2. Overdrafts

2. Overdrafts

Overdrafts usually refer to a financial arrangement whereby a bank allows a customer to borrow money by drawing on its account from time to time up to a limit set by the bank. 

Authorisation

A borrower needs to apply for an overdraft facility from the bank. The bank will assess various factors including the borrower’s financial position and ability to repay and decide to grant or refuse to grant the facility. The bank will usually obtain a credit report about the borrower from credit reference agencies for considering the borrower’s application for an overdraft facility, and for reviewing the facility from time to time. 

A borrower should consider the terms offered by the bank and review the facility letter and other documents to understand its liabilities and obligations before accepting the facility. When offering the facility, the bank has the duty to tell a borrower the major terms such as:

• the principal amount of the facility; 
• interest rate and how interest is calculated and accrued; 
• fees and charges; 
• whether the bank requires collateral or security; 
• repayment arrangement; and 
• whether the bank has the right to require repayment on demand at any time. 

Demand

For details, please refer to section 24 and, in particular, section 24.3 of the Code of Banking Practice. The Code of Banking Practice is issued jointly by the Hong Kong Association of Banks and the DTC Association, i.e., the industry associations, and endorsed by the Hong Kong Monetary Authority.

Overdraft facilities are usually repayable on demand. It means that the bank may cancel the facility and require the borrower to repay all amounts (including principal, interest, fees and charges) owed by the borrower to the bank at any time, often without giving reasons or prior notice.

Interest

The rate of interest charged on the overdraft facility is set by the bank. The borrower should note whether the bank charges default interest and how it is calculated. The facility letter usually gives the bank the right to vary (whether to increase or reduce) the rate of interest after granting the overdraft facility.

Fees and charges

The bank may charge an application fee, handling fee, review fee or other fees and charges relating to the overdraft facility. Banks usually make available fee tables listing out the various items of fees and charges for customers’ information.

Cancellation

The facility letter usually gives the bank the right to cancel the overdraft facility and demand repayment from the borrower at any time. 

The borrower may also cancel the overdraft facility. The borrower should check the facility letter on how to cancel the facility, including whether the borrower is required to give prior notice (and the length of notice) to the bank, the repayment arrangement and whether the bank will charge a cancellation fee or other fees and charges. 

Unauthorised overdraft

An unauthorised overdraft usually refers to (i) the borrower withdrawing an amount from its account where there is insufficient available credit balance in the account, without being granted an overdraft facility; or (ii) circumstances where the borrower has been granted an overdraft facility and it borrows in excess of the maximum limit set by the bank. The bank will usually charge a higher rate of interest for the unauthorised overdrawn amount, and may also charge other fees and charges.