Nostro Account – Charges, Example and How to Open One?
Banks can hold an account in a foreign currency with a foreign bank. Such an account is called a nostro account. This type of account enables businesses to manage their money more easily when conducting international transactions.
What is a Nostro Account?
A nostro account is one where a domestic bank maintains an account in a foreign bank in denominations of that country’s currency. This enables banks to facilitate multi-currency international transactions. Nostro is a Latin word that means ‘ours’.
On the other hand, if a domestic bank holds a foreign bank account in its currency, it will be called a vostro account.
How Does a Nostro Account Work?
Both nostro and vostro accounts are used to facilitate international transactions and other transactions associated with exchange rate risk. When a bank decides to open a nostro account, it chooses another bank in a foreign country with which it has a good working relationship. The foreign bank in this transaction is known as the facilitator bank.
After the bank opens one or more nostro accounts with a facilitator bank, it is the latter’s duty to help the former make transactions with its domestic currency. The facilitator bank uses its networks with its country’s central bank to execute the necessary transactions.
When banks do not have any or marginal physical presence in another country, making transactions in foreign currencies becomes extremely challenging. It is at such times that a nostro account becomes essential. With a nostro account at an established bank in a foreign country, a bank can securely perform international transactions.
How to Open a Nostro Account?
Find banks that offer the facility of nostro accounts. You can also search online for banks that allow you to establish nostro accounts in other countries. Big banks may be a better place to look compared to smaller, local banks.
Fill out application forms, you may be required to fill out two forms of government identification, such as your driver’s license or passport in addition to financial statements of your bank. A minimum opening deposit may be required by the bank as well.
When comparing nostro accounts, make sure to look at the list of countries and currencies in which the bank allows transactions. If a country’s currency is not convertible, meaning it cannot be easily bought and sold on the foreign exchange market, you may be unable to open a nostro account there.
Example of Nostro Accounts
The following examples will illustrate the working of Nostro accounts:
Suppose a resident of the USA wishes to open an account in Europe. He does not need to travel there for this purpose. All he has to do is approach his home bank in the USA and request them to open a Euro account on his behalf.
The US bank would open a Nostro account with a foreign facilitator bank with which it has a good banking relationship. Note that the facilitator bank needs to have a physical presence in the European zone. Now, it is the facilitator’s responsibility to set up a euro account for the US bank.
One must note that this account is much different from regular accounts held by European residents. This account will permit the account holder in the USA to make transactions in the European zone with euros.
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Nostro Accounts vs Vostro Accounts
Let us look at the differences between a Nostro account and a Vostro account:
| Nostro Account | Vostro Account |
| This is an account that a domestic bank opens at another bank in a foreign country in foreign currency. | This is an account that a foreign bank holds for the domestic bank in its home currency. |
| Nostro is the Latin word for ‘ours’. It roughly translates to ‘our account with you’. | Vostro is the Latin word for ‘yours’. It roughly translates to ‘your account with us’. |
| A Nostro ledger is the one kept by the depositing customer. | A Vostro ledger is the one maintained by the bank. |
The words nostro and vostro are actually used to describe the same bank account from two different perspectives. If Bank A opens a nostro account with Bank B in a foreign country, the same account would be a vostro account for Bank B.
Advantages of Using a Nostro Account
1. Maintain Funds Abroad
It helps an entity maintain funds in foreign currency.
2. Easy Transaction
Accountholders can pay money to a third party located in a foreign country in their home currency. A major benefit is this transaction does not involve any exchange rate risk.
3. Reduce the Risk of Fluctuation
Nostro accounts bring down the risk of excessive fluctuation in exchange rates. This is because the requisite amount is directly transferred to the third party without any physical presence.
4. Facilitate International Bank Relationships
Nostro accounts facilitate banking relationships with international banks.
5. Multiple Uses
One can use nostro accounts for several dealings. Additionally, it helps in easing international transactions.
Disadvantages of Using a Nostro Account
Given below are some limitations of Nostro accounts:
1. Expensive
Opening a nostro account is costly because it is a service offered by a domestic bank to facilitate international transactions. Nostro charges between $15 and $30 for each international transaction.
2. Terms and Conditions Must be Strictly Followed
One needs to abide by strict rules and regulations for operating nostro accounts. Failing which can lead to major penalties.
3. High Risk
If nostro accounts fall prey to cyber-attacks, could severely affect the bank’s cash reserves.
Important Points to Know About Nostro Accounts
Listed below are some important points related to Nostro accounts:
- A bank decides to open a nostro account with a facilitator bank in a foreign country where it has only a minor presence.
- Opening this account facilitates flexible and smooth operations.
- One uses domestic banks as custodians for the management of the bank’s operations with respect to foreign exchange transactions.
- Considering that the purpose of a nostro account is the execution of business foreign exchange transactions, officials consider it to be a business expenditure in the financial statements.
- Moreover, as this is a specialised facility that banks provide for their customers, it is quite expensive.
- Facilitator banks are the banks that provide the nostro/vostro facility.
Final Word
There are numerous benefits to having a Nostro account, the most important of which is the convenience and ease of maintaining funds in a foreign currency and It also encourages collaboration with international banks.
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FAQs
The following are some reasons why banks require Nostro accounts:
-It promotes foreign transactions and dealings.
-It provides a guarantee to a foreign dealer that he will receive payments.
-A Nostro account makes international transactions easy.
-One can use it for settlements in foreign currencies.
Indian banks need to send foreign currency cheques to a bank in the concerned country for realisation. There are several ways in which banks can collect funds, including:
-Cash Letter Arrangement (CLA) using Nostro accounts
-Final Credit Services (FCS)
-Direct Collection Arrangement (DCA)
-Check-21 facility
Given below are the features of Nostro accounts:
-A Nostro account is an account held in foreign currency.
-Only a bank can open a Nostro account. This is because no dealer can deal with foreign currencies directly.
-One can use Nostro accounts for the settlement of international transactions that require conversion of different currencies
Nostro account charges for carrying out international transactions may range from $15 – $30 per transaction. When people need to send money abroad, their banks process the necessary transaction via their Nostro accounts. Banks use Nostro accounts for holding foreign currencies.
Bank officials consider a Nostro account that has debit balances as cash assets. A Vostro account with a credit balance is considered a liability. Nostro and Vostro are terms used to denote the same bank account from two different perspectives.
India also offers Nostro Accounts in the majority of the permitted currencies. You can send money to India in any of these currencies by instructing your bankers abroad to send money to our Nostro Account in that currency.
You must have a business account with a bank that offers Nostro accounts in order to open a Nostro account. If you own a small business, you should think about opening a Nostro account with your local bank. This will enable you to obtain the most favorable rates and terms for your Nostro account
A vostro account is a foreign bank account held by a domestic bank in the latter’s domestic currency, here it’s the rupee. Domestic banks use it to provide international banking services to their clients who require such services.
Log in to the internet banking service of your local bank, if you have one. Initiate a third-party fund transfer for the same amount as you did on “RemitMoney” to your preferred bank’s Nostro account. The customer’s Nostro account information will be displayed on the Confirmation page.
