Nostro And Vostro Accounts An Overview iPleaders

In the Indian context, the accounts opened by IndusInd and UCO are Vostro, and the ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts. For example, if an Indian buyer enters into a transaction with a seller from Germany, the Indian buyer has to first convert his rupees into US dollars. The seller will receive those dollars, which is then converted into euro.

• The Reserve Bank of India regulates the Rupee Vostro Account system, which allows foreign banks to maintain accounts with domestic banks to facilitate trade and investment activities in India.
• In July 2022, the RBI had unveiled a mechanism to settle international transactions in rupee to promote the growth of global trade, with emphasis on exports from India, as well as pushing rupee as an international currency.
• The money that is deposited into a Vostro account will be sent to the account holder’s bank.
• They can now simply deposit the money, in Rupee, in the Vostro accounts in the two banks.

Under this, correspondent banks of the partner trading nation must open Special Rupee Vostro Accounts for authorized Indian banks. Vostro accounts are one of the ways that foreign banks manage their foreign currency exposure and facilitate international transactions for their customers. Bank A will use the term Nostro account to refer to «our» account held by Bank B. Basically, Nostro is shorthand for «our money that is on deposit at your bank». The Nostro account is the record maintained by the bank that has money deposited with another bank.

What Is Vostro Account?

An account held by one financial institution for another is referred to by the holding financial institution as a Nostro account. The same account is known as a Vostro account by the counterparty financial institution. Generally talking, each banks in a correspondent relationship maintain accounts for one another for the purpose of tracking debits and credit between the parties. Banks in the United Kingdom or the United States usually hold a Vostro account on behalf of a international financial institution. RBI unveiled a method to settle international transactions in the rupee in July 2022 to encourage the growth of global trade, with an emphasis on exports from India, and to promote the rupee as a global currency.

Out of SWIFT — the messaging service to facilitate and con-firm cross-border payments – most Russian banks are looking for alternative ways. India and several other countries have been looking for ways so that trade can continue. India and Russia have decided to directly trade in rupee-ruble — here Nostro and Vostro accounts come into play.

Closely monitored nostro accounts can be used for better reconciliation of statements. No interest will be paid on the vostro account maintained, as per the directives that have been issued by the RBI in India. A Vostro Account is one that is managed by a correspondent bank on another bank’s behalf.

These two banks will then transfer the money to the account holder banks in India. In the case of Sberbank and JSC VTB, these two banks will now be allowed to open Vostro accounts that will accept payments on behalf of the Indian banks, in Indian rupees, by the traders in Russia. It is an account held by a bank that allows the customers to deposit money on behalf of another bank. Rupee Vostro Accounts keep a foreign entity’s holdings in the Indian bank, in Indian rupees.

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The Rupee Vostro Account system is a financial arrangement that enables foreign banks to conduct transactions in Indian rupees with domestic banks. NOSTRO account is a bank account, that a bank holds in a foreign country’s currency at another bank in that country. This type of account is used by banks to facilitate foreign exchange transactions and to hold funds that belong to their customers who have accounts in foreign currencies. To facilitate settlement of international trade in rupee, as many as nine special vostro accounts by Russian banks have been opened with two Indian banks after the RBI’s go-ahead.

In correspondent banking, an account held by one bank on behalf of another bank (the “customer bank”); the customer bank regards this account as its “Nostro account”. The Loro account is an account wherein a bank remits funds in foreign currency to another bank for credit to an account of a third bank. Without having a physical presence in other nations, they help in the execution of huge foreign exchange transactions. They let banks keep money in other currencies without worrying about the exchange rate. As it is merely a transfer of funds between accounts in the same bank, it is simple to use. A Vostro account is an account that a domestic bank holds for a foreign bank in the domestic bank’s currency — which, in the case of India, is the rupee.

Further, banks should facilitate remittances and payments in all major currencies for commercial purposes. It is for this reason that banks open accounts with other banks to maintain foreign currency deposits and reserves so as to enable easy operations and clearances. In this regard, three types of accounts come into play- Nostro, Vostro, and Loro. For instance, Bank X in India holds an account with the bank in Y in the USA in their residence forex i.e “ Dollars”. A bank generally opens a Nostro account in another bank in a foreign country the place there’s a large number of foreign trade transactions on a periodic foundation.

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Nostro account comes from the Latin word “Nostro” which means “ours” or our money that is on deposit at your bank. In this blog post, Pavitra Palagummi, a Student at University College of Law, Osmania University, and pursuing aDiploma in Entrepreneurship Administration and Business Laws by NUJS, provides an overview of Nostro and Vostro accounts. Now, if any customers in the US want to send money to «A», they can deposit it into A’s account in «B». Let’s presume bank «A» does not have any branches in the US, but bank «B» does. Now, to receive the deposits in the US, «A» will open a Nostro account with «B». Now, if any customers in the Russia want to send money to «A», they can deposit it into A’s account in «B».

