What is a Vostro account?
A Vostro account is a type of bank account that a correspondent bank keeps the holdings and maintains for a foreign bank in the local currency. For instance, if a US bank has a Vostro account with an Indian bank, it means that the Indian bank holds rupees on behalf of the US bank. Vostro accounts are an important part of correspondent banking, allowing banks to provide customer services in different countries. In July 2022, the Reserve Bank of India launched a new mechanism for international trade settlements in rupees with the aim of boosting exports and facilitating imports. This means that instead of using US dollars, the trade invoices will be issued in Indian rupees if the other party has a Rupee Vostro account.
Explanation of Vostro Account
A foreign correspondent bank is a bank that acts on behalf of another bank, usually in a different country. It provides services such as currency exchange, money transfers, trade documentation, and wire transfers for the other bank. It helps domestic banks access foreign markets and serves international clients without opening branches abroad. A Vostro account is an account that a domestic bank holds with a foreign correspondent bank. The RBI in India does not allow interest to be paid on Vostro accounts. A domestic bank can only use an overdraft facility on a Vostro account if the foreign correspondent bank has approved it.
How does Vostro account work?
A rupee Vostro account is a type of account that a foreign bank holds with an Indian bank in rupees. This allows the foreign bank to make and receive payments in rupees for trade and other transactions with India. To open a rupee Vostro account, the foreign bank must get approval from the Reserve Bank of India (RBI) and share the agreement details with the Indian bank. This helps the RBI to keep track of all such trade activities. The parties who opt for this method can settle their payments in rupees after getting consent from the central bank.
An Indian importer who buys goods or services from a foreign seller or provider has to pay the rupee Vostro account of the foreign party for the invoices that the foreign party issues for the supply. Similarly, an Indian exporter who sells goods or services to a foreign buyer will receive payment from the corresponding foreign buyer's Vostro account balance. Market forces will determine the exchange rate between the Indian rupee and the foreign currency.
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