With the world becoming a global village, credit has to flow seamlessly. Further, banks should facilitate remittances and payments in all major currencies for commercial purposes. It is for this reason that banks open accounts with other banks to maintain foreign currency deposits and reserves so as to enable easy operations and clearances.
ClearTax serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India. A Vostro account is defined as an account that a correspondent bank holds on behalf of another bank. Suppose the State Bank of India or SBI wants to open a Nostro Account in the USA, it would get in touch with any bank in the USA like Bank of America, and the Bank of America will open an account and accept payment for SBI in dollars. Vostro account is derived from the Latin word “Vostro” which means “yours” or your money that is on deposit in our bank. Nostro account comes from the Latin word “Nostro” which means “ours” or our money that is on deposit at your bank. It aims to facilitate trade in rupee in the wake of sanctions on Russia.
For example, if an Indian bank keeps an account with an overseas bank in the US in dollars, such an account, maintained in a foreign currency at a foreign centre, would be called a Nostro account by the concerned Indian bank. The American bank concerned will refer to the same account as a Vostro Account. Indian exporters using the mechanism will be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country. Russia’s two largest banks — Sberbank and VTB Bank — are the first foreign lenders to have received approval from the RBI towards settling international trade transactions in rupee. The exchange rate between the currencies of two trading partner countries may be market determined. Rupee Vostro Accounts keep a foreign entity’s holdings in the Indian bank, in Indian rupees.
Domestic banks can now offer customers who require global banking services through Vostro accounts. Wire transfers, foreign exchange transactions, deposits and withdrawals, and expediting international trade are all part of the Vostro account services. Vostro account services include executing wire transfers, performing foreign exchange transactions, enabling deposits and withdrawals, and expediting international trade. According to the mechanism finalised by the RBI, banks of partner countries can approach authorised dealer banks in India for opening special rupee vostro accounts. The authorised dealer bank will then have to seek approval from the central bank with details of such an arrangement.
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German banks may approach an AD bank in India for the opening of Special Rupee Vostro account. The AD bank then will seek approval from the RBI with details of the arrangement and subsequent to the approval granted by the RBI, the Special Rupee Vostro account in the Indian AD bank by a German bank shall be opened. ClearTax offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India.
- Foreign currency means any other currency other than the home currency, so if we say with reference to the above example foreign currency means any other currency other than Rupee for India, Pound Sterling for UK and US Dollar for USA.
- The account is opened by a bank so as to facilitate easy clearing of their transactions in the foreign country.
- A Nostro account is a Vostro account for the bank that opens the account.In the above example, the account will be called a Vostro account for bank “B”.
- 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.
Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing. Enables one to offer international banking solutions to a customer without opening a bank branch in a foreign nation. Bank B, where bank A’s money is deposited, will use the term Vostro account to refer to “your money that is on deposit at our bank”. Full access to our intuitive epaper – clip, save, share articles from any device; newspaper archives from 2006.
To make it clearer, Nostro means ‘ours’ and Vostro means ‘yours’ in Latin. Therefore, the accounts opened by IndusInd and UCO are Vostro, and the ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts. Save taxes with ClearTax by investing in tax saving mutual funds online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP.
This bank will open a Nostro account for an Indian bank and accept their currency as payment. The Indian bank’s account in the country will be a Vostro account for that country’s bank, while the Indian bank’s account in that country will be a Nostro account. An example of such an account would be HSBC vostro account is held by SBI in India. Nostro account refers to the record of the bank which has kept money on deposit at another bank. Nostro and Vostro account basically refer to two different terms that are used to denote one single account by two different banks. Let us learn about the differences between the Nostro and Vostro accounts.
For example when XYZ bank of India is maintaining an account with ABC Bank in New York USA in USD when PQR bank of India refers the said account in correspondence with XZY Bank, Now YORK it is said LORO account . The Indian company gets paid in foreign currency in case of exports and the company converts that foreign currency to rupee since it needs rupee for its needs, in most of the cases. So, in case of imports, the Indian company has to pay in a foreign currency (mainly dollars and could also include currencies like pounds, Euro, yen etc.).
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. Vostro accounts are maintained in the domestic currency whereas, nostro accounts in foreign currency. In the case of trade with Russia, payments in rupee for the export and import of goods will go to these Vostro accounts. The owners and beneficiaries of this money will be the exporters and importers in both the countries. Thus, Nostro and Vostro accounts are accounts customary account maintained across the globe by banks to facilitate easy transactions between them in foreign currency. When countries import and export goods and services, they have to settle payments in a foreign currency.
Nostro and Vostro are Latin words that translate to ‘ours’ and ‘yours’ respectively. The RBI has recently put a mechanism to settle international trade in rupees–promote growth of global trade and exports from India in the rupee. The two largest banks of Russia, Sberbank and VTB Bank are the first foreign lenders to receive RBI approval to settle international trade transactions in rupee. It is a bank account that allows customers to deposit money on behalf of another bank. Bank A will use the term Nostro account to refer to “our” account held by Bank B. Basically, Nostro is shorthand for “our money that is on deposit at your bank”.
What led to creation of the Vostro accounts?
Two kinds of accounts, Vostro and Nostro, are often mentioned together. Both Vostro and Nostro are technically the same type of account, with the difference being who opens the account and where. Curated newsletters on markets, personal finance, policy & politics, start-ups, technology, https://1investing.in/ and more. Now let us look at the differences between Nostro and Vostro accounts. ASPIRE IAS specialises in all three stages of Civil Services preparation. Here, we provide best quality education at the best price with the aim of spreading an EDUCATION REVOLUTION. Read More.
In this regard, three types of accounts come into play- Nostro, Vostro, and Loro. In July 2022, the RBI had unveiled a mechanism to settle international transactions in rupee to promote the growth of global trade, with emphasis on exports from India, as well as pushing rupee as an international currency. A Nostro account is an account maintained by a domestic bank with a foreign bank in foreign currency. Vostro accounts enable domestic banks to provide international banking services to their clients who have global banking needs.
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The Nostro account is the record maintained by the bank that has money deposited with another bank. They enable simplified trade settlements and foreign exchange transactions. The word ‘Nostro’ finds its roots in the Italian word ‘Nostro,’ meaning ‘ours.’ Hence, a literal meaning of a Nostro account is- “Our account with you”. A Nostro account is an account that is opened by a bank with an overseas bank in the currency of the foreign country. The account is opened by a bank so as to facilitate easy clearing of their transactions in the foreign country. Further, sanctions imposed by the US and EU in response to Russia’s invasion of Ukraine have put pressure on the Indian rupee.
Understanding a Vostro Account
Accordingly, for settlement of trade transactions with any country, an AD bank in India may open special rupee Vostro accounts of correspondent banks of the partner trading country. A Vostro account is an account that a domestic bank holds for a foreign bank in the domestic bank’s currency, i.e., rupee. The idea is to get around Western sanctions difference between nostro and vostro account against Russia by carrying on trade in rupees. Without having a physical presence in other nations, they help in the execution of huge foreign exchange transactions. They let banks keep money in other currencies without worrying about the exchange rate. As it is merely a transfer of funds between accounts in the same bank, it is simple to use.