We often hear some economic jargon and get baffled. We think that this might be some very technical or complex thing. But sometimes reality is far from this thought. On this platform, we always try to boost your banking knowledge. Today, we will talk about Nostro and Vostro Bank accounts, so that when you hear these words next, you know what the other person is talking about.
Well, Nostro and Vostro are not two different accounts but are two different words used to describe a single bank account, depending on the situation. These terms are used usually in connection with international trade or other financial transactions between two banks.
When a transaction takes place between two banks, both banks have to record the amount of money transferred between the two. The terms Nostro and Vostro are used to differentiate between the two sets of accounting records maintained by each bank in their personal account.
What is an account?
The account is a record of money owed or held by a third party, usually a bank, but this can be either a company or an individual.
When Bank X refer to “our” account held by another bank, Bank Y, this is denoted as Nostro account in Bank X’s record. Nostro means “ours,” and it is jargon used to refer to “our money deposited in your bank.” A Nostro account is a record of a bank whose money is deposited in another bank. The purpose of maintaining these accounts is to simplify trading and settlement of forex transactions.
The term Vostro account is used by the receiver bank. In the context of the above example. Vostro account is a term used by Bank Y, where Bank X’s deposits are deposited. Vostro means “yours,” and refers to “your money that is deposited in our bank.” A Vostro account is like any other account held by a bank. A Vostro account is maintained in the currency of the country where the money is deposited.
Still not clear?
No worries, for a better understanding, let’s take an example. Suppose any Indian Bank X sends money to its customers in India as remittances from the UAE. Since this Bank X has no physical branches in the UAE, it enters into an agreement with a Bank Y in UAE, here the latter opens an account for X in Dirhams. In this way, businesses sending money to UAE customers and Bank X account holders in India will be credited to an account that is held Bank Y.
The deposited funds will then be transferred via SWIFT by Bank Y to Bank X’s Dirhams account in India. Bank X receives money in Dirham currency, converts it to local currency ie. INR, and deposits it into the local accounts of the recipients.
From Bank X perspective, its Dirham account with Bank Y is a NOSTRO account. From Bank Y perspective, it maintains a VOSTRO account for Bank X in Dirham.
Nostro accounts with debit balances are considered cash assets. In contrast, Vostro accounts with credit balances have liabilities.