Vostro and Nostro Accounts

Vostro and Nostro Account History

• Internationalization of Rupee: In July 2022, the RBI had unveiled a mechanism to settle international transactions in rupee.
  • The move is aimed to promote the growth of global trade, with emphasis on exports from India, as well as pushing rupee as an international currency.
  • 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.
  • Under the mechanism, all exports and imports may be denominated and invoiced in
  • rupees, with the exchange rate between the currencies of the two trading partner countries to be market determined.
  • Under this, authorized Indian banks have to open Special Rupee Vostro Accounts of correspondent banks of the partner trading country.

What are Vostro and Nostro Account

• Meaning of the terms: “Nostro” and “Vostro” are two different terms used to describe the same bank account.
  • Vostro comes from the Latin word for “yours,” as in “your money that is on deposit at our bank.”
  • Nostro comes from the Latin word for “ours,” as in “our money that is on deposit at your bank.”
• Definition: A Nostro Account is said to be a record of deposits held by a bank with a foreign bank in the currency of the country holding the funds.
  • A Vostro Account is one that is managed by a correspondent bank on another bank’s behalf.
• Difference: The difference between the two is that it is described from the point of view of the two different banks i.e., depositor and holder.
• Example: If an Indian bank like the SBI wants to open an account in the United States, it will get in touch with a bank in the US, which will open a Nostro account and accept payments for SBI in dollars.
• The account opened by the Indian bank in the US will be a Nostro account for the Indian bank, while for the US bank, the account will be considered a Vostro account.
• In the Indian context, the accounts opened by IndusInd and UCO are Vostro, and the ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts.

Advantages of Vostro and Nostro Accounts

• They help in executing large foreign exchange transactions without having any physical presence in other countries.
• They enable banks to keep funds in foreign currency without any exchange rate risk.
• It is easy to operate since it is a mere transfer of funds from one account to another in the same bank.

Disadvantages of Vostro and Nostro Accounts

• A lesser rate of interest as compared to savings or current account.
• It is generally more expensive since it is a facility provided by the home bank to execute foreign exchange transactions smoothly.
• Rigorous regulations and laws are imposed for the operation of these accounts.

RBIs Directions Related to Rupee Vostro and Nostro Accounts

• As per the Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, AD (Authorized Dealer) banks in India have been permitted to open Rupee Vostro Accounts.
• Accordingly, for settlement of trade transactions with any country, AD bank in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country.
  • AD Banks are commercial banks, state co-operative banks and urban co-operative banks that are authorized by the RBI under Foreign Exchange Management Act, 1999 (“FEMA”) to deal in foreign exchange transactions, be it current account or capital account.

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