Russian banks have been permitted by the RBI to open special Vostro accounts to pave the way for rupee-based export-import transactions.
Why such move?
- Logged out of SWIFT -the messaging service to facilitate and confirm cross-border payments – most Russian banks are looking for alternative ways.
- India and several other countries too want a way out so that trade can continue.
- India and Russia are now exploring to directly trade in rupee-ruble.
And this is where Nostro and Vostro may come into play.
What is a Vostro Account?
- A Vostro account is defined as an account that a correspondent bank holds on behalf of another bank.
- Vostro is a Latin word that means “your”, therefore, a vostro account implies that it is “your account”.
- An example of such an account would be HSBC vostro account is held by SBI in India.
Understanding a Vostro Account
- The banks are acting in a fiduciary relationship and they share a principal-agent relationship.
- The correspondent foreign bank is a financial intermediary in the transactions that they are involved in.
- The foreign bank acts as an agent that provides services such as executing wire transfers, performing foreign exchange, enabling deposits, enabling withdrawals, expediting international trade on behalf of the domestic bank.
- It is most used in settlement of foreign exchanges or foreign trade.
- No interest will be paid on the vostro account maintained, as per the directives that have been issued by the RBI in India.
- An overdraft facility can only be availed if it is specifically sanctioned.
Other related terms: Nostro and Loro Accounts
- Vostro and Nostro accounts are often confused to be the same.
- While in essence, it is the same account that is being spoken about, the perspective from which it is being seen matters.
- In a vostro account, it is the correspondent foreign bank point of view, whereas in a nostro account, it is the point of view of the domestic bank.
- Vostro accounts are maintained in the domestic currency whereas, nostro accounts in foreign currency.
- A Loro account is a current account that is maintained by one domestic bank for another domestic bank in the form of a third party account, unlike nostro and vostro which is bilateral correspondence.
Why is it used?
- This account serves as an economic way for small domestic banks to access the financial resources and services of a larger foreign bank.
- Enables one to offer international banking solutions to a customer without opening a bank branch in a foreign nation.
- It minimizes the time for transfer of funds.
- Closely monitored nostro accounts can be used for better reconciliation of statements.
