How compensating balance works? Assume a clothing store needs a 100,000 line of credit (LOC) to
  manage its operating cash flow each month. The store plans to use the
  LOC to make inventory purchases at the beginning of the month, and
  then pay down the balance as the store generates sales. The bank
  agrees to charge a lower interest rate on the LOC if the clothing
  store deposits a $30,000 compensating balance. The bank loans the
  clothing store’s compensating balance to other borrowers, and profits
  on the difference between the interest earned and the lower rate of
  interest paid to the clothing store.


From https://www.investopedia.com/terms/c/compensating-balance.asp

Why can't the bank provide only 70,000 loan to the clothing company at an adjusted equivalent interest rate?

I can't see the value of compensating balance.
The short answer is that the bank could do that, but it prefers to hold the $30,000 as collatoral on the LOC since presumably this clothing store is a relatively high-risk client.