Definition of Nostro Account

NOSTRO Account is the bank account used for settlement of International transactions used for foreign currency dealings and it is mainly used by the exporters or importers or persons dealing in foreign currency to settle the transactions by converting from home currency to the foreign currency with the help of bank.

NOSTRO Accounts is the account kept in foreign currency held by one bank with another bank. The term Nostro is derived from latin word that means “ours” i.e., our account on your books. It is used for settlement of transactions which involves foreign currency dealings. Account which is NOSTRO for one bank is VOSTRO for another bank because NOSTRO account is “our account on your books which is in foreign currency for us” and VOSTRO account is “your account on our books which is in home currency.” The most common convertible currencies are US Dollar, Canadian dollar, British Pound, Euro, Indian Rupees, Japanese Yen etc. NOSTRO account is the record held by domestic bank of the funds held with foreign bank in the currency of foreign bank.

Features of Nostro Account

Following are the Features of Nostro Account:

Account Held in Foreign Currency: NOSTRO Account is the account held in foreign currency by the domestic bank and it is opened by the person dealing in international transactions requesting bank to receive or pay the foreign exchange on behalf of him.
Can be Opened by Bank Only: The dealer in foreign exchange cannot go to the foreign bank and ask the bank to pay. No dealer can directly deal with the foreign currency. It is only through the domestic bank and domestic bank is only allowed to open the NOSTRO Account with the foreign bank held in domestic country.
Used for Settlement of International Transaction Required Conversion of Currencies: NOSTRO Account is used for settlement of International Transactions i.e. receipt or payment of amount in currency other than home currency.

How does it Work?

The dealer who wants to receive or pay in foreign currency will approach to the bank to pay or receive the amount on behalf of him in foreign currency in exchange of home currency. The concerned domestic bank will approach to the foreign bank for opening of NOSTRO Account to deal in the currency of that country and accordingly if dealer wants to pay in foreign currency, the bank pays the amount to the foreign bank in foreign currency by purchasing from exchange market or by asking the foreign bank for purchase of foreign currency and pay in home currencyat the current exchange rate prevailing in the market. Then accordingly pay to the foreign dealer in his home currency. The Account maintained by Domestic bank in home currency of foreign bank is NOSTRO account for domestic bank.

Example of Nostro Account

An Indian dealer Mr. A want to pay amount in US dollars to the dealer in US for import of goods. Now Mr. A will approach his bank to set the dollar account on behalf of him as he wanted to make payment in dollars against the goods imported from US. The local bank approached by Mr. A will approach to the foreign bank with which the bank is having banking relations and physical location in India for opening of NOSTRO Account. The bank will convert the amount paid by dealer A in US dollars against the equal amount of domestic currency paid or guaranteed by Indian dealer so that the dealer can pay in US dollars and this account can last for all transactions dealing in US currency i.e. dollar. Say domestic bank approached by Mr. A is state bank of India which opens account with Bank of America in New York then the account opened by SBI is referred as NOSTRO Account.

Why is Nostro Account Required?

Nostro Account is required due to the following reasons:

It is used for settlement in the Foreign currency.
It is used for settlement of international transactions involves payment or receipt in currency other than foreign currency.
To give guarantee to the foreign dealer that his money will be guaranteed paid in form of prior guarantee to the foreign bank from domestic bank.
To give facilities and promote the foreign transactions and dealings.

Difference between Nostro Account and Vostro Account

The key differences between Nostro account and Vostro account are as follows:

It is the account which is maintained by domestic bank with the foreign bank in foreign currency whereas the VOSTRO account is the account held by foreign bank in home currency of that bank.
Nostro is latin word which means ours i.e., our account with you. Whereas the Vostro is the latin word derived from yours i.e., your account with us.
Domestic bank state bank of India opens the account with bank of America in US dollars for State bank of India it is the NOSTRO account maintained with Bank of America and for Bank of America it is VOSTRO account maintained by State Bank of India.

Advantages

Some of the advantages are:

The domestic dealer can pay to the foreign dealer in foreign exchange through the domestic bank and without taking any risk of foreign exchange.
The account will ease the transactions in international dealings.
The account is used for several dealings.
The account is easy to operate and facilitate the banking relationships with international banks.

Disadvantages

Some of the disadvantages are:

The legal formalities that has to comply by the dealer in foreign currencies are high.
Involves the higher cost due to legal formalities.
Rate of interest on balance maintained is low as compared to home currency.

Conclusion

It is the account which is kept in foreign currency by the domestic bank with foreign bank having physical location in domestic country for the dealers who wants to deal in foreign currency. The dealer who wants to receive or pay in foreign currency will approach to the bank for payment or receipt at the rate prevailing or mutually decided and then that domestic bank will pay to the foreign bank and foreign bank will transfer the amount in the home currency of foreign dealer. This gives assurance to the foreign dealer but the regulations involved are many hence cost is high for opening of the account.

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