Nostro Account Meaning Examples How Does It Work

Nostro Account Meaning

It refers to the foreign bank account established through the domestic bank in the respective country of the currency desired. For example, Bank X in India holds an account with the bank in Y in the USA in their home currency, i.e., “ Dollars.” A bank generally opens a Nostro account in another bank in a foreign country where there are many foreign exchange transactions periodically. Alternatively, it will be considered a Vostro account for other banks, i.e., your account in our books of accounts. These accounts are not opened in countries on the restricted list or where there is a minimal amount of foreign exchange transactions happening.

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Examples

Example #1

State Bank of India opens an account with Bank of America in New York. It will be referred to as the Nostro account for the State Bank of India.

Example #2

Suppose Bank A in the USA has to buy euros 1,00,000 from Bank B in the UK. On the settlement dateThe Settlement DateThe settlement date is the date on which the cash and assets that have been exchanged or traded are settled by netting out a process that happened a few days ago. Commonly for shares, it is two business days after the trade.read more, bank b will transfer euros 1,00,000 to the Nostro account in the UK itself. However, a bank must pay dollars for the transactions. Hence Bank A will transfer the required amount in dollars to the Nostro account of bank b in the united states of America. Thus there is no money exchange from one country to another; however, the transaction is executed smoothly.

Example #3

Suppose an Individual, Mr. A, wants to remit $ 1,00,000 to another person, Mr.B, in the USA. In this case, Mr. A will approach his home bank and ask them to open a Nostro account in the correspondent bank in the USA. Now Mr. A will pay ~65,00,000 ( $1 = rs 65 ) to the domestic bank in the Nostro account of Mr. B, and the home bank will pay the corresponding bank in the USA $1,00,000 into its Vostro account. The correspondent bank will pay $1,00,000 to Mr. B’s Account from that account. In this way, there is no movement of funds from one country to another. Still, the transactions go through, and both parties are satisfied. MrB gets his money, and Mr. A pays off its obligations.

Advantages

It is for the one who takes care of the entire financial framework of the company or government. Below are some of the advantages:

You can pay the money to a third party in your home currency without any exchange rate risk. It is easy to operate since it is a mere transfer of funds from one account to another in the same bank.Enables to keep funds in foreign currency.Reduces the excessive fluctuation risk in exchange rates since money is directly emitted to the other party without physically being there.

Disadvantages

Below are some of the disadvantages:

A lesser rate of interest as compared to savings or current account.It is generally more expensive since it is a facility provided by the home bank to execute foreign exchange transactions smoothly.Rigorous regulations and laws were imposed for the operation of the Nostro account by the federal bank;Open to cyberattacks, which can have a huge impact on the bank’s cash reserves if hacked.

Important Points

Domestic banks are often used as custodians to manage the bank’s operations regarding foreign exchange transactions.A bank recognizes the Nostro balance in the account as a debit balance with other banks and hence recorded as the bank’s assets on the balance sheet.It is opened by the bank in those countries where the bank’s physical presence is marginal, and it would not be easy to communicate daily. To avoid this discomfort, a bank opens a Nostro account in another bank in a foreign country in foreign currency for flexibility and smooth operations.Since this is an additional and specialized facility provided by the banks to its customers, it comes with a very expensive cost. It is allowed as business expenditure in the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more since it has been used to execute business foreign exchange transactions.

Conclusion

Nostro Account is one of the most important and key facilities the banks provide to the customers to carry out their foreign exchange transactions smoothly without difficulty. In modern times, Nostro and Vostro Accounts are the essential components of the financial system since they help execute large foreign exchange transactions without having any physical presence in other countries.

It’s a specialized service brought in by the federal bank to promote international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more and financial transactions to drive business growth in the future with ease in settlements and payment mechanisms. These accounts come along with certain rules and regulations, and the returns need to be filed with the statutory bodies as per the due dates mentioned.