While dealing in any transaction in foreign currency, be it a purchase of commercial documents, retirement of a bill of exchange under a letter of credit or a remittance, a bank must have accounts (normally current accounts) in foreign currencies with its overseas correspondents through which the transactions in relevant — Currencies can be put. The balances of such foreign currency accounts — debit or credit — are taken into overall financial position of the banks involved. These accounts are known as ‘Nostro’ Vostro’ and ‘Loro’ accounts.
‘Nostro’ accounts mean current accounts of banks maintained in the books of their branches or correspondents in foreign centers in terms of the latter’s currency. For example, in order to meet its requirements for transactions in pound sterling, AB Bank, Cochin maintains an account in pound sterling with its correspondent in the UK, say XY Bank, London. Such an account would be designated by the AB Bank as its Nostro account with the XY Bank.
‘Vostro’ accounts are current accounts of foreign banks maintained in the books of their correspondents in terms of the latter’s currency. The so called Vostro accounts are the Nostro account of another bank involved. Taking the example under ‘Nostro’ account above, the XY bank London will refer the pound sterling account of AB Bank, Cochin, as ‘Vostro’ account. Similarly, the XY Bank, to meet its requirements in Indian rupee, may maintain a current account in Indian rupee with AB Bank, Calcutta. This account will be designated by XY Bank as its ‘Nostro’ account, while AB Bank will designate it as XY Bank’s ‘Vostro’ account.
‘Loro’ accounts represent current accounts of third parties (banks) kept with foreign correspondents in terms of either foreign currencies or in the home currency. In short, these mean ‘third party’ accounts. To explain the position, suppose, RS Bank, New York, also keeps a rupee account with AB Bank, Cochin. A remittance in rupee made by the XY Bank, London, to the AB Bank for account of RS Bank will mean the proceeds of the remittance are ‘for credit of Loro account’ of RS Bank. In the instant transaction, the XY Bank in their correspondence with AB bank will refer the account of RS Bank as ‘their account with you’
The three types of foreign currency accounts, in the light of the examples cited above, can be summarized as under:
- AB Bank’s account in pound sterling with XY Bank, London, is the former’s ‘Nostro’ account and they will refer it to the latter as ‘our account with you’.
- XY Bank will treat the AB Bank’s account with them as the latte’s ‘Vostro’ account and the former will refer it to the ABC Bank as ‘your account with us’.
- From the point of view of the XY Bank, London, the rupee account of Rs Bank, New York, with AB Bank, Cochin, is the ‘Loro’ account and the XY Bank will refer this account to the AB Bank as ‘their account with you’.