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Most large commercial banks worldwide hold nostro accounts in every country with a convertible currency. To do foreign exchange transactions in a foreign country, you must understand the Nostro account along with VOSTRO and LORO accounts with their difference. Definition of Vostro Account A Vostro account is defined as an account that a correspondent bank holds on behalf of another bank. Vostro is a Latin word that means “your”, therefore, a vostro account implies that it is “your account”. An example of such an account would be HSBC vostro account is held by SBI in India.
Say domestic bank approached by Mr. A is state bank of India which opens account with Bank of America in New York then the account opened by SBI is referred as NOSTRO Account. Nostro and Vostro are Latin words that translate to ‘ours’ and ‘yours’ respectively. The difference between the two is that it is described from the point of view of the two different banks i.e., depositor and holder. Nostro and Vostro are Latin words that translate to ‘ours’ and ‘yours’ respectively.
While corresponding with the foreign bank maintaining an account with it, the Indian bank would refer to the account as Vostro account, meaning ‘your account with us’. For example, a bank in Middle East may open an account with an Indian bank, and draw drafts on the account. The Indian bank on presentment of the drafts to it would pay to the debit of the foreign bank’s account with it. For exchange control purposes such accounts are known as ‘non-resident bank accounts’. All foreign exchange transactions are routed through Nostro accounts. For example, if the bank issues a demand draft on London payable in pound-sterling, it would be drawn on Grindlays Bank, London.
It is used to facilitate the settlement of international trade and foreign exchange transactions. Nostro and vostro (from Italian, nostro and vostro; English, ‘ours’ and ‘yours’) are accounting terms used to distinguish an account held for another entity from an account another entity holds. Computerized accounting allows for easily reconciling nostro and vostro accounts just by using “+” or “-” signs in the banks’ respective accounting systems. Both banks in the venture must record the amount of money being stored by one bank on behalf of the other bank. The terms nostro and vostro are used to differentiate between the two sets of accounting records kept by each bank.
Difference between Nostro Account and Vostro Account
When opening a Nostro account, the client bank elects to open an account with another bank that it has a banking relationship with in a foreign country. The foreign bank, in this case, is referred to as the facilitator bank. Once the bank has secured an account with the facilitator bank, the latter will assist the former in making payments for transactions using its home currency. A Vostro account is a bank account that other foreign banks hold with “our” bank in the domestic currency.
The opposite term “vostro accounts,” derived from the Latin word for “yours,” is how a bank refers to the accounts that other banks have on its books in its home currency. A Nostro account is a reference that Bank A uses to refer to its account https://1investing.in/ that is on deposit in Bank B, in the local currency of the country where Bank B is located. It is simply a record that Bank A’s money is held in Bank B to facilitate foreign exchange transactions and settlement of international trade.
A resident is a citizen who stays in India for at least 182 days in a financial year. On the other hand, a Vostro account is a reference used by Bank B, which holds Bank A’s funds. From Bank A’s perspective, a Nostro account is denominated in foreign currencies, whereas a Vostro account is denominated in the home currency. Vostro accounts are most commonly used in currency settlements in which a bank must hold balances of a currency other than its home currency.
Vostro account is derived from the Latin word “Vostro” which means “yours” or your money that is on deposit in our bank. Vostro account refers to the account that is held by a bank which allows customers to deposit money on behalf of another bank. Nostro account comes from the Latin word “Nostro” which means “ours” or our money that is on deposit at your bank.
Rupee trade: Understanding difference between Nostro and Vostro accounts
The central banks of many developing countries limit the buying and selling of their currencies, which is usually to control imports and exports and to control the exchange rate. Banks generally do not hold nostro accounts in those countries, as there is little or no foreign exchange business. When a bank needs to make a payment in a country where it does not hold a nostro account, it can use a bank with which it has a correspondent relationship to make the payment on its behalf. Unlike Nostro accounts, these types of accounts are not confined or restricted to banks; they can be used by any other entity if they want to use them.
- Therefore, the accounts opened by IndusInd and UCO are Vostro, and the ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts.
- Both Vostro and Nostro are technically the same type of account, with the difference being who opens the account and where.
- A Nostro account is used as a specialized, additional feature that is mostly found in the countries with the facility of convertible currencies.
Whereas Vostro accounts that have credit balances are viewed as a type of liability. This will allow any money that the customers want to send to the bank in Ghana to be deposited in the remote account. Vostro is a Latin word that essentially translates to “your” and, in this context, refers to “your account,” which is held by another bank.
