Nostro Account vs Vostro Account: Understanding the Difference

Nostro and vostro (from Italian, nostro and vostro; English, ‘ours’ and ‘yours’) are accounting terms used to distinguish an account held for another entity from an account another entity holds. Additionally, international transactions can span different time zones and require communication between banks in various regions worldwide. Delays may occur due to differences in working hours, holidays, or operational procedures across different countries. If a domestic bank, vostro and nostro account Bank A, opens an account in a foreign bank, Bank B, in the foreign currency, then Bank A has maintained a Nostro account with Bank B, while Bank B maintains a Vostro account with Bank A. International students who want to study in another country can open a Nostro account with a bank in their country, which will then set up their performance in a foreign bank. Once you find a bank, you’ll need to complete an application and submit any required documentation.

1. The accounts benefit clients with global banking needs and allow them, through their own bank, to open accounts in other countries as they need.
2. This account is our account in another country, and a Vostro account is the account of a foreigner in our country.
3. Prior to the advent of the euro as a currency for financial settlements on Jan. 1, 1999, banks needed to hold nostro accounts in all the countries that now use the euro.
4. You may hear the terms ‘nostro account’ and ‘vostro account’ used in discussions of foreign trade and currency exchange.

The account will be treated as a Nostro account (our account) for the U.S. bank and a Vostro account (your account) for the European bank. Keep in mind that most transfers will incur transaction fees, which are deducted from the account at the end of the transaction. A Nostro account is a reference used by Bank A to refer to «our» account held by Bank B. Nostro is a shorthand way of talking about «our money that is on deposit at your bank.» Therefore, the accounts opened by IndusInd and UCO are Vostro, and the ones opened by Russia’s Sberbank and VTB Bank are Nostro accounts. Presently Mr. A will pay $1,00,000 to the homegrown bank in the Nostro record of Mr. B, and the home bank will pay the related bank in the USA $1,00,000 into its Vostro account.

On the other hand, an Indian bank can also have one of these accounts held with a bank in the United States. With a vostro account relationship in place, the customer of a domestic bank can walk into the office of a correspondent bank to withdraw or deposit funds. The funds are converted to the local currency, deducted from the vostro account, and paid to the domestic bank’s customer, minus the applicable fees. For most banks, the cost of building physical branches in every country their customers might need banking services is prohibitive.

Nostro accounts can offer convenience, since holding funds in the local currency can save the entity that established the account the trouble of having to convert foreign currencies. 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.

These accounts are most widely used for currency settlement, which occurs when a bank or other financial institution wants to settle balances in a currency other than the currency of its home accounting unit. While opening a Nostro account, the client bank chooses to open an account with one more bank with a financial relationship within a far-off country. It is an instrument that banks use to monitor all assets being held in different banks in the currency of the nation where the assets are held. It is kept within a foreign currency that can be changed for use in foreign trade and exchanges.

If C does not have an account directly with FNBA’s corresponding bank, the funds may be transferred within the banking system of country B by cheque or some form of electronic funds transfer (EFT). In this case CMB will make entries on several other accounts, such as a teller’s receiving account, or a clearing account with the third bank holding C’s account. For these accounts, the domestic bank is acting like a custodian or managing the accounts of a foreign counterpart. These accounts are utilized for facilitating the settlements of forex and foreign trades. A vostro account is a record of money held by a bank or owed to a bank by a third party (an individual, company or bank). Nostro and vostro are variations on the Latin words that mean «ours» and «yours,» respectively.

Bank A in the U.S. enters into a spot foreign-exchange contract to buy British pounds from Bank B, which is in Sweden. A nostro account and a vostro account actually refer to the same entity but from a different perspective. To Bank X, that is a nostro, meaning «our account on your books,» while to Bank Y, it is a vostro, meaning «your account on our books.» 20 Russian banks have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India for the settlement of payments in rupee for trade between India and Russia. The terms Nostro and Vostro describe the same bank account; the terms are used when one bank has money on deposit with another bank. Thus Bank A will move the necessary sum in dollars to the Nostro record of Bank B in the United States of America.

Both banks in the venture must record the amount of money being stored by one bank on behalf of the other bank. The terms nostro and vostro are used to differentiate between the two sets of accounting records kept by each bank. Digital cross-country payments are increasing in volume with each passing day, and most countries are upgrading their payment systems. Bank of America collaborates with ICICI Bank in India and opens an account with Indian Rupees (INR) as the currency. This account is called a VOSTRO account, and ICICI Bank is the domestic bank that holds it on behalf of Bank of America. Nostro accounts are used simultaneously with Vostro accounts to keep track of banking transactions and differentiate between both sides of the relationship.

