What is a Vostro Account – Meaning, Working and Difference
What is a Vostro Account?
A Vostro account is a bank account held by a domestic bank on behalf of a foreign bank or financial institution in the local currency of the country where the account is held. It is a type of correspondent banking that enables foreign banks to conduct transactions and provide services in local markets where they do not have a presence. The domestic bank acts as a custodian, maintaining and managing the account on behalf of the foreign bank.
How Does Vostro Account Work?
The domestic bank establishes a Vostro account with a foreign correspondent bank, which acts as an intermediary or agent to facilitate various banking services for the domestic bank’s clients.
The services provided by the foreign correspondent bank may include the following:
- Executing wire transfers
- Performing foreign exchange transactions
- Enabling deposits and withdrawals
- Expediting international trade
When a domestic bank establishes a Vostro account with a foreign correspondent bank, they enter into a fiduciary relationship where the correspondent bank acts as a financial intermediary on behalf of the domestic bank. This relationship is based on the principal-agent model, where the correspondent bank acts as an agent and provides services to the domestic bank’s clients.
The correspondent bank charges the domestic bank for the services associated with the Vostro account. This arrangement allows small domestic banks with limited financial and human resources to access global banking services economically.
Vostro Account vs Nostro Account
The table below highlights the difference between the Nostro and Vostro account:
| 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 Vostro account is maintained in domestic currency. | Nostro accounts are maintained in foreign currency. |
| Vostro accounts are used for monitoring funds that are either held by or owed to a bank by a third party. | Nostro accounts are used to record the amount of money from the original bank being held by another institution. |
| The Vostro account serves as an intermediary for transactions in foreign banking, where the correspondent bank supervises and manages the funds. | Nostro account holds funds in the foreign country’s currency where the correspondent firm operates, facilitating international trade transactions that involve different currencies and foreign exchange. |
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Why is the Nostro account Used?
Banks and large corporations use a Nostro account engaged in international trade to keep track of all funds held in other banks. A bank holds this type of bank account with a foreign bank in the currency of the country where the funds are held.
A Nostro account allows the bank to conduct international trade transactions and foreign exchange without converting its local currency into foreign currency.
The Nostro account is maintained in a foreign currency that can be converted for use in foreign exchange and foreign trades. It makes it possible for banks to manage their international transactions more efficiently, as they do not need to convert their local currency every time they engage in a transaction.
Moreover, banks use Nostro accounts when buying or selling in another country where they do not have a physical presence. Instead, they use an established bank in the foreign country to carry out the transaction on their behalf. It enables banks to leverage the expertise and knowledge of the foreign bank, ensuring that the transaction is completed smoothly and efficiently.
Example of Vostro Account
Suppose City Bank, based in the USA, wants to conduct business in India. To do so, they must maintain an account with an Indian bank. City Bank partners with HDFC Bank based in India and opens an account with the denoted currency INR (Indian Rupee). The account that City Bank holds with HDFC Bank is called a Vostro account.
In this scenario, HDFC Bank is the domestic bank holding the Vostro account on behalf of City Bank, the foreign bank. HDFC Bank provides services to City Bank in India, such as processing transactions, providing credit facilities, and managing the account. The Vostro account enables City Bank to conduct business in India without establishing a physical presence there.
Final Word
The Vostro account is a valuable tool for banks to offer efficient and cost-effective cross-border payment services. It’s an attractive option for businesses and individuals with several benefits, including dedicated relationship management, low fees, and real-time tracking of transactions. With its customisable features and advanced technology, it enables banks to meet the evolving needs of their clients and stay competitive in the global banking industry.
FAQs
Banks use a Vostro account to hold funds on behalf of another bank. It is commonly used in international trade transactions where one bank is an intermediary between the buyer and seller’s banks. The Vostro account allows for smoother and more secure settlement of these transactions.
Foreign banks from 18 countries have been given the green light by the Reserve Bank of India (RBI) to establish Vostro accounts for settling international trade transactions in Indian rupees. A system will be created for settling international trade in Rupees.
Several banks, such as HDFC Bank and UCO Bank, have established dedicated vostro accounts to facilitate cross-border trade in Rupees, and several countries have shown interest in implementing a similar arrangement for their local currency trade. Currently, 20 banks have set up a specialised Rupee vostro account.
At present, the Reserve Bank of India (RBI) has allowed countries, including Botswana, Germany, Fiji, Israel, Guyana, Malaysia, Kenya, Myanmar, Mauritius, Oman, New Zealand, Seychelles, Russia, Sri Lanka, Singapore, Uganda, Tanzania, and the United Kingdom to open a Vostro account in India.
The primary benefits of having a Vostro account include enabling domestic banks to provide international banking services to their clients without having to open branches in foreign countries, reducing the dependence on foreign currencies, and minimizing the time for the transfer of funds.
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