offsetting balance
Noun: A minimum deposit amount that a borrower is required to maintain in an account with a lending bank as a condition for obtaining a loan or a line of credit. This balance does not earn interest for the borrower and effectively reduces the usable amount of the loan, thereby increasing its effective cost.
An offsetting balance is a requirement set by a financial institution. It is not an additional fee but a portion of the loan that must remain untouched in a deposit account. * The bank approved the business loan with the condition of maintaining a 10% offsetting balance. * The offsetting balance requirement meant the company could only access $900,000 of its $1 million credit line.
- Compensating Balance: This is a direct synonym for offsetting balance. The term "compensating" highlights that the balance compensates the bank for the service of providing the loan or credit line.
- The loan agreement specified a 15% compensating balance.
- The offsetting balance is a key factor in calculating the effective interest rate, which is higher than the stated nominal rate because interest is paid on the full loan amount, not the net amount available for use.
- Compensating Balance (n): An identical term for offsetting balance.
- Minimum Balance (n): A more general term for any required minimum deposit in an account, not exclusively linked to a loan.
- Compensating balance
- Required minimum balance (in the context of a loan)
The term specifically applies in commercial banking and finance. It is not a voluntary savings account but a mandatory, non-interest-bearing deposit that serves as collateral or a form of compensation for the lender, making the cost of borrowing higher than it initially appears.
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a minimum credit balance that a bank may require a borrower to keep on deposit as a condition for granting a loan; a common requirement for establishing a line of credit at a bank
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the compensating balance increases the effective interest rate to the bank since the net amount loaned is reduced but the interest paid is unchanged
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