Understanding Vostro Accounts
A Vostro account is a bank account held by a foreign bank in a correspondent bank's local currency. For example, if a US bank has a Vostro account with an Indian bank, the Indian bank holds rupees on behalf of the US bank. These accounts are crucial in global banking, aiding banks in offering services across different countries. Recently, the Reserve Bank of India introduced a new method for international trade settlements in rupees to stimulate exports and imports.
Details of Vostro Account
A foreign correspondent bank performs banking services such as money transfers and currency exchange for another bank in a different country. This assists local banks in accessing international markets without the need to open branches abroad. A Vostro account is one such account that a local bank has with a foreign correspondent bank. However, the Reserve Bank of India doesn't allow interest on these accounts and only permits an overdraft facility with the correspondent bank's approval.
Functionality of Vostro Accounts
A rupee Vostro account is an account that a foreign bank maintains with an Indian bank in rupees. This allows the foreign bank to conduct transactions in rupees with India. To open a rupee Vostro account, the foreign bank needs to get approval from the Reserve Bank of India. This system helps to monitor trade activities.
An Indian importer who purchases goods or services from a foreign seller pays the rupee Vostro account of the foreign party. Similarly, an Indian exporter who sells to a foreign buyer receives payment from the foreign buyer's Vostro account. The exchange rate between the Indian rupee and the foreign currency is determined by market forces.
Indian exporters can also accept advance payments from foreign buyers for their exports. The money in the rupee Vostro account will be used first to settle any export payments, if any, before receiving any such advance payments