Difference between Nostro and Vostro accounts

In existing mechanism, when India imports goods and services from any other country (excluding Bhutan/Nepal), in case of imports, India company must pay in dollars, Euro, yen etc. For example, Bank X has an account with Bank Y in Bank Y’s home currency. Russian banks have been permitted by the RBI to open special Vostro accounts to pave the way for rupee-based export-import transactions.

The RBI allowed nine Russian banks to open special Vostro accounts to pave the way for any export-import transactions. The Indian banks which have participated in this process One in Uco Bank, one in Sber, one in VTB and 6 with IndusInd Bank. Predominantly, all transactions happen using the dollar, which is the world’s reserve currency.

For instance when an Indian financial institution maintains a ₹ account of a bank/department of the USA in India. Thus, we can see that Nostro account is the opposite of the Vostro account and vice versa. You’re more prone to get the money instantly—or within fewer than 10 days—if you have a healthy account stability and no historical past of overdrafts. A history of overdrafts and low account balances may imply you may have to attend the total 10 days to receive the money. When a payee presents a examine to the bank, the bank credit the payee’s account.

From the attitude of domestic banks, the funds deposited at correspondent banks are referred to as nostro accounts. Nostro accounts are denominated in the foreign foreign money of the correspondent financial institution. The term vostro translated from Latin means “yours,” as in your account. From the overseas correspondent financial institution’s perspective, the funds held on behalf of other banks are known as vostro accounts and are denominated within the native foreign money. Vostro account services embody executing wire transfers, performing foreign trade transactions, enabling deposits and withdrawals, and expediting international trade.

Current Affairs

For example Banks of America’s account held with State Bank of India in rupees. In simple words, if any foreign bank opens an account with an Indian bank in rupees. Vostro accounts are primarily opened by foreign banks to facilitate the easy clearing of their transactions in India.

These providers include executing wire transfers, withdrawals, and deposits for customers in nations the place the home financial institution doesn’t have a physical presence. Recently, the government announced that nine special Vostro accounts had been opened with two Indian banks following permission from the RBI to facilitate rupee trade in the aftermath of US and European sanctions against Russia. For example, if an Indian bank keeps an account with an overseas bank in the US in dollars, such an account, maintained in a foreign currency at a foreign centre, would be called a Nostro account by the concerned Indian bank.

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RBI gave permission to open nine special Vostro accounts in IndusInd Bank and UCO Bank. Ever since the Russia-Ukraine war broke out in late February this year, economies suffered to an extent, currencies tumbled and geopolitical tensions soared. This precipitated the western superpowers like the USA, UK and the Eurozone to impose sanctions on Russia, enabling travel bans, and asset freezes and eventually debarring Russia from the SWIFT network. Vostro and Nostro accounts are frequently mentioned in the same sentence. Both Vostro and Nostro are technically the same type of account, with the only difference being who and where the account is opened.

Without reading current affairs, no one can crack their competitive exam. Bank B, where bank A’s money is deposited, will use the term Vostro account to refer to « your money that is on deposit at our bank ». Usefulness of any foreign Currency can be had only if it is converted in to home currency because, foreign currency is not used or acceptable in India if we take example of India. For giving usefulness to any foreign currency the said currency needs to be converted in to the home currency. Foreign currency means any other currency other than the home currency, so if we say with reference to the above example foreign currency means any other currency other than Rupee for India, Pound Sterling for UK and US Dollar for USA. Geographical boundaries are no more a limitation to interbank transactions with Nostro, Vostro and Loro accounts.

For example, an Indian company is doing business with a company in America. Now the Indian company wants to seek payment for the services rendered to the American Company. The Indian company has an account in the State Bank of India while the American company has an account with Wells Fargo. So now that American Company would instruct their bankers to deposit money in State Bank of India’s Nostro account. Once the money is received in State Bank’s Nostro account the Indian company would be informed and their account will get credited for the same. An authorized domestic dealer bank would also ensure that the correspondent bank is not from a country mentioned in the updated Financial Action Task Force Public Statement on High Risk & Non-Co-operative jurisdictions.

A vostro account is an account that a correspondent bank holds on behalf of another bank. The foreign bank acts as an agent that provides services such as executing wire transfers, performing foreign exchange, enabling deposits, enabling withdrawals, and expediting international trade on behalf of the domestic bank. If a rustic had been to leave the eurozone, either voluntarily or involuntarily, banks would need to re-set up nostros in that nation in its new foreign money in order to continue making funds. A nostro account refers to an account that a financial institution holds in a international foreign money in another financial institution. Nostros, a term derived from the Latin phrase for “ours,” are frequently used to facilitate international change and trade transactions. The reverse time period “vostro accounts,” derived from the Latin word for “yours,” is how a financial institution refers to the accounts that different banks have on its books in its house forex.

UPSC Special: What are Vostro accounts, 9 of which have been opened with 2 Indian banks? (And what is a Nostro account?)

For example, the State Bank of India’s account with Bank of America is held in dollars.In simple words, if any Indian bank opens an account with any foreign bank it will be called a Nostro account. Nostro accounts are primarily opened by any Indian bank to facilitate the easy clearing of their transactions in a foreign country. According to the central bank, AD banks in India have been permitted to open rupee Vostro accounts. Accordingly, for settlement of trade transactions with any country, an AD bank in India may open special rupee Vostro accounts of correspondent banks of the partner trading country. According to the mechanism finalized by the RBI, banks of partner countries can approach authorized dealer banks in India for opening special rupee vostro accounts.

