Nostro, Vostro, Loro Accounts

To understand different foreign exchange transaction terms, we must first understand what the terms of home currency and foreign currency are. Home currency is a currency that is used by a country. Let’s take an example, and US dollars are used in the USA. Foreign currency can be explained like any other currency other than home currency.

Foreign exchange involves collecting at a centre of a given currency and then giving it to the center in a different currency. Foreign Exchange takes place only if it is converted to home currency. To use a foreign currency, that particular currency must be exchanged into home currency. The three major accounts related to foreign accounts are the Nostro account, Vostro account, and Loro account.

Nostro Account 

Nostro Account is defined as a bank account that is created by any commercial bank of a given country in some other foreign country with the currency of a foreign country. It is derived from the Italian word Nostro account meaning ‘Our.’ Simply, the money that is in your bank is in your country’s currency. The interest rate is not given to this type of account. If a case arises where there is an overdrawn amount or there is an insufficient amount of funds in the Nostro account, some fee is charged from these accounts. 

The account of the State bank of India was held with the bank of America in dollars. In simple words, if there is any bank in India that opens an account to deal with transactions with a foreign bank, it will be called a Nostro Account. A Nostro account is used as a specialized, additional feature that is mostly found in the countries with the facility of convertible currencies. Banks usually tie up with third parties to enable transactions like these. The banks with Nostro facilities are also called facilitator banks. These banks are not at all similar to deposit accounts, and they demand that the deposit accounts are kept in the same currency as a bank.

Vostro Account

The word Vostro Account has been derived from an Italian word that means ‘yours.’ That is why, in an actual sense, it means your account, which is held by us. From the domestic bank’s point of view, a Vostro account is just the same as any other ordinary bank account as it is payable on demand and is denoted by the same domestic currency of the country. Vostro accounts are maintained in the domestic country. For example, imagine that a particular USA-based bank wants to open an account in a particular India-based bank that has the currency of INR (Indian Rupees). Then this type of account is called a Vostro account. 

Unlike Nostro accounts, these types of accounts are not confined or restricted to banks; they can be used by any other entity if they want to use them. For example, business entities and insurance companies. The motive that lies behind a Vostro account is the need for the entities and banks to gain a physical presence in all the countries. For example, a bank that operates in the United Kingdom or any other country will also want to be able to work in other countries like China, Spain, Japan, the United Kingdom, and other parts of the world. This kind of relationship makes both of them correspondent banks, which means that customers of a domestic bank can use services like money withdrawal, money transfer, or deposit funds in the corresponding bank. Managing or holding a Vostro account often comes with a fee.

Difference between Nostro and Vostro

Suppose a domestic bank (State Bank of India) opens a foreign account with Citigroup (the USA) in currency $ USD. For the SBI, this will be a Nostro account, and for Citigroup, it is a Vostro Account.

The bank account that a domestic bank maintains with a foreign bank in a foreign country and in that foreign country’s currency is Nostro, whereas the same account held by a foreign bank in the domestic currency is called Vostro

Vostro is a Latin word meaning ‘yours,’ and Nostro is a Latin word meaning ‘ours.’

Loro Account 

Loro account is derived from the Italian word “Loro,” which means ‘Their,’ which means this account is a ‘Third Party Account.’ In bilateral correspondence between any two given banks, the words Vostro (Your) and Nostro (Our) are used, that is, the bank whose book the account is maintained and the one who is maintaining the account. In such conditions, a third bank’s account, which is talked about, is called a Loro account. 

Conclusion

The Nostro account, Vostro account, and Loro account, are three very important terms when it comes to understanding foreign exchange. You must clearly understand these three main terms if you receive or send money to your loved ones in a foreign country.