The RBI allowed nine such accounts, including IndusInd Bank and Uco Bank. Nostro and Vostro accounts are normally used in the context of foreign exchange transactions done by the banks or during currency settlement. VOSTRO account is a type of bank account that is held by a foreign bank at a domestic bank in the domestic bank’s currency. In other words, a VOSTRO account is a foreign bank’s account at a domestic bank. NOSTRO accounts are one of the ways that banks manage their foreign currency exposure and facilitate international transactions for their customers.

For instance XYZ financial institution of USA maintains an account with a Bank in India in Indian Rupee such account maintained in the foreign currency at international center by Foreign bank is said as ‘Vostro Account’. 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. A Vostro account is an account that a domestic bank holds for a foreign bank in the domestic bank’s currency, i.e., rupee.

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Once the funds are received in the Nostro account abroad, the bank will then credit the same to the account of the company here in India at the prevailing exchange rate. 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.

When a currency is not convertible, a financial institution or other enterprise will arrange for a third party that does business within the applicable nation to make the required cost on its behalf. A Vostro account, on the other hand, is a domestic currency account held by a foreign bank in a domestic bank. It is used by the foreign bank to hold domestic currency deposits, and to facilitate domestic currency transactions such as payments to local vendors. The word “vostro” means “yours” in Italian, and the term reflects the fact that the domestic bank holds the foreign bank’s funds on its behalf. According to the mechanism finalised by the RBI, banks of partner countries can approach authorised dealer banks in India for opening special rupee vostro accounts.

“Nostro” and “Vostro” are two totally different terms used to describe the identical bank account. Similarly, Domestic exporters are to be paid the export proceeds from the balances in the designated account of the correspondent bank of the partner country. Also, all major domestic banks have listed their nodal officers to sort out issues faced by exporters under the arrangement.

The banks are acting in a fiduciary relationship and they share a principal-agent relationship. The correspondent foreign bank is a financial intermediary in the transactions that they are involved in. The traders will no longer be required to send the payments to India in US dollars. They can now simply deposit the money, in Rupee, in the Vostro accounts in the two banks.

It can facilitate wire transfers, conduct business transactions, accept deposits, and collect documents on behalf of another monetary institution. Correspondent banks are most likely to be used by home banks to service transactions that either originate or are completed in international nations, performing as a domestic bank’s agent overseas. When a bank maintains a neighborhood or residence forex account of a overseas financial institution or branch in its personal country it’s referred to as a “Vostro” account. Most worldwide wire transfers are executed through the Society for Worldwide Interbank Financial Telecommunication community.

As a result of the trade facilitation mechanism introduced by the RBI, we see the payment issues with Russia easing. Logged out of SWIFT -the messaging service to facilitate and confirm cross-border payments – most Russian banks are looking for alternative ways. The Reserve Bank of India has allowed the opening of nine Special Vostro Accounts with two Indian lenders — UCO and IndusInd Bank — to facilitate overseas trade in rupee. Similarly, if Bank XYZ’s customer in India wants to send money to a recipient in Australia, Bank XYZ can use the funds in its VOSTRO account with Bank ABC to complete the transaction.

A difference between nostro and vostro account 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 accounts enable domestic banks to provide international banking services to their clients who have global banking needs. Thus, Nostro and Vostro accounts are accounts customary account maintained across the globe by banks to facilitate easy transactions between them in foreign currency. But that is offcourse only if you end up speaking about “corresponding banking”. With each Nostro account at every financial institution (EURO & CNY) they’ll make this transactions instantly.

• 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.
• But that is offcourse only if you end up speaking about “corresponding banking”.
• To facilitate settlement of international trade in rupee, as many as nine special vostro accounts by Russian banks have been opened with two Indian banks after the RBI’s go-ahead.
• No interest will be paid on the vostro account maintained, as per the directives that have been issued by the RBI in India.

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In early September, UCO Bank had also received RBI’s approval to open Vostro accounts with Russia’s Gazprom.

Seven monetary institutions, together with HSBC, FirstRand Bank, Clearstream, DnB NOR, Nedbank, and Standard Bank of South Africa, as well as SWIFT piloted the service. Nostro and Vostro account are usually used in the context of overseas trade transactions accomplished by the banks or throughout forex settlement. Prior to the advent of the euro as a foreign money for financial settlements on Jan. 1, 1999, banks wanted to carry nostro accounts in all of the countries that now use the euro.