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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.
It is the account which is maintained by domestic bank with the foreign bank in foreign currency whereas the VOSTRO account is the account held by foreign bank in home currency of that bank. A nostro account is a bank account held in a foreign country by a domestic bank, denominated in the currency of that country. A nostro account and a vostro account actually refer to the same entity but from a different perspective. For example, Bank X has an account with Bank Y in Bank Y’s home currency. The word Vostro Account has been derived from an Italian word that means ‘yours.’ That is why, in an actual sense, it means your account, which is held by us.
Difference Between Domestic and International Trade
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.
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.
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.
- A Nostro account is a bank account that a bank holds with a foreign bank in the domestic currency of the country where the funds are held.
- 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.
- Now, to receive the deposits in the Russia, “A” will open a Nostro account with “B”.
- From the domestic bank’s point of view, a Vostro account is just the same as any other ordinary bank account as it is payable on demand and is denoted by the same domestic currency of the country.
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.
Nostro, Vostro, Loro Accounts
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.
A Nostro account is used as a specialized, additional feature that is mostly found in the countries with the facility of convertible currencies. Banks usually tie up with third parties to enable transactions like these. These banks are not at all similar to deposit accounts, and they demand that the deposit accounts are kept in the same currency as a bank. An Indian dealer Mr. A want to pay amount in US dollars to the dealer in US for import of goods. Now Mr. A will approach his bank to set the dollar account on behalf of him as he wanted to make payment in dollars against the goods imported from US. The local bank approached by Mr. A will approach to the foreign bank with which the bank is having banking relations and physical location in India for opening of NOSTRO Account.
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.
From the domestic bank’s point of view, a Vostro account is just the same as any other ordinary bank account as it is payable on demand and is denoted by the same domestic currency of the country. For example, imagine that a particular USA-based bank wants to open an account in a particular India-based bank that has the currency of INR . A Nostro account is a bank account that a bank holds with a foreign bank in the domestic currency of the country where the funds are held.
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 https://1investing.in/ 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 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 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.
Whereas the Vostro is the latin word derived from yours i.e., your account with us. Now, if any customers in the Russia want to send money to “A”, they can deposit it into A’s account in “B”. 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. Write About ICICI ICICI provides financial services and promotes economic development and growth.
What are the differences between Nostro and Vostro Account?
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.
These two banks will then transfer the money to the account holder banks in India. 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. A bank may have a Nostro account in any country that has a convertible currency, such as the euro, British pound, and the US dollar. If a currency is not convertible, a bank may work with a third party in the foreign country to carry out the transaction on its behalf.
Example of a Payment Using a Nostro Account
Contrarily, vostro accounts with a credit balance are considered liabilities. With the transfer complete, GTBank receives the dollar-denominated funds, converts them into the local currency (i.e., the naira), and deposits them to the local accounts of the recipients. So, in case of imports, the Indian company has to pay in a foreign currency (mainly dollars and could also include currencies like pounds, Euro, yen etc.). Nostro accounts are not the same as standard demand deposit accounts because these types of accounts are denominated in foreign currencies. 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. Usually, banks use Nostro accounts when buying or selling in another country where it does not have a physical presence, and instead uses an established bank in the foreign country to carry out the transaction on its behalf.
A vostro account is an important part of correspondent banking in which a foreign bank provides financial services on behalf of a domestic bank. 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.
The American bank concerned will refer to the same account as a Vostro Account. Now, this is called the ‘Nostro account’ from country A’s point of you. And since country ‘B’ maintains an account of a foreign bank in its home currency, difference between nostro and vostro account i.e., ‘B’ currency, this will be a ‘Vostro account’ from country B’s point of view. The Nostro account, Vostro account, and Loro account, are three very important terms when it comes to understanding foreign exchange.