The “Nostro” and “Vostro” are financial terms used to describe the same bank account. Such accounts are opened up to ease the financial exchange and trades between two countries.
By opening these accounts we can eliminate the need of a middle currency (dominating currency) which is used for exchange, for example US$ is a dominating currency in the world.
For example, If India wants to do trade with Russia and vice-versa trade, there will be no need for 3rd currency. We can directly trade with each other in our own currencies with the help of Nostro and Vostro accounts. Traditionally we have to rely on US$ for all sort of conversions.
This direct trading of current helps countries to eliminate the various transaction and currency conversion fees which indirectly helps both countries to cut the cost and enhance the trade.
Now come back to Nostro account and Vostro account terminology again.
The terms are used when one bank has another bank’s money on deposit, typically in relation to international trading and other financial transactions. Both banks in the venture must record the amount of money being stored by one bank on behalf of the other bank.
- Nostro comes from the Latin word for “ours”,
- as in “our money that is on deposit at your bank”.
- Vostro comes from the Latin word for “yours”,
- as in “your money that is on deposit at our bank”.
A Nostro account is a reference used by Bank A to refer to “our” account held by Bank B. Nostro is a shorthand way of talking about “our money that is on deposit at your bank”.
The Nostro account is the record of the bank that has money on deposit at another bank. These accounts are often used to simplify settlements of trade and foreign exchange transactions.
Nostro accounts differ from standard demand deposit bank accounts in that they are usually held by financial institutions, and they are denominated in foreign currencies.
Vostro is the term used by Bank B, whereas Bank A’s money is on deposit. Vostro is a reference to “yours” and refers to “your money that is on deposit at our bank”. A Vostro account is like any other account held by a bank. The account is a record of money owed to or maintained by a third party, typically another bank, but it can be either a company or an individual.
Banks in the UK or the US often hold a Vostro account on behalf of a foreign bank. The Vostro account is held in the currency of the country where the money is on deposit.
Let’s understand this with a table form:
|An account that a bank holds in a foreign currency in another bank.
|An account that other foreign bank holds with our bank in the domestic currency.
|Latin words that mean “ours”.
|Latin words that mean “yours”.
|Often used to simplify settlements of trade and foreign exchange transactions.
|Used to execute wire transfers and foreign exchange transactions, enabling deposits and withdrawals, and expediting international trade.