Wednesday, November 18, 2009

Banking Fundementals-Nostro and Vostro Accounts

When Money transfer is to be done beteen countries in different currencies Nostro and Vostro Accounts are used.

When Bank ‘A’ opens an account with Bank ‘B’ (which is located in another country), that account is called (from A’s point of view) a NOSTRO account. The same account will be called a VOSTRO account (from B’s point of view). The account will be generally in B Bank's country currency.

Example Nostro Transaction:

Exporter Mohan sells his goods to an importer Robert in Bermuda. Mohan banks with ICICI bank in India and Robert Banks with Bank Of Bermuda which has no operations in India.

Bermudian Dollar is not traded in India and hence the importer needs to pay for the goods imported through a common currency which is generally US Dollar or Euro. Assuming Mohan has preferred his payments throgh US Dollar and has asked Robert to pay through US Dollar.

Since Bank Of Bermuda has no operations in India, The bank will find a common bank which has operations in India or has established relationship with an Indian bank. In the current context Bank Of Bermuda will look for some bank which has a relationship with ICICI Bank of India to make the transaction simple.

Assuming that ICICI Bank has relationship with CITI Bank, New York which has operations in many countries. Bank Of Bermdua will establish a relationship with CITI Bank , New York and open US Dollar Account. As the need has forced Bank Of Bermuda to open an account with CITI NY, ICICI Bank also has opened a USD account with CITI NY.

These accounts are called NOSTRO Accounts of Bank Of Bermuda and ICICI Bank with CITI NY.

In the above export /import transaction between Mohan and Robert where Robert to pay USD 500,000 to Mohan the following will happen.

At Bank Of Bermuda

Debit Roberts USD account 500,000
Credit CITI NY Account USD 500,000 with an Instruction to pay this to ICICI Bank Account with CITI NY.

At CITY NY

Debit Bank Of Bermuda's (Nostro)Account USD 500,000
Credit ICICI (Nostro) Account USD 500,000 with an instruction to pay Mohan in India

At ICICI India

Debit CITI NY Account USD 500,000
Credit Mohans Account INR (500,000X47), 47 being the exchange rate between USD and INR


Example Vostro Account:

If in the above example, if Robert Exports and Mohan Imports, Robert should be getting the money. CITI will maintain an account with Bank Of Bermuda if it does not have operations in Bermuda. This account of CITI to pay inside Bermuda is called the Vostro Account.

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