From simplifying transactions to reducing exchange rate risk and convenience, opening a nostro account benefits businesses in many ways nowadays. Vostro accounts also benefit a business organization differently in other countries. Read on to learn more about both these accounts with a nostro and vostro account example.
What is a Nostro Account?
A nostro account is a form of bank account that a country’s domestic bank maintains with a bank of another country. The domestic bank deposits funds in foreign currencies. This arrangement simplifies international trade between two countries. The term ‘nostro’ is an adaptation of a Latin word called “nostros”, which means “ours”. Just like nostro, the term “vostro” also originates from a Latin word that means “yours.”
The best way to understand nostro account meaning is to consider an example. Picture this: Bank A, which operates in India, maintains a bank account with Bank B, which belongs to Australia. Bank A’ maintains its account with Bank B by keeping its funds exclusively in Australian dollars. This arrangement exemplifies or illustrates a nostro account of Bank A with Bank B.
Working of a Nostro Account
A bank nostro account operates by a systematic and straightforward method. A domestic bank of a country creates and sets up a bank account with a bank in another country. Next, the former deposits funds in foreign currencies. Thereafter, the bank that holds the funds of the domestic bank allows the latter to make payments in different currencies. This way, the bank in the foreign country assists the domestic bank in carrying out its financial transactions.
Often, large corporations and banks are the only organizations that maintain nostro accounts. This explains why a nostro agent belongs to an entity from one of these categories. Generally, converting a sum of money from one currency to another can be a tedious job, especially in the hour of need. Nostro banks help overcome this challenge by enabling foreign exchange and international trade transactions. More importantly, it eliminates the need to convert a local currency into the currency of any other country for trading.
Importance of Nostro Account
A nostro account is primarily a trade-only account for international trading, which either belongs to a government or a business organization. It has many characteristics. Prominent among them are the ones mentioned below.
- Foreign currency denomination – Because the denomination of a nostro account is based on foreign currencies, a nostro balance is primarily meant for either governments or businesses.
- Exclusive accounts for governments or businesses – A nostro account differs from standard bank accounts in the sense that it is not offered to an individual account holder. Instead, it is exclusively offered to governments or businesses.
- Foreign exchange transactions – A bank that holds a nostro account in a country uses its funds as a point of reference in terms of the currency of that country.
What is a Vostro Account?
A Vostro account refers to a bank account that a bank maintains with a correspondent bank in a foreign country. Alongside acting as a custodian of the Vostro account, the correspondent bank also takes care of it (the Vostro account). The correspondent bank helps the other bank with the efficient management of finances. How does it work? Refer to the example below to gain an insight into it.
Suppose a German life insurance company requests a bank in the United States to manage funds for a German life insurer. In this scenario, the account with the General Life Insurance Company with the bank in the United States is a Vostro account.
Differences Between Nostro & Vostro Account
Nostro and Vostro accounts may seem to be similar on the surface. However, they are quite different from each other. Refer to the table below to gain an understanding of the key differences between them.
| Nostro Account | Vostro Account |
| The term ‘nostro’ refers to ‘ours’ | The term ‘vostro’ refers to ‘yours’. |
| Nostro credit is perceived as an asset due to its debit balance. | A Vostro account is perceived as a liability as it involves a credit balance. |
| A nostro account features a bank account with a bank in another country with its funds in a foreign currency. It is maintained by a domestic bank. | A Vostro account is a bank account that is managed by a separate bank in another country. Its fund features an amount of money in the currency of the country to which the bank that holds the Vostro account belongs. |
| Nostro accounts are foreign currency accounts that are facilitated by a domestic bank. | A Vostro account is facilitated by a foreign bank. |
Charges or Fees Charged Associated With the Nostro Account
A Nostro account holder is required to pay a fee for using their Nostro account number for international transactions. Typically, the fee varies between $15 to $30 for each transaction. It is charged from a nostro account directly at the time of processing a transaction.
Are Nostro Accounts Similar to Traditional Demand Deposit Accounts?
This is a pertinent question that most people ask when they attempt to define nostro account. The answer to it is that both accounts are different from each other. A traditional demand deposit account allows its account holder to withdraw funds at any time without prior notice. A Vostro account, on the other hand, is a bank account with a bank in another country. The only way to deposit funds in it is to deposit a sum of money in the currency of the country where the bank is located.
Example of a Payment Using a Nostro Account
One of the best ways to understand the concept of nostro account management is to consider an example of how payments are made through nostro accounts. Picture this: Bank A, which is operational in the United States, has a nostro account with Bank B, which operates in India. An amount of money is sent to a recipient from Bank A in U.S. Dollars. The recipient will receive it from Bank B in Indian Rupees.
Here is how it works: the amount of money that is sent from Bank A in the United States is converted into its Indian Rupee equivalent. The recipient in India receives the same amount of money in Indian rupees, which concludes the process of nostro payment for a transaction.
This is a Nostro account example that illustrates how a payment is made from a Nostro account.
Advantages & Disadvantages of Nostro Account
Just like other bank accounts, Nostro accounts also have their share of positives and downsides. Both these aspects play a key role in defining the Nostro bank account meaning. The advantages and disadvantages of Nostro accounts are discussed below.
1. The Advantages of a Nostro Account
- Nostro finance facilitates international trade by removing constraints related to the conversion of a local currency into foreign currencies.
- A Nostro correspondent bank helps bypass the risk of a sudden or abrupt foreign exchange in transactions in the hour of need.
- Currency exchange rates may fluctuate at any time due to changing market dynamics. A nostro account protects companies from the vulnerability of fluctuations in the exchange rates of currencies.
- A nostro account enables a government or business entity to access the cost-effective and efficient channels of correspondent banks. Payments through such channels help avoid delays in international transactions with other banks.
2. The Disadvantages of a Nostro Account
- The simplicity and ease of online transactions of a Nostro deposit account come with the caveat that it also has higher operational risks compared to standard bank accounts.
- The operationalization and maintenance of a nostro account necessitates adherence to some of its strict terms and conditions.
- Unlike a standard bank account, a nostro account is not meant for individuals. Instead, it is tailor-made and exclusively meant for governments and business organizations.
Final Words
To conclude, a Nostro account and Vostro account are two different types of trade accounts for trading with foreign currencies. A nostro account deals with a debit balance, whereas a vostro account involves a credit balance. Though the management of both these bank accounts is characterized by complexities, a good understanding of the points that draw a line of distinction between these accounts can help with the optimum use of a Nostro and Vostro account for business purposes.
FAQs
No, only an authorized national bank can open a nostro account.
While Nostro and Vostro accounts are like the two sides of a coin, they deal with different types of funds. While the former features a debit balance, the latter involves a credit balance. For this reason, a nostro account is considered as an asset.
A Nostro account facilitates trade through foreign currency denominations and foreign currency transactions with exclusive accounts for governments or businesses.
Yes, this is a mandatory requirement for setting up and maintaining a nostro account.
A domestic bank facilitates Nostro funding as well as a Nostro account.
Disclaimer
This article is solely for educational purposes. Stable Money doesn't take any responsibility for the information or claims made in the blog.
