Vostro Accounts & its Functioning

In news

20 Russian banks have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India.

SRVA Arrangement

A Vostro account is an account that domestic banks hold for foreign banks in the former’s domestic currency, in this case, the rupee.
- For example, if CITI Bank, New York open an account in Rupees in ICICI Bank, India then it would be a Vostro Account for ICICI Bank.
Domestic banks use it to provide international banking services to their clients who have global banking needs.
Banking services such as wire transfers, conducting business transactions, accepting deposits and gathering documents on behalf of the other bank.
Domestic banks gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.

Three important components of SRVA are:

Invoicing: All exports and imports must be denominated and invoiced in INR.
Exchange Rate: The exchange rate between the currencies of the trading partner countries would be market-determined.
Settlement: The final settlement also takes place in Indian National Rupee (INR).

Vostro VS Nostro Account

Nostro and Vostro are Latin words that translate to ‘ours’ and ‘yours’ respectively. While a Nostro Account is said to be a record of deposits held by a bank with a foreign bank in the currency of the country holding the funds, a Vostro Account is one that is again managed by a correspondent bank on another bank’s behalf.
The difference between the two is that it is described from the point of view of the two different banks i.e., depositor and holder.
LORO Account: When the two banks have Nostro Account with a third bank then in this scenario Nostro Account of one bank with a third bank would be a Loro Account for another bank. For Example, if the Bank of Japan and Bank of India have Nostro Accounts in Bank of America.

Eligibility Criteria of Banks

First, Banks from partner countries would approach an authorised domestic dealer bank that would then seek approval from the apex banking regulator for opening an SRVA.
The domestic banks would be responsible to ensure that the correspondent bank is not from a country mentioned in the updated Financial Action Task Force (FATF) Public Statement on High Risk & Non-Co-operative jurisdictions.
Authorised banks can open multiple SRV accounts for different banks from the same country.

Need of the SRVA

The Economic Survey (2022-23) pointed out that SRVA would reduce the net demand for foreign exchange, for the settlement of current account-related trade flows.
It would also reduce the need for holding foreign exchange reserves and dependence on foreign currencies, making the country less vulnerable to external shocks.
Indian exporters could get advance payments in INR from overseas clients and in the long-term promote INR as an international currency once the rupee settlement mechanism gains pull.

Previous article Flooding from Glacial Lakes

Next article Whale Stranding