The Nostro account is the record of the bank that has money on deposit at another bank. These accounts are often used to simplify settlements of trade and foreign exchange transactions. Nostro accounts differ from standard demand deposit bank accounts in that they are usually held by financial institutions, and they are denominated in foreign currencies. Nostro accounts are generally held in a foreign country (with a foreign bank), by a domestic bank (from our perspective, our bank). It obviates that account is maintained in that foreign currency. From the perspective of domestic banks, the funds deposited at correspondent banks are referred as nostro accounts.
- Banks dealing in foreign currency or the FX market may open branches in foreign countries and transact in their currencies.
- If a case arises where there is an overdrawn amount or there is an insufficient amount of funds in the Nostro account, some fee is charged from these accounts.
- The terms are used when one bank has another bank’s money on deposit, typically in relation to international trading or other financial transactions.
International accounting transactions between local banks and overseas banks are serviced through Nostro and Vostro accounts. Nostro Account is defined as a bank account that is created by any commercial bank of a given country in some other foreign country with the currency of a foreign country. It is derived from the Italian word Nostro account meaning ‘Our.’ Simply, the money that is in your bank is in your country’s currency.
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The working of a Vostro account is just opposite to Nostro Account. 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. So now when the payments are to be made for the services rendered, the Indian company will ask its banker (Canara Bank) to deposit the amount in Bank of America’s Vostro account. Once the money gets into Bank of America’s Vostro account they will transfer the same to that American merchant.
If a singapore bank holds a account in India at an indian bank with Indian currency, it is called as VOSTRO. A vostro account is the account a correspondent bank holds on behalf of another bank. Foreign Currency Account (FCA) is a transactional account denominated in a currency other than the home currency and can be maintained by a bank in the home country (onshore) or a bank in another country (offshore). For example when an Indian bank maintains a ₹(Indian Rupees) account of a bank/branch of the USA in India. Thus, we can see that Nostro account is the opposite of the Vostro account and vice versa. GTBank, a Nigerian bank, gets a lot of money sent to its customers at home from the United States in the form of remittances.
Nostro Account vs. Vostro Account: What’s the Difference?
Exchange Earner’s Foreign Currency (EEFC) account is in the form of a non-interest-bearing current account. Special Economic Zones (SEZ) developers can open, maintain and hold EEFC accounts and credit their foreign exchange earnings to this account. If C does not have an account directly with FNBA’s corresponding bank, the funds may be transferred within the banking system of country B by cheque or some form of electronic funds transfer (EFT).
Thus in many banks a credit entry on an account (“CR”) is regarded as negative movement, and a debit (“DR”) is positive – the reverse of usual commercial accounting conventions. Banks in the United Kingdom or the United States often hold a vostro account on behalf of a foreign bank. The vostro account is held in the currency of the country where the money is on deposit. 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. “Nostro” and “vostro” are two different terms used to describe the same bank account.
These rates are often used to determine interest on various accounts held by third parties, or Vostro accounts. Those looking at Vostro accounts may be trying to figure out what interest is due to the account holder, or what restrictions are in the financial agreement between the two parties. 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.
Difference between Nostro and Vostro
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. For these accounts, the domestic bank is acting like a custodian or managing the accounts of a foreign counterpart. These accounts are utilized for facilitating the settlements of forex and foreign trades. In such conditions, a third bank’s account, which is talked about, is called a Loro account.
For SBI, Mumbai, its account in BOA, New York, will be termed a Nostro account, while BOA’s account with SBI will be termed a Vostro account. A Nostro account is opened by a bank with another bank on the underlying statement “My account with you”. In contrast, a Vostro account is maintained by a bank with another bank on the concept “Your account with me” or “My account of your money maintained by me”. Suppose a domestic bank (State Bank of India) opens a foreign account with Citigroup (the USA) in currency $ USD. For the SBI, this will be a Nostro account, and for Citigroup, it is a Vostro Account.
Nostro Account vs. Vostro Account
The three major accounts related to foreign accounts are the Nostro account, Vostro account, and Loro account. Considering the importance of three current accounts today I have decided to write a blog post on What is a Nostro Account. Similarly, I will discuss on Vostro and Loro accounts as well. So basically, there are three types of International current accounts.
Since, many a time foreign exchange transaction becomes little cumbersome, to provide a better facility in making international transactions banks maintain these type of three current accounts. For example, an account maintained by an Indian bank with a foreign bank. In simple words, it is a cash account held under our name with you. Nostro accounts are held usually in the currency of the foreign country, and this helps in an easy and effective cash management as currency doesn’t need to be converted.
Banks dealing in foreign currency or the FX market may open branches in foreign countries and transact in their currencies. However, it is not really feasible to open a bank branch in each and every country where the bank is having an FX market. To understand different foreign exchange transaction terms, we must first understand what the terms of home currency nostro vostro loro and foreign currency are. Foreign currency can be explained like any other currency other than home currency. In short, if someone refers to an account as Nostro, she is referring to an account that she owns. If a bank or other party refers to a Vostro account, that is an account that includes deposits by others that the bank is holding on their behalf.
@ddljohn– Nostro, vostro and loro terms are used often for remittances. You can think of a loro account as being “their account with them.” Multiple banks may be working with one another when you send money abroad. 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’. The nostro account is a way of keeping track of how much of the bank’s money is being held by the other bank. This is similar to an individual keeping a detailed record of every payment in and out of his or her bank account so that she/he knows the balance at any point in time.
Nostro accounts are mostly commonly used for currency settlement, where a bank or other financial institution needs to hold balances in a currency other than its home accounting unit. With a view to securing appropriate governance and improving risk management, the central banks of the Group-of-Ten (G10) countries have been cooperating internationally in the oversight of SWIFT. The SWIFT Oversight Forum was established in 2012 to share information on SWIFT oversight activities among G10 and ten other central banks. SWIFT messaging standards are used by banks, brokers, dealers, corporates, investment managers, etc., to transmit desired information underlying foreign transactions. SWIFT is the banking language that is widely accepted and understood globally in the banking industry. SWIFT messages typically result in monetary transactions between institutions.
Since GTBank does not have a physical presence in the United States, it enters into an agreement with Citibank where the latter has an account remotely opened for GTBank in U.S. dollars. This way, money received by U.S. customers and businesses sending money to GTBank account holders in Nigeria will be deposited in the account that GTBank has with Citibank. A Nostro account is a reference used by Bank A to refer to “our” account held by Bank B. Nostro is a shorthand way of talking about “our money that is on deposit at your bank.”
The terms are used when one bank has another bank’s money on deposit, typically in relation to international trading or other financial transactions. To do foreign exchange transactions in a foreign country, you must understand the Nostro account along with VOSTRO and LORO accounts with their difference. It might similarly be easier to think of nostro accounts definition as “our account with you” and the vostro accounts definition as “your account with us.” 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. In practice this is rarely used, the main exception being complex syndicated financing. SWIFT is based in Brussels and is the most commonly used term in international banking transactions.