assets.
What is an Overdraft Facility?
An overdraft (OD) is a facility that allows an account holder to borrow up to a particular amount whenever the account balance reaches zero. While cash credit is strictly for business use, overdrafts are available to both individuals and businesses.
How Does Overdraft Facility Work?
Cash credit overdraft facilities can be "Secured" (against Fixed Deposits, Property, or Insurance) or "Clean" (unsecured, based on relationship).
Difference between cash credit and overdraft with example:
Imagine a business owner has a salary payout of ₹10 Lakh but only ₹7 Lakh in their account.
- With an Overdraft: If they have a ₹5 Lakh limit, they can withdraw the remaining ₹3 Lakh instantly. Interest is charged only on that ₹3 Lakh for the specific days the account remains in negative.
- With Cash Credit: The business would draw from their CC account (separate from their current account) based on their latest stock statement value to fund the payout.
Comparison: Cash Credit vs Overdraft Key Differences
| Parameters | Cash Credit Loan | Overdraft Facility |
| Purpose | Strictly for business working capital needs. | Short-term personal or business obligations. |
| Basis of Limit | Linked to stock, inventory, and receivables. | Linked to relationships, FDs, or property. |
| Account Type | Requires a separate CC account. | Associated with an existing Current/Savings account. |
| Interest Rate | Generally lower as it is always secured. | Slightly higher, especially for unsecured/clean ODs. |
| Pre-payment | No charges for MSEs up to ₹50 Lakh. | No charges on floating-rate ODs for individuals. |
Key Similarities Between Cash Credit and Overdraft Facility
- Interest Calculation: Interest is levied solely on the amount utilized, not the total sanctioned limit.
- Repayable on Demand: Both are technically "demand" facilities, meaning the lender can recall the amount with prior notice.
- NPA Norms: As per RBI 2025 Prudential Norms, both accounts are classified as "Out of Order" (NPA) if the balance remains in excess of the limit for 90 days.
Critical Considerations for 2026
- Key Fact Statement (KFS): Regulated NBFCs like Hero FinCorp are now mandated to provide a Key Fact Statement (KFS) outlining the "All-in-cost," including processing fees and penal interest, in a simplified format.
- Foreclosure Charges: Under the Reserve Bank of India (Pre-payment Charges on Loans) Directions 2025, NBFCs shall not levy pre-payment penalties on floating-rate CC/OD facilities for MSE borrowers with sanctioned limits up to ₹50 Lakh.
- Audit Requirements: CC accounts require periodic "Stock Statements" to justify the drawing power, whereas ODs are typically reviewed based on the value of the underlying security (like an FD).
Conclusion
Cash credit and overdraft difference lies in their structural intent: CC for ongoing asset-backed business operations and OD for temporary liquidity gaps. When seeking a cash credit overdraft, ensure you partner with a regulated NBFC like Hero FinCorp that adheres to the latest RBI Fair Practice Codes for transparent digital processing.
Frequently Asked Questions (FAQs)
Can I Have Both A Cash Credit And An Overdraft?
Yes, but total exposure is monitored. For aggregate exposure above ₹10 Crore, RBI mandates a "Working Capital Demand Loan" (WCDL) component for better credit discipline.
Is A Cash Credit Loan Better Than An Overdraft For An MSME?
CC is often cheaper as it is secured by current assets (stock), but it requires more documentation (monthly stock statements). OD is faster but may carry a higher rate if unsecured.
What Are The Foreclosure Charges For Cash Credit And Overdraft Facilities?
As per 2025 RBI Directions, for MSEs with limits up to ₹50 Lakh, there are zero pre-payment or foreclosure charges on floating-rate facilities.
Disclaimer: Hero FinCorp is a regulated NBFC. All loan approvals, CC/OD limits, and interest rates are subject to credit appraisal and the internal policy of the lender. In accordance with RBI's 2025 Fair Practices Code, borrowers should review the Key Fact Statement (KFS) for all-in-cost transparency. Pre-payment norms mentioned are as per RBI Directions 2025 and may vary for fixed-rate products. This content is for educational purposes and does not constitute financial advice.
