Understanding Nostro Account
A nostro account is an account a bank maintains in a foreign currency with another bank. This account enables the bank to carry out international transactions. The term "nostro" comes from Latin meaning "our," while its counterpart, vostro account, means "your." These accounts play crucial roles in international trade and foreign exchange.
Example of Nostro Account
Consider an Indian bank, XBI, that holds an account in Japanese Yen with a Japanese bank, DUMG. This account allows XBI to perform transactions in Japan swiftly. For example, if XBI wishes to transfer money within Japan, it can do this through DUMG, which handles currency conversion and settlement. Therefore, XBI does not need a physical branch in Japan to operate. Nostro accounts are common among banks involved in foreign trade.
Key Points of Nostro Account
- A nostro account, also known as a nostro-vostro account, means "our account on your books" and "your account on our books" from the perspective of the two banks involved.
- Domestic banks often act as custodians to manage foreign exchange transactions and banking operations.
- A nostro account is listed as an asset on the balance sheet of the bank that owns it. This account represents a debit balance with another bank, and the bank records the foreign exchange transactions that occur through the nostro account as part of its operations.
- Nostro accounts are an additional service that banks offer to their international trade customers. These accounts usually come with high costs, which customers can list as a business expense in their financial statements.