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Correspondent Banking | Nostro, Vostro and Loro Accounts - Learn in 8 Mins - YouTube
Channel: Shuddh Desi Banking
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Hello everyone. Today we will learn what is ...
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meant by correspondent banking,
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nostro, vostro and loro accounts.
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In simple words, correspondent banking is a ...
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way one bank called the 'correspondent bank'
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provides certain banking services
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to another bank called the 'respondent bank',
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the two banks usually being in two different countries.
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Lets understand with an example.
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Let us suppose there is a Bank A in India and a Bank B in Mexico.
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Bank A enters into a tie up with Bank B to handle its ...
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transactions for Mexico.
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Here Bank A will be called the respondent bank and ...
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Bank B the correspondent.
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In most cases, this tie up is bilateral or two ...
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way, meaning Bank B also assigns ...
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Bank A to handle its transactions in India.
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Also correspondent banking relationships are for on going ...
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basis, and not for one off transactions.
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Lets see how it works.
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Bank A opens a current account in USD currency with ...
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Bank B. Similarly Bank B opens an ...
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INR account with Bank A.
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Now suppose a customer of Bank A needs to send some ...
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money In USD to Mexico. The customer deposits her ...
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money to Bank A which sends the money to Bank B ...
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in Mexico which in turn makes the payment to the ...
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final recipient.
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This is the simplest case where there is a direct ...
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bilateral relationship between the banks.
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But in many cases the respondent bank originating ...
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the payment does not have a direct bilateral account ...
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relationship with the bank receiving the payment and ...
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multiple intermediary banks come into play in between ...
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which may involve multiple jurisdictions.
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Another type of correspondent banking is ...
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called the nested correspondent banking.
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Here a third bank, Bank C,
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comes into the picture which uses this correspondent ...
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relationship to send money to its own customers.
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Bank C does not have any established tie up with Bank ...
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B, but needs to send money to Mexico.
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It then uses Bank A's account with Bank B to complete the action.
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This is how nested correspondent banking works.
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Now why do banks establish correspondent banking relationships?
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The decision is made depending on cost to benefit analysis.
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A correspondent bank can provide services like currency ...
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exchange, handling business ...
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transactions, trade documentation,
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and money transfers in exchange of a fee.
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Suppose a bank has less number of foreign branches ...
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in a country or no branches at all.
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It may be more cost effective for it to enter into a ...
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correspondent relationship than to open new branches if ...
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it wants to expand its reach in that foreign country.
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Now that you have a fair idea about correspondent ...
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banking, let's see what are nostro,
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vostro and loro accounts.
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First and foremost you need to keep in mind,
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these names depend on which bank's perspective you ...
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are referring the account to.
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The USD account that Bank A opens with Bank B will be ...
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called a Nostro account by Bank A.
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'Nostro' is a latin word meaning ...
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'Ours'. So for Bank A this account is ...
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'Our account with them'.
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Now, the same account is called ...
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the Vostro account for Bank B.
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'Vostro' in latin means 'Yours'.
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From Bank B's perspective this is '
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Your account with Us'. So Nostro and Vostro does ...
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not refer to some separate accounts,
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but rather the same account in two separate perspectives ...
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of the two banks involved.
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While dealing with such accounts if you ever get ...
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confused if an account of your bank is a Nostro or a ...
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Vostro, just check the currency.
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Nostro accounts will always be denominated in some ...
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foreign currency,
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for example the Indian Bank A,
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opening accounts denominated in USD in USA,
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GBP in UK,
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AUD in Australia, likewise.
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For the Indian Bank all these are Nostro accounts or 'our ...
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accounts with them' in different foreign currencies.
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Whereas a vostro account will always be denominated in home currency.
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For example an American bank,
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a British bank or Australian bank opening Rupee ...
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accounts in Indian Bank A.
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From the Indian Bank's perspective,
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these accounts are vostro or 'Your account with us'
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in Rupees, which is the home currency.
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Now what is meant by a Loro account?
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To understand that let's go back to the example of the ...
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nested correspondent relationship we understood earlier.
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Loro accounts are 'their account with them',
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notice both 'their' and 'them'
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are third parties.
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So for Bank C, the USD account of Bank A in ...
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the books of Bank B,
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which it used to make payment in Mexico,
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will be referred to as a Loro account.
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In recent years there has been a considerable decline ...
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in correspondent relationships between banks.
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The main reason is high risk associated with possible ...
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money laundering.
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As the correspondent bank does not know the ...
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respondent bank's customer, gaps in due diligence arise in ...
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KYCC or 'Know your customer's customer' guidelines.
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A notable case is that of ING Bank in Netherlands which ...
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had to pay a stupendous amount as fine for violating guidelines.
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In recent years, banks have terminated ...
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relationships under their 'de-risking' policies,
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especially in jurisdictions regarded as high risk.
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This has resulted in very high concentration of payment ...
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traffic in a handful of regions, while lower payment traffic in ...
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all other regions.
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Another interesting development in recent years ...
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is the rise of blockchain based payment methods,
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which may replace traditional correspondent banking in future.
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For example, Ripple's payment product,
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xCurrent, uses blockchain technology
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and real-time messaging to enable cross-border ...
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payments which are settled in seconds
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within the network of financial institutions using Ripple's ...
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software, called RippleNet.
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Though this technology is nascent,
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this is something we should keep an eye on,
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as it has a strong potential to completely disrupt
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the way payment systems have run for ages around the world.
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