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difference between nostro and vostro account

These accounts are often set up to make it easier for businesses to complete foreign trade transactions. Vostro account refers to the account that is held by a bank which allows customers to deposit money on behalf of another bank. You can access GlobalBanks IQ, our international banking intelligence platform, in just a few clicks. Unlock our bank database, individual bank profiles, account opening strategies and reports, banker scripts, and more. This article is part of our free series on how to open a bank account, which covers bank accounts for all possible scenarios, including when an account has been deemed dormant.

  • It is simply a record that Bank A’s money is held in Bank B to facilitate foreign exchange transactions and settlement of international trade.
  • Both institutions on each side of the transaction are required to maintain a record of all funds held on behalf of other banks.
  • In short, nostro and vostro refer to the different accounting records that are maintained when one bank holds funds at another bank in the holding bank’s home currency.
  • A Nostro account is used as a specialized, additional feature that is mostly found in the countries with the facility of convertible currencies.
  • Nostro account comes from the Latin word “Nostro” which means “ours” or our money that is on deposit at your bank.

These accounts are used to facilitate international transactions and to settle transactions that hedge exchange-rate risk. Vostro accounts are most commonly used in currency settlements in which a bank must hold balances of a currency other than its home currency. Vostro account is a term used to describe an account held by another bank on behalf of the bank which owns it.

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Both institutions on each side of the transaction are required to maintain a record of all funds held on behalf of other banks. Banks have nostro accounts to let them process transactions in foreign currencies without having a physical presence in that country. An Indian dealer Mr. A want to pay amount in US dollars to the dealer in US for import of goods.

difference between nostro and vostro account

And since country ‘B’ maintains an account of a foreign bank in its home currency, i.e., ‘B’ currency, this will be a ‘Vostro account’ from country B’s point of view. The Nostro account, Vostro account, and Loro account, are three very important terms when it comes to understanding foreign exchange. You must clearly understand these three main terms if you receive or send money to your loved ones in a foreign country. Take our earlier US bank, which holds a nostro account with a large UK financial institution. When the US bank wants to exchange USD to GBP, they’ll deposit USD to the British bank’s nostro bank in the US. The British bank will then simultaneously deposit the equivalent amount of GBP into the UK based nostro account of the US bank.

Difference between Nostro and Vostro accounts

NOSTRO account is the record held by domestic bank of the funds held with foreign bank in the currency of foreign bank. From the perspective of domestic banks, the funds deposited at correspondent banks are referred to as nostro accounts. Nostro accounts are denominated in the foreign currency of the correspondent bank. The term vostro, translated from Latin, means “your,” as in your account.

Also, only businesses or governments have nostro or vostro accounts, they aren’t offered in the same way to individual account holders. Vostro account at RBI refers to an account that is held for the benefit of another financial institution at RBI. In other words, foreign banks have bank accounts with the RBI in order to directly hold rupee deposits.

Vostro account

Vostro means “your,” and it’s a way to say, “your money that is on deposit at our bank.”
A vostro account can be either a company’s or an individual’s. Banks in the United Kingdom and the United States often hold a vostro account on behalf of a foreign bank. The vostro account is held in the currency of the country where money is on deposit. A nostro account is the record of the bank whose money is at another bank. Nostro accounts are often used to simplify trade and foreign exchange transactions.

On the other hand, a Vostro account is a reference used by Bank B, which holds Bank A’s funds. From Bank A’s perspective, a Nostro account is denominated in foreign currencies, whereas a Vostro account is denominated in the home currency. The following example illustrates the process of making a payment using a nostro account. Bank A in the U.S. enters into a spot foreign-exchange contract to buy British pounds from Bank B, which is in Sweden. For both Nostro and Vostro accounts, the domestic bank, i.e., the bank that is holding the account, acts as caretaker for the account and is sometimes referred to as the “facilitator” bank.

Understanding Vostro Accounts

A Nostro account is a mechanism that banks use to keep track of all funds being held in other banks in the currency of the country where the funds are held. The Nostro account is maintained in a foreign currency that can be converted for use in foreign exchange and foreign trades. A bank may have a Nostro account in any country that has a convertible currency, such as the euro, British pound, and the US dollar. If a currency is not convertible, a bank may work with a third party in the foreign country to carry out the transaction on its behalf.

  • For example, if a bank in the United Kingdom has a vostro account with a bank in the United States, the account will be denominated in US dollars and will be designated as belonging to the bank in the United Kingdom.
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  • The banks involved in this situation both need to record the money that is being held by one bank for the other bank involved.
  • Below are three of the most common questions that we receive from people looking into the difference between a nostro and vostro account.
  • When a bank needs to make a payment in a country where it doesn’t hold a nostro account, it can use a bank with which it has a correspondent relationship to make the payment on its behalf.

To facilitate the wire, the originator of the transfer sends the amount of the wire plus applicable fees to the vostro account held on its behalf by the correspondent bank. The correspondent bank deducts the fees and the amount of the wire from the vostro account and executes a domestic wire to the receiving bank. A vostro account is established to enable a foreign correspondent bank to act as an agent or provide services as an intermediary for a domestic bank. These services include executing wire transfers, withdrawals, and deposits for customers in countries where the domestic bank does not have a physical presence.

If you’ve heard both of the terms nostro and vostro you might be wondering what the difference is between a nostro and a vostro account. In fact, these terms can refer to the same bank account but from different points of view. A nostro account and a vostro account actually refer to the same entity but from a different perspective. For example, Bank X has an account with Bank Y in Bank Y’s home currency. 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.” Nostro and Vostro are variations on the Latin words that mean “ours” and “yours,” respectively.

The ledger kept by the depositing customer called it a Nostro ledger; the bank kept the corresponding Vostro ledger. It is a current account maintained by one domestic bank (say SBI) for other domestic bank (say PNB). Here PNB does not have a current account with Citibank and uses SBI’s nostro account with Citibank for some transaction. Vostro is a reference to “yours” and refers to “your money that is on deposit at our bank.” A vostro account is like any other account held by a bank. The account is a record of money owed to or maintained by a third party, typically another bank, but it can be either a company or an individual.

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It is the account which is kept in foreign currency by the domestic bank with foreign bank having physical location in domestic country for the dealers who wants to deal in foreign currency. This gives assurance to the foreign dealer but the regulations involved are many hence difference between nostro and vostro account cost is high for opening of the account. Contrarily, vostro accounts with a credit balance are considered liabilities. Computerized accounting allows for easily reconciling nostro and vostro accounts just by using “+” or “-” signs in the banks’ respective accounting systems.

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). Below are three of the most common questions that we receive from people looking into the difference between a nostro and vostro account. If you have further questions you would like answered, don’t hesitate to get in touch with us directly. The facilitator bank will open a euro account, but the account will be different from the typical checking account for residents of the eurozone. The account holder will have the ability to buy or sell in the eurozone using the euro currency.

Usually, banks use Nostro accounts when buying or selling in another country where it does not have a physical presence, and instead uses an established bank in the foreign country to carry out the transaction on its behalf. To understand different foreign exchange transaction terms, we must first understand what the terms of home currency and foreign currency are. Foreign currency can be explained like any other currency other than home currency.

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