Overdrafts
Lending has long been recognised as one of the two core activities of a bank /
deposit taking institution.
Indeed, banking business is defined by Cranston as: “an undertaking whose business
is to receive deposits or other repayable funds from the public and to grant credits
for its own account.”
Commercial lending by banks can take many forms and banks often use the generic
term ‘bank facility’ to describe them.
Lending agreements generally can vary in the detail.
The way most commercial banks make the majority of income
Essentially, an overdraft is the extension of credit to a customer over a relatively
short period of time.
Two types of overdraft:
o Arranged Overdraft;
o Unarranged Overdraft.
Where an agreement is in place (i.e. arranged overdraft), there is a ceiling to
borrowing and interest is chargeable (based on daily balance, but debited to the
account in monthly arrears).
An unarranged overdraft may incur additional charges on top of the above.
Prevailing practice:
A bank customer, who maintains a current account, may seek an overdraft facility on
his account if he requires short-term financial accommodation.
If the customer’s application for an overdraft is declined he should be told the
reason. (Lending Code (November 2009), [56]; Lending Code (March 2011), [88]).
o Bank obliged to tell you reason for rejecting overdraft- may be a poor credit
score etc.
The letter, informing the customer of the overdraft facility should outline:
The ceiling of the agreement (how much your allowed to lend within
arranged overdraft);
The period for which the overdraft is granted (might have a
termination date)
The letter should also state that the sum is repayable on demand- letter must
contain this clause- if you have another account with them they will take money out
of your account.
Should the customer exceed the ceiling, then they should be prepared to have their
payment instructions dishonoured or to pay unauthorised overdraft charges.
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