Before getting into the differences let’s look at the similarity both cash credit facility and overdraft facility
The first difference is in terms of assessment cash credit facilities are served by considering the working capital cycle of the borrower
This is basically sanctioned to fill the working capital gap
Whereas in the overdraft facility banks will perm with the customer to withdraw more than the balance available in their respective account
Banks are also sanctioned overdraft as a separate credit facility considering cash requirements of the borrower
The second difference is in terms of security
The CC facility will have two types of security the first one is primary security and the second one that is another one is collateral security
Primary security is basically the pledge or hypothecation of current assets
Whereas collateral security can be both liquids securities as well as properties
Whereas overdraft facility will not have any primary security
Rather it is sanctioned only on the strength of collateral security which Maybe liquid security or properties
The third difference is in terms of drawings
Drawings and cash credit or draws in cash credit is regulated by drawing power derived from the stock statement
So it is possible that drawing power or the amount that can be drawn
From CC facility may be below sanction limit
Whereas royals in overdraft facility is straightforward and the borrower can withdraw sanctioned limit anything
The fourth differences in terms of utilization
Cash credit facility can be generally utilized only for business purposes Whereas overdraft facility can be used for any purpose not just confined for business
Fifth differences in terms of interest
Generally, interest on the overdraft will be slightly or marginally higher than interest on cash facility
The reason is the risk in overdraft facility is comparatively higher and there is also no primary security and there is no stringent monitoring mechanism like as we have for cash credit
The six differences in terms of insurance of securities
In cash create both primary security and collateral securities have to be secured
Whereas in overdraft facilities only the collateral securities because there is no primary security so only the properties have to be secured
The seventh difference is in terms of multiple banking arrangements
If a bank is already sanctioned the cash credit facility, they would have taken a charge on entire current assets of the business
That’s how generally it happens it means if any new banker is going to sanction additional cash credit facility to the borrower, they cannot get their proportionate charge or say pari passu charge on the current assets unless they get a NOC (no objection certificate) from the existing banker
Whereas in the case of overdraft no objection certificate from the existing banker who has sanctioned cash credit facility is not required because here there is no purpose of charge creation on current assets
What does sanction here is an independent facility with an exclusive charge on independent assets given as collateral so no objection certificate NOC is not required from existing cash credit banker
However, following banking ethics, new bankers should inform the existing banker that they have a sanction or a facility for this particular customer
