What is a nostro account?
A bank that holds an account in a foreign currency with another bank is said to have a nostro account. The word “nostro” comes from Latin and means “our,” indicating that it is the bank’s own account abroad. The opposite of a nostro account is a vostro account, which means “your” in Latin. A Vostro account is an account that a foreign bank holds with a local bank in the local currency. Nostro and Vostro accounts are used to facilitate international trade and foreign exchange transactions.
Nostro Account Explained
An Indian Bank, XBI, holds an account with Bank DUMG, a Japanese bank. The currency in this account is the Japanese Yen. This account helps Bank XBI conduct overseas transactions faster and without any hassle. For instance, if Bank XBI wants to transfer money to another account within Japan, it can do so through Bank DUMG, which will handle the conversion and settlement in the local currency. This is how Bank XBI does not need to have a physical branch or presence in Japan to operate there. Nostro Accounts are common among banks that deal with a lot of foreign trade and transactions.
Key Points Related to Nostro Account
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A Nostro account is also called a nostro-vostro account, meaning "our account on your books" and "your account on our books" from the perspective of the two banks involved.
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Domestic banks are generally used as custodians to facilitate foreign exchange transactions and manage the bank’s operations.
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A Nostro account is recorded as an asset on the bank's balance sheet that holds it, as it represents a debit balance with another bank. The bank recognizes the foreign exchange transactions that occur through the Nostro account as part of its operations.
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A Nostro account is a specialized and additional service that banks provide to their customers who engage in international trade. It comes with a high cost, which is allowed as a business expense in the financial statements of the customers who use it.