Loro accounts
From GTBank’s perspective, its U.S. dollar account with Citibank is a nostro account. From Citibank’s perspective, it is holding a vostro account for GTBank in U.S. dollars. Nostro and vostro are variations on the Latin words that mean “ours” and “yours,” respectively. Modern retail banking is derived from 13th and 14th century Italy, where both depositors and retail banks maintained ledgers of their account balances.
SWIFT refers to the Society for Worldwide Interbank Financial Telecommunications, a member-owned cooperative that offers safe and secure financial transactions for its members. Nostro and vostro are terms used to describe the same bank account; the terms are used when one bank has another bank’s money on deposit. Indian exporters using the mechanism will be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country. Suppose a domestic bank opens a foreign account with Citigroup in currency $ USD. For the SBI, this will be a Nostro account, and for Citigroup, it is a Vostro Account. Before the adoption of the euro as the primary currency of the European Union, banks needed to hold Nostro accounts in all countries in the eurozone.
A vostro account is an account a correspondent bank holds on behalf of another bank. These accounts are an essential aspect of correspondent banking in which the bank holding the funds acts as custodian for or manages the account of a foreign counterpart. Banks in the United States and the eurozone often hold Vostro accounts on behalf of other foreign banks, and the funds are held in the currency of the home currency of the country where they are on deposit.
However, with the adoption of the euro, a single Nostro account in the entire region is sufficient. The facilitator bank uses its clearing network with the central bank to carry out the transaction. This account is held in the currency of the country in which it is deposited, and other parties will be instructed to settle transactions using this account. There is also the notion of a loro account (“theirs”), which is a record of an account held by a second bank on behalf of a third party; that is, my record of their account with you.
Drishti Specials
Correspondent banks are financial institutions that act as an agent on behalf of other financial institutions, usually foreign banks. Correspondent banks may perform number of functions like Treasury services, manage foreign exchange, manage international investments and facilitate international trade and finance on behalf of the foreign bank. A Nostro account is a mechanism that banks use to keep track of all funds being held in other banks in the currency of the country where the funds are held. The Nostro account is maintained in a foreign currency that can be converted for use in foreign exchange and foreign trades. Vostro account services include executing wire transfers, performing foreign exchange transactions, enabling deposits and withdrawals, and expediting international trade. 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.
The Reserve Bank of India has approved two Russian banks, Sberbank and JSC VTB, to open special Vostro accounts for rupee trade. The approval came months after India’s central bank announced its norms for rupee trade. These accounts are often set up to make it easier for businesses to complete foreign trade transactions. In this case CMB will make entries on several other accounts, such as a teller’s receiving account, or a clearing account with the third bank holding C’s account. A client bank elects to open an account with another facilitator bank. The facilitator bank will assist the client bank in making payments in its country’s currency, usually using its own access to primary clearing arrangements .
The Structured Query Language comprises several different data types that allow it to store different types of information… For example, assume that Bank X maintains an account in Bank Y’s home currency. To Bank X, the account will be treated as a Nostro account, while Bank Y will treat the account as a Vostro account. Curated newsletters on markets, personal finance, policy & politics, start-ups, technology, and more. Then, any money sent by the customers from Ghana will be transferred by the U.K.
Therefore, the accounts opened by IndusInd and UCO are Vostro, and the ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts. Two kinds of accounts, Vostro and Nostro, are often mentioned together. Both Vostro and Nostro are technically the same type of account, with the difference being who opens the account and where. Major examples of convertible currencies are the U.S. dollar, Canadian dollar, British pound, the euro, and the Japanese yen. Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
Both types of accounts are used to differentiate the different types of accounts that banks hold for other banks. A Nostro account is an account maintained by a domestic bank with a foreign bank in foreign currency. For both nostro and vostro accounts, the domestic bank (i.e., the bank that is holding the account) acts as the caretaker for the account and is sometimes referred to as the “facilitator” bank. Vostro is the term used by Bank B, where bank A’s money is on deposit. Vostro is a reference to “yours” and refers to “your money that is on deposit at our bank.” A vostro account is like any other account held by a bank. The account is a record of money owed to or maintained by a third party, typically another bank, but it can be either a company or an individual.
It is the account which is kept in foreign currency by the domestic bank with foreign bank having physical location in domestic country for the dealers who wants to deal in foreign currency. This gives assurance to the foreign dealer but the regulations involved are many hence cost is high for opening of difference between nostro and vostro account the account. The dealer who wants to receive or pay in foreign currency will approach to the bank to pay or receive the amount on behalf of him in foreign currency in exchange of home currency. The Account maintained by Domestic bank in home currency of foreign bank is NOSTRO account for domestic bank.
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