To enable export-import transactions based on the rupee, the RBI has authorised Russian banks to open exclusive Vostro accounts.
Why?
The majority of Russian banks are seeking for alternatives after being locked out of SWIFT, the messaging platform used to handle and authenticate international payments.
India and a number of other nations also desire a solution so that trade may resume.
Currently, direct rupee-ruble commerce is being investigated between India and Russia.
In this case, Nostro and Vostro might be useful.
About Vostro Account
- An account that a correspondent bank manages on another bank’s behalf is known as a Vostro account.
- A vostro account implies that it is “your account” because the Latin word vostro means “your”
- An illustration of one of these accounts is the HSBC Vostro account held by SBI in India.
- The banks are in a principal-agent relationship and functioning in a fiduciary capacity.
- A financial middleman in the transactions they are a part of is the correspondent foreign bank.
- On behalf of the domestic bank, the foreign bank serves as an agent, carrying out tasks like carrying out wire transfers, performing foreign exchange, enabling deposits, enabling withdrawals, and speeding up international trade.
- It is most frequently used to settle foreign exchanges or international trade.
- As per the instructions given by the RBI in India, no interest will be paid on the kept vostro account.
- Only when an overdraft facility has been properly approved may it be used.
Nostro and Loro Accounts
Vostro and Nostro accounts are frequently mistaken for one another.
Although the discussion is essentially about the same story, the viewpoint from which it is seen important.
A vostro account represents the viewpoint of the correspondent foreign bank, whereas a nostro account represents the viewpoint of the domestic bank.
While nostro accounts are kept in foreign currency, vostro accounts are kept in the local currency.
In contrast to nostro and vostro, which involve bilateral correspondence, 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.
Uses
- Small domestic banks can use this account to economically access the resources and services of a bigger overseas bank.
- allows one to provide a customer with international banking solutions without having to create a bank location there.
- It cuts down on the time needed for fund transfers.
- Statement reconciliation can be improved by using closely watched nostro accounts.