In order to understand nostro and vostro accounts, one needs to learn basic definitions of both the terms. Here I have explained both the banking terms with examples.
What is a Nostro account?
The word nostro is derived from a Latin word literally meaning 'ours'. A Nostro account is an account that a bank has of its own in another country's bank. In simpler terms it means 'our' account in another country, in that country's currency. For example, if a person living in UK would want to open an account in USA, his or her bank would open an account for them in a USA bank in USA's currency. This would be a Nostro account. It is less common for an individual to have such an account but it is mostly used by companies that have business established in another country without having an office or other such arrangements there. It allows them to have an account in some other country without physical presence being necessary.
Pros and Cons of a Nostro account
Now for the cons of a nostro account. While it does minimize losses that could result from exchange rates fluctuating, it is still a bit expensive to have your bank execute this foreign exchange. There are a lot of laws and regulations that need to be considered if a legal matter is to be avoided since two countries and two different banks are all involved.
What is a Vostro account?
The word 'Vostro' is derived from a Latin word that literally means 'yours'. Which means that a vostro account is 'your' account in our bank, country and currency. So according to the example given at the very beginning of this article, the said account will be 'nostro' in terms of UK and 'vostro' in terms of USA.
Pros and Cons of a vostro account
Similar to the problems associated with a nostro account, a vostro account has to operate in a way acceptable to the laws and regulations of both countries and banks involved. However, it does significantly simplify transfers through countries and reduces the fluctuations in payments due to foreign exchange. The convenience of making or receiving payments through these accounts is immense and much more acceptable.
The fees and procedural requirements in relation to opening and operating a vostro account varies from one country to another but any country would be accommodating and have friendly policies if they want foreign businesses to operate in their country.
Difference between Nostro and Vostro accounts
Literally speaking, Nostro is OURS and Vostro is YOURS. A nostro account is our account in your country and currency. Vostro is the exact opposite. A vostro account is your account in our country and currency. In a way an account can be both at the same time. If a company in country A has an account in country B, it will be a nostro account in terms of country A. And a vostro account in terms of country B.
In any case, the bank that actually holds the account is called a 'facilitator' bank. That facilitates whatever actions need to be taken using that account.
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