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In addition to the requirements in case of borrowal accounts as explained by Mr. Vinod Jetley;;Banks may additionally impose restrictions to a borrowal account to route their total transaction through the account as a pre condition for allowing term loans, Overdrafts, Cash credits, Bill discounting facilities etc in order to service the routine expenses like interests, Transfer for Term Loan accounts, Interest charges on bill discounted, and also enable them to evaluate the total turnover in the accounts for the purpose of facilitating further renewals in the accounts on a timely basis--usually for yearly renewals.
Similarly in the case of Savings and Current Accounts, also insist Cash balance requirements with minimum and may fix that minimum on the average balances kept, say for3 months. Any reduction the balance from the stipulated minimum need to be compensated by additional increased deposits so that the average of daily balances are maintained at the minimum level throughout the stipulated period.
In many commercial credit relationships, borrowers maintain compensating deposit balance with the bank as a part of loan agreement. The term compensating indicates that the balance are used, in part, to compensate the bank for service rendered.
agree with all
Compensating balances are funds that a bank needs a customer to maintain in a non-interest bearing account till the loan is retired. Sometimes banks impose compensating balance requirements therefore as to increase the bank's return on a loan. Compensating balances are most likely to be utilized when the stated interest rate at a loan is below the bank's required rate of return.
Banks sometimes resort to rebalance the establishment of investment portfolios at a lower price or benefit banks resorted possible decisions that adversely affect the transactions by reducing the interest rate on deposits or current accounts or resort to interest rates on loans granted to customers raise
I agree with Vinod and Ventikaraman; this is also called the right to set off the balances and set up auto set-off, if agreed with the customer.
If your financials are weak or in case you are a new client to the bank or in case the bank charges you lesser, you may be required to maintain these balances to cover the risk of exposure. It may also depend upon the type of exposure, whether funded or non-funded.
When the bank agrees to lend to a borrower at a rate below the rate it would normally charge, it may impose a condition, asking the borrower to keep compensatory balances in its checking account.
For example, a corporation may agree to keep $1 million in its checking account at a bank in exchange for the bank agreeing to lend up to $10 million to the corporation at1% below the prime lending rate.
Banks sometimes impose compensating balance requirements so as to increase the bank’s return on a loan. Compensating balances are most likely to be used when the stated interest rate on a loan is below the bank’s required rate of return.
