Overdraft (OD) vs Cash Credit (CC)

Welcome to Motivational Banker! In today’s video capsule, we will explore the differences between Overdraft (OD) and Cash Credit (CC), essential topics for JAIIB and CAIIB exams. Understanding these differences is crucial for effective financial management and exam preparation. Let’s dive into the key distinctions between these two financial tools.

You can watch the below video or go through the blog to understand the concept in detail.

1. Primary Security

• Overdraft (OD): The primary security for an OD is typically a fixed asset, such as immovable property. This aspect is important for JAIIB and CAIIB candidates to note.
• Cash Credit (CC): In CC, the primary security comprises stock, machinery, or debtors. Understanding the types of security is vital for exam success.

2. Drawing Power

• Overdraft (OD): Drawing power in OD is based on immovable property. For instance, if you have an OD limit of ₹10 lakhs against your property, this limit remains relatively fixed.
• Cash Credit (CC): Drawing power in CC is calculated based on stock and creditors/debtors. This means you need to submit a stock statement regularly. If the stock value decreases, the bank will adjust the drawing power accordingly. Thus, the drawing power can fluctuate but will not exceed the maximum limit. This concept is often tested in JAIIB and CAIIB exams.

3. Purpose of Use

• Overdraft (OD): OD can be used for any purpose other than speculative activities. You can utilize the funds as needed without specific restrictions.
• Cash Credit (CC): CC is designated for business purposes only, particularly for working capital needs. The usage of CC funds is restricted to the specified business activities. This distinction is crucial for exam questions.

4. Insurance

• Overdraft (OD): In OD, the bank insures the immovable property used as security.
• Cash Credit (CC): In CC, the bank requires insurance for the stock, machinery, or any other movable property used as security. Knowing these insurance requirements is important for both JAIIB and CAIIB candidates.

Additional Insights

• Overdraft Flexibility: OD offers flexibility since it doesn’t have a fluctuating drawing power, unlike CC where drawing power can vary based on the stock value and regular assessments. This flexibility is a key point for exam preparation.
• Business Suitability: CC is more suited for businesses needing consistent working capital, whereas OD is suitable for individuals or businesses needing flexible financial support. Understanding these suitability aspects can help in answering related exam questions.

Conclusion

In summary, the primary differences between Overdraft and Cash Credit revolve around the type of security, calculation of drawing power, purpose of use, and insurance requirements. Understanding these differences helps in choosing the right financial product based on your specific needs and is crucial for JAIIB and CAIIB exam preparation.

Thank you for reading this post. We hope it clarifies the distinctions between OD and CC. Stay tuned for more knowledge capsules.

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