Vostro Account vs. Nostro Account

Prior to the advent of the euro as a currency for financial settlements on Jan. 1, 1999, banks needed to hold nostro accounts in all the countries that now use the euro. Computerized accounting allows for easily reconciling nostro and vostro accounts just by using «+» or «-» signs in the banks’ respective accounting systems. Banks in the United Kingdom or the United States often hold a vostro account on behalf of a foreign bank.

Compliance and regulatory adherence

In simpler terms, Vostro accounts are used to track money held or owed to a bank by a third party. A Nostro account is used to record how much of the original bank’s money is being held by another institution. If a United States resident wants to open a euro account, they do not necessarily have to travel to Europe to open the account.

Now Mr. A will approach his bank to set the dollar account on behalf of him as he wanted to make payment in dollars against the goods imported from US. The local bank approached by Mr. A will approach to the foreign bank with which the bank is having banking relations and physical location in India for opening of NOSTRO Account. Vostro accounts are an essential part of correspondent banking because the bank holding the funds https://1investing.in/ acts as a custodian for or maintains the account of a foreign counterpart. Therefore, the services related to the Vostro account are charged by the correspondent bank to the domestic bank. These accounts are a specialized feature typically found in countries with convertible currencies. However, in countries without convertible currencies, banks collaborate with third parties to facilitate such financial transactions.

Therefore, no transactions occur from one country to another; be that as it may, the exchange is executed without a hitch. On the settlement date, bank B will move euros 1,00,000 to the Nostro account in the UK. As a rule, banks use Nostro accounts while trading in another nation where it doesn’t have an actual presence, and on second thought involves a laid out bank in the outside country to complete the exchange for its benefit.

Example of a Vostro Account

It is a foreign currency account opened through your local bank at a bank in the country where the currency is desired. This account is our account in another country, and a Vostro account is the account of a foreigner in our country. But if you do run a company that does business internationally, it’s important to evaluate how a nostro account might help to meet certain financial needs. Computerized accounting allows for easily reconciling Nostro and Vostro accounts just by using «+» or «-» signs in the banks’ respective accounting systems.

Banks generally don’t hold nostro accounts in those countries, as there is little or no foreign exchange business. The primary objective is to achieve faster, more cost-effective, and more reliable settlement while leveraging the capabilities and networks of other banks or intermediaries. The intermediary bank then helps to facilitate the movement of that money to your home bank, where it can be converted into the local currency. Their current bank doesn’t offer banking services in Europe, but they’re able to find a facilitator bank that offers nostro accounts. We know that Vostro accounts are used in foreign banking as an intermediary for transactions where the correspondent bank acts as a manager or supervisor of the funds. Further, the term “Vostro” is Latin for “yours,” implying the funds are solely the customers.

This money deposited will then be transferred by Citibank via SWIFT to GTBank’s U.S. dollar account in Nigeria. SWIFT refers to the Society for Worldwide Interbank Financial Telecommunications, a member-owned cooperative that offers safe and secure financial transactions for its members. With the transfer complete, GTBank receives the dollar-denominated funds, converts it into the local currency, i.e., the naira, and deposits it to the local accounts of the recipients. As an agent of a domestic bank, the correspondent bank can facilitate agreed-upon services for the client as they travel abroad, work abroad, or do business/own a company internationally. Correspondent banks act as a financial intermediary in the relationship and execute transactions that are requested. In this type of relationship, the correspondent bank provides regular reports to the respondent bank.

A record of Bank A’s cash is held in Bank B to work with foreign trade exchanges and repayment of global business. This account is an extra specialized feature mainly found in countries with convertible currencies. Here is an example to further break down the use of a Vostro account from the customer side. A domestic bank customer who maintains a Vostro account at a correspondent bank can go to their home bank to use the correspondent’s international services and complete transactions through its Vostro account. Most countries, including India, are looking to update and amend the rules of foreign currency transactions.

The opposite term «vostro accounts»—derived from the Latin word for «yours»—is how a bank refers to the accounts that other banks have on their books denominated in the holding bank’s home currency. International banking transactions don’t always work exactly the same as domestic banking. You may hear the terms ‘nostro account’ and ‘vostro account’ used in discussions of foreign trade and currency exchange.