One kind of bank account that a correspondent bank maintains and holds for a foreign bank in local currency is called a Vostro accounts. For example, when an Indian bank and a US bank have a Vostro accounts, the Indian bank is holding rupees on behalf of the US bank. Vostro accounts are a crucial component of correspondent banking, enabling banks to offer client support internationally. This means that if the other party has a Rupee Vostro , the trade invoices will be produced in Indian rupees rather than US dollars.
How Does The Vostro Accounts Work?
Due to this, payments for trade and other transactions with India can be made and received by the foreign bank in rupees. The Reserve Bank of India (RBI) must provide permission to the foreign bank and communicate the agreement details with the Indian bank in order for the foreign bank to open a rupee Vostro account. When purchasing products or services from a foreign vendor or supplier, an Indian importer is required to pay the foreign party’s rupee Vostro account for the invoices that the foreign party issues for the supply.
Foreign buyers of Indian commodities may also take advance payments from exporters in India. Prior to receiving any such advance payments, any export payments, if any, shall be settled with funds in the rupee Vostro account.
Why is the Used?
International Trade: Banks utilize Vostro accounts to enable transactions in international trade between themselves and the corresponding banks in other nations. A bank manages a Vostro account on another bank’s behalf. It stands for the foreign bank’s money that is kept in the local bank.
Correspondent Banking: Vostro accounts are created by correspondent banks to facilitate the handling of transactions in many currencies and time zones. The foreign bank assigns the local bank, where the Vostro account is kept, the role of custodian for the money, overseeing and carrying out transactions.
Clearing and Settlement: For the purpose of settling and clearing international transactions, Vostro accounts are essential. They facilitate the exchange of money and paperwork more quickly between banks engaged in cross-border operations.
Payment and Collection: Vostro accounts are used for both making payments and retrieving money. For instance, money may be moved from a bank in Country A’s Vostro account to a bank in Country B’s local account if a bank in Country A wishes to pay a client of a bank in Country B.
It’s important to remember that the phrase “Vostro account” is exclusive to the banking and financial industry, especially when it comes to international trade and correspondent banking.
Let’s say American-based Citibank wishes to do business in India. They need to keep an account open with an Indian bank in order to do this. City Bank creates an account using the designated currency INR (Indian Rupee) in partnership with HDFC Bank, which is situated in India. A Vostro account is the name of the account that City Bank has with HDFC Bank.
In this case, City Bank, the international bank, is represented by HDFC Bank, the domestic bank that is in charge of the Vostro account. In India, HDFC Bank offers City Bank services like account management, credit facilities, and transaction processing. City Bank can do business in India without opening a physical location thanks to the Vostro account.
Vostro Account vs Nostro Account
The table below highlights the difference between the Nostro and Vostro accounts:
|Vostro account||Nostro account|
|The term comes from the Latin term, Vostro, meaning ‘your’||The term comes from the Latin term, Nostro, meaning ‘our’|
|The account is kept up to date using local money.||Nostro accounts are maintained in foreign currency.|
|The accounts are used to track money that a third party either owns or owes a bank.||When money from the original bank is being held by another institution, it is recorded in nostro accounts.|
|The account acts as a middleman in international financial transactions, with the funds being managed and overseen by the correspondent bank.||Foreign exchange and multiple currency transactions are made easier by Nostro accounts, which hold funds in the currency of the foreign nation in which the correspondent firm conducts business.|
Banks can provide effective and affordable cross-border payment services by using the Vostro accounts. With various advantages, such as devoted relationship management, affordable costs, and real-time transaction tracking, it’s a desirable choice for both individuals and companies. Because of its cutting-edge technology and adaptable features, banks can fulfill the changing needs of their customers and maintain their competitiveness in the global banking market.