What is the compensatory balance?

compensatory balances are minimal balances that can be maintained in the account and still meet the loan requirements. Bankers often offer this as a means of obtaining more favorable interest rates on existing banking customers. If the compensatory balance falls below the minimum minimum, the interest rate is used on the loan corresponding to the way.

The purpose of the compensatory balance is sometimes referred to as the equalization balance, it is to compensate for the expenditure associated with the extension and service of the loan. The Bank allows funds to remain freely using the funds on the basis of an account without interest in the loan, these funds can freely use these funds within its investment strategies. In this way, the cost of providing loans is reduced and the bank and the debtor benefit from the transaction.

In addition to loans, a compensatory balance can be used to secure the credit line. As with an individual loan or a business entity that receives a loan line, they must already have accounts with a banku and agrees to maintain a minimum account balance for the loan period. If the balance falls below the minimum, the interest rate is adjusted up and usually does not drop back even if the minimum balance to the account is renewed.

The most common structure of the compensatory balance is very simple. The structure, known as a compensatory balance of 10 and 5, requires the debtor to have at least ten percent of the extended credit line in the account at the time the credit line, and another five percent before drawing against the credit line. This means that if a credit line is set for $ 100,000.00 (USD), the debtor will have a minimum balance of $ 10,000.00 in his account at the time of the credit line. At a time when the credit line is accessible and drawn, the balance on the compensation account will be $ 15,000.00.