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Foreign Currency Account

The document discusses different types of foreign currency accounts used in international transactions: - Nostro accounts are accounts that a bank holds in foreign currencies at foreign banks to facilitate foreign exchange transactions. For example, an Indian bank may hold a USD account with an American bank. - Vostro accounts are accounts that foreign banks hold in local currencies at domestic banks. For example, an American bank may hold an INR account with an Indian bank. - Loro accounts refer to accounts of third parties. For example, if one Indian bank holds an account with an American bank, another Indian bank may refer to this account when transacting with the first Indian bank.

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109 views3 pages

Foreign Currency Account

The document discusses different types of foreign currency accounts used in international transactions: - Nostro accounts are accounts that a bank holds in foreign currencies at foreign banks to facilitate foreign exchange transactions. For example, an Indian bank may hold a USD account with an American bank. - Vostro accounts are accounts that foreign banks hold in local currencies at domestic banks. For example, an American bank may hold an INR account with an Indian bank. - Loro accounts refer to accounts of third parties. For example, if one Indian bank holds an account with an American bank, another Indian bank may refer to this account when transacting with the first Indian bank.

Uploaded by

Sonam Kus
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Foreign Currency Accounts: Nostro Account,

Vostro Account and Loro Account in foreign


transactions

Foreign Currency Account (FCA) is a transactional account denominated in a currency other


than the home currency and can be maintained by a bank in the home country (onshore) or a
bank in another country (offshore).

Exchange Earner’s Foreign Currency (EEFC) account is in the form of a non-interest-bearing


current account. Special Economic Zones (SEZ) developers can open, maintain and hold EEFC
accounts and credit their foreign exchange earnings to this account. The claims which are settled
in rupees by the Insurance companies or the Export Credit Guarantee Corporation of India is not
construed as the export realisation in foreign exchange, and thus, the claim amount cannot be
credited to this account.

The sum total of the accruals during the current month in the account should be converted into
Indian Rupees before the last day of the next month after adjusting for utilisation of the balances
for forward commitments or approved purposes. Credit facilities, both non-fund and fund-based,
are not granted against the balances held in this account.

A ‘Foreign Currency Account’ means an account held or maintained in a currency that is not the
currency of India or Bhutan, or Nepal. Any person who is residing in India can open, hold and
maintain a foreign account. ‘Person Resident in India’ is defined under Section 2(v) of the
Foreign Exchange Management Act, 1999 (FEMA).

Nostro Account

Nostro Account Home Currency of one country is foreign currency for other country.
Conversion of foreign currency in to home currency is the fundamental of foreign exchange.
Therefore, in order to put through the foreign exchange transaction, the bank which is authorized
to deal in foreign exchange, maintains an account with its overseas Bank to keep stocks of
foreign currencies. Normally, such account is a current account in the books of the overseas
Bank. For example, an Indian bank authorized to deal in foreign exchange maintain an account
with overseas bank in USA in US Dollar such account maintained in the foreign currency at
foreign center by Indian bank is said as ‘Nostro Account’. Nostro is an Italian word which
literally means ‘Our’. So, the ‘Nostro Account’ of the Indian bank with its
branch/correspondents in USA is said as ‘Our Accounts with You’.

Working of a Nostro account


For example, an Indian company is doing business with a company in America.  Now the Indian
company wants to seek payment for the services rendered to the American Company. The Indian
company has an account in the State Bank of India while the American company has an account
with Wells Fargo. So now that American Company would instruct their bankers (Wells Fargo) to
deposit money in State Bank of India’s Nostro account. Once the money is received in State
Bank’s Nostro account the Indian company would be informed and their account will get
credited for the same.

Vostro Account

Vostro Account For the similarly reason, foreign bank of other country authorized to deal in
foreign currency maintains an accounts with overseas Bank to keep stocks of foreign currencies
(home currency of the country in which the overseas branches/ correspondents are situated) for
the purpose of putting through the foreign exchange transactions. For example, XYZ bank of
USA maintains an account with a Bank in India in Indian Rupee such account maintained in the
foreign currency at foreign center by Foreign bank is said as ‘Vostro Account’. ‘Vostro’ is an
Italian word which literally means ‘‘Your’. So, the ‘Vostro Account’ of the foreign bank with
Indian bank in India is said as ‘YOUR Accounts with Us’.

Working of a Vostro account

The working of a Vostro account is just opposite to Nostro Account. For example, an American
merchant is providing consultancy services to an Indian company. That Indian company has an
account with Canara Bank and the American merchant has an account with Bank of America. So
now when the payments are to be made for the services rendered, the Indian company will ask its
banker (Canara Bank) to deposit the amount in Bank of America’s Vostro account. Once the
money gets into Bank of America’s Vostro account they will transfer the same to that American
merchant.

Loro Account

Loro Account The terms Nostro (Our) and Vostro (Your) are used in the bilateral
correspondence between the concerned two Banks ie the Bank maintaining the account and the
Bank in whose book the account is maintained. But in such correspondence when third bank
account is referred it is said as LORO account. For example, when XYZ bank of India is
maintaining an account with ABC Bank in New York USA in USD when PQR bank of India
refers the said account in correspondence with XZY Bank, Now YORK it is said LORO account.
LORO is an Italian word which literally means ‘Their’. Loro account means ‘Third Party
Account’.

Working of a Loro account

A Loro account is a combination of an ordinary and a Nostro account. Let us take an example of
a student seeking admission to a university abroad. That particular student has a bank account
with Bank of Baroda and the university has an account with Wells Fargo. For instance, Bank of
Baroda does not have an account with Wells Fargo so now when that student wants to deposit
his/her tuition fees, Bank of Baroda will instruct State Bank of India (assuming SBI has an
account with Wells Fargo) to deposit fee in the University’s account on their behalf.

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