Vostro Accounts & its Functioning

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    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.

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