Define: Compensating Balance

A compensating balance refers to the minimum balance that a borrower must maintain in a bank account as a condition for obtaining a loan or credit facility.

Lenders require compensating balances to mitigate the risk associated with lending money. By requiring borrowers to maintain a minimum balance, lenders ensure that they have access to funds in case the borrower defaults on the loan.

Yes, it is legal for lenders to require compensating balances as long as it is clearly stated in the loan agreement or credit facility terms. Borrowers have the option to accept or decline such terms before entering into the agreement.

No, the compensating balance cannot be used to directly repay the loan. It is held as a security measure by the lender and is separate from the loan repayment obligations.

Yes, the compensating balance can be used for other banking transactions, such as withdrawals, deposits, or payments, as long as the minimum balance requirement is maintained.

Yes, the lender may charge fees for maintaining a compensating balance. These fees are typically disclosed in the loan agreement or credit facility terms and should be agreed upon by both parties.

Closing the bank account with the compensating balance may not be allowed without the lender’s consent. The borrower should consult the loan agreement or credit facility terms to understand the specific requirements and restrictions related to the compensating balance.

In some cases, lenders may accept collateral instead of a compensating balance. This would depend on the lender’s policies and the borrower’s creditworthiness. It is important to negotiate and agree upon such terms before finalizing the loan agreement.

Yes, borrowers can negotiate the amount of the compensating balance with the lender. However, the lender may have certain minimum requirements based on their risk assessment and lending policies. It is advisable to discuss and negotiate these terms during the loan application process.