What is an intraday overdraft facility and what is the risk involved in this product ?

Intra Day Overdraft (also known as Day light Overdraft) is a credit facility offered by a Lender to a borrower to cover debit transactions that occur during the day while a credit of the balance should occur at the end of the operations day.

Two of the most common examples:

1. a borrower that has many debit transactions but wishes to reduce the operational hassle by ensuring one credit transaction of the total balance is done towards day end;

2. Debit transactions are performed over the course of the day in anticipation of the clearance of funds transferred to the lender under "cheques under collection" or "overseas fund transfers".

It is apparent from the examples above that such facility is usually offered for inter-bank transactions among two banks/financial institutions within an agreed credit limits.

Naturally, the risk associated is non credit/coverage of the overall balance by the borrower at the end of the day, which causes the facility to become in default.

One very known such risk is historically referred to as "Herstatt Risk" after the default of Bankhaus Hestatt when correspondent banks honored debit/payment transactions in favor of the bank but by the end of the day, the bank defaulted and could not honor the credit obligation to cover the debits owed to the paying banks.

The occurrence of such incident was the main trigger that established banks awareness of the need to assess the credit worthiness of other counterpart financial institutions that is now a standard practice by any FI/BI department of a bank before establishing approved cross bank limits.  

Intraday overdraft / excess is when a customer's account is overdrawn during the course of the day (to meet his/her specific temporary financial requirements), and had to be settled / credited before the close of banking on the same day. This is only a one-off scenario and cannot be rolled over during the day.

Ex:- A clearing cheque of 15k is honoured by extending an Intraday excess of 10k. During the day customer deposits 6k to reduce this to 4k. Subsequently a cash cheque for 4k is presented for payment at the counter. Note - This cheque for 4k should not be paid unless the customer deposits sufficient funds (4k). Reason - The Intraday overdraft / excess of 10k was SPECIFICALLY granted to honour the 15k cheque presented by clearing. This should not be rolled over.

The risk involved is if the customer does not fully settle the overdraft within the day by crediting the account, the unsettled amount becomes an Unauthorized overdraft / excess. Therefore, Intraday assistance should ideally be granted to customers with good account discipline, proven track record & sufficient repayment capacity.

Daylight overdraft or intraday overdraft is a facility wherein the customer can avail the facility upto the limit within the banking day, which reflects the account in debit balance and the customer has to repay the amount by the end of the banking day by crediting the amount.

Risk involved is that if the amount is not repaid by the customer by end of the day, the debit balance is treated becomes an excess or irregularity. Hence, this facility is awarded only to customers who have decent credit history, good financial performance and most importantly repayment capability.

As the name suggest that is a credit facility available for intra day. You avail this facility during the day and settle by the end of the day. This is very useful tool for those dealing in voluminous transactions everyday.

This is high risk product and need to be handled very carefully. Collateral security of equivalent or more amount is must for a Bank. Vigilant mechanism to bar the customer in case there are failures in past with same or some other banks are also must from Bank's perspective.

From Borrower perspective the cost of this facility need to be compared with business opportunity cost. Of course, in case of Buyer's market, borrower need to compare this with inter bank deposit rate and create competition among the banks. 

Daylight overdraft (called also intraday overdraft) refers to a scenario in which a debit balance occurs in a customer’s account in the course of the banking day and is expected to be repaid by a credit to the account prior to the end of the banking day.

Under most circumstances a daylight overdraft incurred by a customer of bank for an account will not face overdraft fees if the balance is brought positive by the next business day.

An example of a daylight overdraft is making a $100 deposit at an Automated teller machine which allows for instant withdrawal of the first $100 deposited. This atm transaction will post the next day however if you were to transfer the funds from this account to another account using other means (internet, telephone) the funds would be withdrawn that day and will post your account negative the next day.

Another example is the Federal Reserve policy of daylight overdraft when a fee is not imposed on collateralized daylight overdrafts, but a 50 basis points fee is taken on uncollateralized ones.