They can now simply deposit the money, in Rupee, in the Vostro accounts in the two banks. These two banks will then transfer the money to the account holder banks in India. In the case of trade with Russia, payments in rupee for the export and import of goods will go to these Vostro accounts. The owners and beneficiaries of this money will be the exporters and importers vostro account meaning in both the countries. This account serves as an economic way for small domestic banks to access the financial resources and services of a larger foreign bank. A Loro account is a current account that is maintained by one domestic bank for another domestic bank in the form of a third party account, unlike nostro and vostro which is bilateral correspondence.

Vostro account is an integral offshoot of correspondent banking that entails a bank to facilitate wire transfers, conduct business transactions, accept deposits, and gather documents on behalf of the other bank. To facilitate ease of doing international trades & businesses banks generally maintain three types of current accounts for the quick transfer of funds in different currencies namely ‘Nostro’, ‘Vostro’ and ‘Loro’. To carry out these trade transactions, authorised Indian banks have to open Special Rupee Vostro accounts of correspondent banks of the partner trading country.

Drishti Specials

The word ‘Nostro’ finds its roots in the Italian word ‘Nostro,’ meaning ‘ours.’ Hence, a literal meaning of a Nostro account is- “Our account with you”. A Nostro account is an account that is opened by a bank with an overseas bank in the currency of the foreign country. The account is opened by a bank so as to facilitate easy clearing of their transactions in the foreign country.

Nostro and Vostro account are normally used within the context of foreign trade transactions carried out by the banks or during forex settlement. It enables customers to deposit funds in another bank into the bank’s account. It is frequently used when a bank does not have a branch in a foreign country. It enables customers to deposit funds into the bank’s account in another bank.

“This is the right step going forward because instead of keeping the money idle in the vostro accounts, this money can be utilised for the purpose of earning interest by investing it in G-Secs,” he said. When a bank maintains a local or home currency account of a foreign bank or branch in its own country it is called a “Vostro” account. For example, when an Indian bank maintains its US$ account in a bank in the USA it is called a Nostro account of the Indian bank. So, it can be said that a current account of an Indian Bank or a dealer in a foreign country in the local currency of that country is termed as Nostro account. When a bank maintains its foreign currency account in a bank in a foreign country in the local or home currency of that country it is called a “Nostro” account. When a financial institution maintains an area or home forex account of a overseas bank or branch in its personal country it is known as a “Vostro” account.

It allows the customers to deposit money in the bank’s account in another bank. Nostro is a Latin word that means “ours”.Let’s presume bank « A » does not have any branches in the Russia, but bank « B » does. Now, to receive the deposits in the Russia, « A » will open a Nostro account with « B ». 3.Net external liabilities of the banking system, however, declined by RM4 .

For example control purposes, such accounts are known as ‘ non-resident bank accounts’. However, in March, post Russia invading Ukraine, it was debarred from using the SWIFT network making it impossible to facilitate trades with other countries. So far, seven banks namely Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, Vnesheconombank and VTB Bank have been excluded from the system. The idea was to ensure that they ‘are disconnected from the international financial system and harm their ability to operate globally’. For example, an American merchant is providing consultancy services to an Indian company. That Indian company has an account with Canara Bank and the American merchant has an account with Bank of America.

• It is also requested that the purpose of the remittance be stated so that the funds can be disposed accordingly.
• The nostro account is a way of keeping track of how much of the bank’s money is being held by the other bank.
• The central bank’s move has come in the wake of increasing pressure on the Indian currency in the wake of Russia’s invasion of Ukraine and sanctions by the US and the EU.
• « We have received applications from about 15 banks in different countries. We are looking at those applications and depending on the requirement, we’ll go ahead with the opening of certain other accounts also, » he told CNBC-TV18.

The Nostro account is the report of the bank that has cash on deposit at one other bank. These accounts are often used to simplify settlements of commerce and overseas change transactions. To keep away from this charge, you should use those world famous banks, most of them could make direct international wire switch, and there’ll no third bank cost happen. Despite the obvious strikes to make immediate world money transfers a reality, many obstacles have but to be overcome. Now the problem is, both the parties have to bear the conversion rates and market fluctuations in exchange rates, which is detrimental for both parties. Thus the rupee-ruble agreement will allow both the countries to directly trade with each other using the vostro and nostro accounts.

For example when XYZ bank of India is maintaining an account with ABC Bank in New York USA in USD when PQR bank of India refers the said account in correspondence with XZY Bank, Now YORK it is said LORO account . Let us take an example ofa student seeking admission to a university abroad. That particular student has a bank account with Bank of Baroda and the university has an account with Wells Fargo. The exchange rate between the currencies of the trading partner countries would be market-determined. Suppose the State Bank of India or SBI wants to open a Nostro Account in the USA, it would get in touch with any bank in the USA like Bank of America, and the Bank of America will open an account and accept payment for SBI in dollars. No interest will be paid on the vostro account maintained, as per the directives that have been issued by the RBI in India.

Prasad said certain formalities are yet to be completed, following which the vostro account of the Russian lender would be opened. The public sector lender is the first to have received the central bank’s approval following RBI’s July decision to allow Indian banks to settle trade in Indian currency. A person or customer in Russia wants to send money to India in bank A, s/he can deposit it in Bank B in Russia. Nostro and Vostro originated from the Latin words, which stand for ‘ours’ and ‘yours’ respectively.