The role of banks in international trade is crucial. The banks provide financing products such as letters of credit, forex and helps to reduce risks and allow transactions to go smoothly for importers and exporters worldwide. Because of the worldwide trade, commerce, and finance, forex markets tend to be the world’s largest and most liquid asset markets. Nostro and Vostro accounts helps ease foreign exchange in international trade.
NOSTRO
A nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for “ours,” are frequently used to facilitate foreign exchange. The opposite term “vostro account” derived from the Latin word for “yours,” is how a bank refers to the accounts that other banks have on its books in its home currency.
A Nostro account is an account maintained by a domestic bank with a foreign bank in foreign currency. For example, State Bank of India has opened an account with Bank of America in New York for dealing in US Dollars, this account is called as the Nostro account for the State Bank of India. In the Nostro account, the domestic bank acts as the facilitator – in this case SBI is the facilitator. A Nostro account with debit balances is considered an asset because domestic banks are often used as custodians to manage the bank’s operations regarding foreign exchange transactions. A bank recognizes the Nostro balance in the account as a debit balance with other banks and hence recorded as the bank’s assets on the balance sheet.
Nostro accounts are usually held by banks and large corporations that are involved in international trade. By holding funds in another bank in a foreign currency, the bank can conduct international trade transactions and foreign exchange without having to convert its local currency into foreign currency. Nostro accounts work by allowing one party to hold money in a bank in a foreign country in that country’s currency. When transactions are conducted through a nostro account, the bank that holds the account aids in completing transactions involving different currencies.
VOSTRO
A Vostro account is an account maintained by a foreign bank with the home currency of that bank. In the Vostro account, the foreign bank acts as the facilitator. Hence SBI’s opening Vostro account with Bank of America, makes Bank of America facilitator. Vostro means yours. A Vostro account with a credit balance is considered a liability, and a vostro with a debit balance (a loan) is an asset. Another example of such an account is SBI holding a vostro account in HSBC. Several banks, including HDFC Bank and UCO Bank, have opened as many as 30 special vostro accounts to facilitate overseas trade in the rupee. Sberbank and VTB Bank — the largest and second-largest banks of Russia, respectively are the first foreign lenders to receive the approval from RBI. The move to open the special vostro account clears the deck for settlement of payments in rupee for trade between India and Russia, enabling cross-border trade in the Indian currency, which the RBI is keen to promote. RBI announced the guidelines on overseas trade in the rupee in July 2022.
The Government of India has allowed 20 Russian banks, including Rosbank, Tinkoff Bank, Centro Credit Bank and Credit Bank of Moscow have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India. All major domestic banks have listed their nodal officers to sort out issues faced by exporters under the arrangement.
Additionally, it is anticipated to facilitate trade with Russia and other nations subject to sanctions. The RBI’s finalized mechanism allows authorized dealer banks in India to open special rupee vostro accounts on behalf of partner banks. The authorized dealer bank will then need to present the specifics of the arrangement to the central bank for approval.
Domestic banks use Vostro account to provide international banking services to their clients who have global banking needs. Vostro is an integral offshoot of correspondent banking that entails a bank or an intermediary to facilitate wire transfer, conduct business transactions, accept deposits and gather documents on behalf of the other bank. It helps domestic banks gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.
The SRVA is an additional arrangement to the existing system that uses freely convertible currencies and works as a complimentary system. For perspective, freely convertible currencies refer to currencies permitted by rules and regulations of the concerned country to be converted to major reserve currencies like U.S. dollar or pound sterling and for which a fairly active market exists for dealings against major currencies. The existing systems thus require maintaining balances and position in such currencies.
Functioning of SRVA
The framework involves three important components: invoicing, exchange rate and settlement.
The framework entails three important components – invoicing, exchange rate and settlement.
- Invoicing entails that all exports and imports must be denominated and invoiced in INR.
- The exchange rate between the currencies of the trading partner countries would be market-determined.
- The final settlement also takes place in Indian National Rupee (INR).
How much money do you think is in nostro vostro accounts worldwide?
There are $27 trillion dollars resting in nostro and vostro accounts to fulfill payments. Let that sink in for a moment, there is $27 trillion of “dead capital” laying idle for days on end in these accounts.
