Cross-border payments play a key role in international business. To facilitate dealing in foreign exchange, a bank in India may maintain banks with abroad. Similarly, some foreign banks may maintain accounts with banks in India. A brief description about these accounts is important to understand exchange dealings.
Nostro, Vostro, and Loro accounts form the foundation of how banks move money across borders and settle foreign currency transactions.
International payments do not move directly from one bank to another. They pass through a network of partner banks that hold and manage funds on each other’s behalf. This system, known as correspondent banking, makes cross-border payments possible even when your bank has no branch in the destination country.
Nostro account is a bank’s foreign currency account held with another bank overseas.
Example: LTC Ltd. (India) exports goods to the USA and receives USD 60,000.
SBI has a Nostro account with Citibank, New York.
Exchange rate: USD/INR = 85
Amount credited to SBI’s Nostro account = USD 60,000
Converted into INR: 60,000 × 85 = Rs. 51,00,000
Note: The Indian bank uses its USD Nostro account with a US bank to receive the money before converting it to rupees and crediting the account.
Vostro account is a foreign bank’s account held with a domestic bank.
Example: PLK Company (USA) imports goods from India and pays INR 50,00,000.
Citibank has a Vostro account with SBI.
Citibank instructs SBI to debit its Vostro account.
Payment made to Indian exporter = Rs.50,00,000
Note: It supports local payouts, remittances, and settlements. Foreign bank’s money is held with SBI. SBI pays Indian exporter from Vostro account.
Loro account is a reference to an account between two other banks.
Example: HSBC (London) has a USD account with Citibank (USA). SBI refers to this account.
HSBC balance in Citibank = USD 200,000.
For SBI: HSBC’s account with Citibank = Loro account
Comparative Table: Nostro, Vostro and Loro Accounts
| Feature | Nostro Account | Vostro Account | Loro Account |
| Meaning | Our money with you | Your money with us | Their money with them |
| Perspective | Home bank’s view | Foreign bank’s view | Third-party reference |
| Held by | Domestic bank with a foreign bank | Foreign bank with a domestic bank | Not held by the referring bank |
| Currency | Foreign currency | Domestic currency | Depends on the two other banks |
| Nature | Actual bank account | Actual bank account | Reference term, not an account |
| Accounting treatment | Asset for the holding bank | Liability for the holding bank | No separate accounting treatment |
| Example | SBI’s USD account with Citibank (USA) | Citibank’s INR account with SBI (India) | HSBC’s account with Citibank, referred by SBI |
| Role in forex operations | Used for foreign currency receipts and payments | Used to settle foreign banks’ transactions | Used for information and correspondent banking |
| Impact on exchange position | Increases foreign currency assets | Increases foreign currency liabilities | No direct impact |