Banks have gone global today. Money is flowing seamlessly in this global village. All major banks facilitate payments and remittances in all major currencies for transactional purposes. This is the sole reason why banks open accounts with foreign banks to maintain a level of deposit in a foreign currency. In this regard, three types of accounts come into picture i.e. Vostro, Nostro, and Loro
The word Nostro is an Italian word which means ours. Therefore in literal terminology Nostro means our’s account with you. Nostro accounts are accounts held in foreign currency with a foreign bank by a domestic bank. For example, the State Bank of India’s account with Bank of America is held in dollars.In simple words, if any Indian bank opens an account with any foreign bank it will be called a Nostro account. Nostro accounts are primarily opened by any Indian bank to facilitate the easy clearing of their transactions in a foreign country.
For example, an Indian company is doing business with a company in America. Now the Indian company wants to seek payment for the services rendered to the American Company. The Indian company has an account in the State Bank of India while the American company has an account with Wells Fargo. So now that American Company would instruct their bankers (Wells Fargo) to deposit money in State Bank of India’s Nostro account. Once the money is received in State Bank’s Nostro account the Indian company would be informed and their account will get credited for the same.
Vostro is also an Italian word that means ‘yours’. Therefore in literal terminology, it means your account with us. A Vostro account is just like any other ordinary account from the domestic bank’s perspective as it is denoted in domestic currency payable on demand. For example Banks of America’s account held with State Bank of India in rupees. In simple words, if any foreign bank opens an account with an Indian bank in rupees. Vostro accounts are primarily opened by foreign banks to facilitate the easy clearing of their transactions in India.
The working of a Vostro account is just opposite to Nostro Account. For example, an American merchant is providing consultancy services to an Indian company. That Indian company has an account with Canara Bank and the American merchant has an account with Bank of America. So now when the payments are to be made for the services rendered, the Indian company will ask its banker (Canara Bank) to deposit the amount in Bank of America’s Vostro account. Once the money gets into Bank of America’s Vostro account they will transfer the same to that American merchant.
Loro account is maintained by one domestic bank on the behalf of other domestic banks in a foreign bank denoted in foreign currency. So basically a Loro account is Nostro account for the bank that opened an account and it will be a Loro account for banks on whose behalf that account was opened.Loro is also an Italian word meaning ‘their’. For example, if Bank of Baroda asks State Bank of India to open a bank account with Citi Bank New York it would be a Nostro account for State Bank of India and a Loro account for Bank of Baroda
A Loro account is a combination of an ordinary and a Nostro account. Let us take an example ofa student seeking admission to a university abroad. That particular student has a bank account with Bank of Baroda and the university has an account with Wells Fargo. For instance, Bank of Baroda does not have an account with Wells Fargo so now when that student wants to deposit his/her tuition fees, Bank of Baroda will instruct State Bank of India (assuming SBI has an account with Wells Fargo) to deposit fee in the University’s account on their behalf.
The Loro account means their account. Simply, it is a bank’s Nostro account in any foreign but made on behalf of a domestic bank.
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