An essential part of correspondent banking, the Vostro accounts are the ones in which the bank holding the funds acts as a custodian for the account of a foreign counterpart.
These accounts are used for the settlement of foreign exchanges or foreign trade.
For example, if a Russian company approaches an Indian bank to manage funds on its behalf, the account is deemed by the holding bank as a Vostro account of the company.
Understanding a Vostro Account
As per tax experts at Clear, in a Vostro account, the banks act in a fiduciary relationship, on a principal-agent relationship. Wherein the correspondent foreign bank is a financial intermediary in the transactions.
The foreign bank in the Vostro account acts as an agent that provides services such as executing wire transfers, performing a foreign exchange, enabling deposits, enabling withdrawals, and expediting international trade on behalf of the domestic bank.
As per the directives issued by the Reserve Bank of India, the Vostro account will get no interest. However, the account can use an overdraft service, if specifically sanctioned.
Understanding Vostro Account in Rupee-trade scenario
The Reserve Bank of India introduced a mechanism for international trade settlements in rupees in July 2022 intending to improve foreign trade.
The Rupee Vostro accounts will keep a foreign entity's holdings in the Indian bank, in rupees.
So when an Indian importer makes a payment to a foreign trader in rupees, the amount will be credited to the Vostro account. Likewise, when an Indian exporter is to be paid for supplying goods or services, the amount would be deducted from the Vostro account and will be credited to the exporter's account.
