A Nostro account is a bank account in which the bank will have an account with a foreign bank. The currency will differ as the account is held in a foreign country. Nastro means “Ours” in Latin language and it is used for facilitating foreign exchange and international business transaction deals and this is especially in foreign currency. On the other hand, Vostro account means “Your Account”.
The Nostro account currency will be in domestic currency in the country where the account is opened. This account is used for facilitating international transactions trading in the form of foreign exchange. This account cannot be opened by the individual user but it is opened and accessed by banks and large business corporations. This facility is for those corporations that perform international transactions on a regular basis.
Nostro accounts are managed by large business corporations and banks. These entities are involved in international transactions. Usually, the banks will conduct business in foreign currency. They will do the operations without converting their currency into foreign currency for the transactions. On the other hand, Vostro accounts are bank accounts where the foreign banks will hold their accounts in domestic currency.
A bank in the UAE or rather a bank of any country can have their Nostro account in any country. The condition is that it should have a convertible currency like US dollars, INR, AED, Euros etc. If there is no possibility of convertible currency then that bank should contact the third-party for carrying out transactions on its behalf. The banking institutions should maintain a record of transactions where the funds are moved from accounts.
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Nostro Account Operations
A Nostro account is a way that banks will keep track of funds that are in other currencies of other banks where the account is operated. This account is maintained and monitored by a bank that is in foreign currency and this is used for foreign exchange and trading.
Let us consider an example to better understand this, suppose bank ABC has an account in Bank XYZ’s home currency. According to the bank ABC, the account is called Nostro and the bank XYZ will treat the account as a Vostro account.
During the process of opening a Nostro account, the bank will select a foreign bank that has already established a relationship with this bank. By doing this, the transactions and process of operations will be healthy as it’s an established relationship. The foreign bank will act as a facilitator bank and once the bank opens an account with the facilitator bank the foreign bank will help in doing business transactions by the use of home currency.
The foreign bank will use its network with the central bank for doing the business transactions. If a foreign bank does not have access to the payments clearing with the central bank then it can get facilitation for making the payments through the other bank within the same nation.
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Banks will use Nostro accounts during purchase or sales in foreign countries and this is done where it will not have a physical presence. Instead, it will use an already established bank in the non-domestic country to do the transactions on its behalf.
A Nostro account is an account where bank Z will put its money in Bank Y for facilitating foreign exchange transactions and international trade settlements. Vostro account is a reference that is used by Bank Y which will hold Bank Z funds. The Nostro account will be completely in foreign currency and the Vostro account will be in home country currency.
Usually, the banks in the USA and the other European countries’ banks will hold a Vostro account on behalf of the foreign bank. Funds will be held in the home currency where funds are deposited.
To better understand this let us consider an example of payment using a Nostro account. Suppose Bank XYZ in the UAE gets into a foreign exchange contract for the purchase of pounds from Bank ABC from Sweden. During the settlement period, Bank ABC should give pounds from the Nostro account to Bank XYZ. Simultaneously Bank XYZ in the UAE should pay Dirhams into the Nostro account of Bank ABC.
The central bank of developing countries will limit the purchase and sale of currencies and this is specifically for controlling the imports, exports and exchange rates. Banks will not hold account in those countries because there is less or sometimes no foreign exchange business. Here, when a bank wants to make the payment in that country where there is no Nostro account, it will take help from its correspondent bank for making the payments.