Rupee trade: Understanding difference between Nostro and Vostro accounts

The RBI has allowed two Russian banks, Sberbank and JSC VTB, to open Vostro accounts for rupee trade. Read more to find out what a Vostro account is and how it is different from a Nostro account

The Reserve Bank of India (RBI) has approved two Russian banks, Sberbank and JSC VTB, to open special Vostro accounts for rupee trade. The approval came months after India's central bank announced its norms for rupee trade.

In early September, UCO Bank had also received RBI's approval to open Vostro accounts with Russia's Gazprom.

What is a Nostro account?

A Nostro account is an account held by a bank in another bank. It allows the customers to deposit money in the bank's account in another bank. It is often used if a bank has no branches in a foreign country. 

Let's presume bank "A" does not have any branches in the US, but bank "B" does. Now, to receive the deposits in the US, "A" will open a Nostro account with "B".

Now, if any customers in the US want to send money to "A", they can deposit it into A's account in "B". "B" will transfer the money to "A".

The main difference between a deposit account and a Nostro account is that the former is held by individual depositors while foreign institutions hold the latter.

What is a Vostro account?

A Vostro account is just another name for a Nostro account. It is an account held by a bank that allows the customers to deposit money on behalf of another bank.

A Nostro account is a Vostro account for the bank that opens the account.

In the above example, the account will be called a Vostro account for bank "B". The Vostro account accepts the payments on behalf of the account holder's bank.

If a person deposits money in the Vostro account, it will be transferred to the account holder's bank.

Nostro and Vostro accounts are held in a foreign denomination.

In the case of Sberbank and JSC VTB, these two banks will now be allowed to open Vostro accounts that will accept payments on behalf of the Indian banks, in Indian rupees, by the traders in Russia.

The traders will no longer be required to send the payments to India in US dollars. They can now simply deposit the money, in Rupee, in the Vostro accounts in the two banks.

These two banks will then transfer the money to the account holder banks in India.