Correspondent Accounts For Foreign Banks: Fill & Download for Free

Just like you’d have an account with a bank, a bank itself has accounts, with other banks.Let’s say, HDFC Bank in India, wants to make and receive payments in US Dollars, in the US. It will tie up with , say, Citibank in the US. Citibank will act as its representative or ‘correspondent’ bank. HDFC Bank will have an account in Citibank, US - its USD receipts and payments will happen from this account. This account is HDFC’s ‘Nostro’ account. ‘Nostro’ means, ‘our account with them’; and is the term for a bank’s foreign currency account, with a foreign bank.What, then, is a ‘Vostro’ account? It is the same account, seen from the view of the foreign bank. That is, Citibank will refer to HDFC Bank’s account with it, as a ‘Vostro’ account - which means ‘their account with us’. It is the account which a bank from another country, holds with us .Banks will have balances in Nostro accounts, across the world - for example, HDFC Bank may have Nostro accounts in JPY, EUR, USD, AED, SGD, CND, etc.

Ah! Another question where I get to explain the difference between what happens at the user level and what at bank level.As a user you first need to have an international payments enabled credit/debit card or a PayPal account. You pay in your home currency (whatever the value comes out to be after conversion from USD to your local currency, in this case INR). You're done. Your item will be shipped to you.Coming to what happens at bank level-You have paid in rupees, your seller needs dollars. You and your banker are in India, your seller and their banker are in the US. You have arithmetically converted USD amount into equivalent INR value, how does the actual real world conversion takes place? How does your seller recieve dollar bills?The solution lies in Nostro and Vostro accounts.Every bank authorized to carry out foreign exchange transactions has an account in every major foreign bank at the foreign location in foreign currency. That foreign bank is known as the corresponding bank to this Indian bank, and the foreign account is known as the nostro account.Similarly, most of the major foreign banks have an account of their own in major Indian banks in INR. These are called vostro accounts.We'll understand their working by way of an example:Let's say you use your SBI account to make a purchase from Amazon (US) for an item marked at $10. SBI deducts ₹650 from your account (considering exchange rate of 65). Amazon has a dollar account in Bank of America, US. SBI has a dollar account in Bank of America too (the nostro account) in which it has some hundred thousand dollars lying. It just sends a SWIFT Message to Bank of America stating that Amazon needs to be paid $10. Bank of America deducts $10 from SBI’s account and credits the same to Amazon's account. Amazon gets $10 and the transaction is complete.Similarly, if you have a friend who wants to transfer you, say $20, and he also uses a Bank of America account, BoA debits your friend's account, credits SBI’s nostro account, sends a SWIFT Message to SBI stating sender (your friend) & beneficiary (your) details, SBI credits your Indian account with INR equivalent.Vostro accounts are used if the transactions are in Indian rupees. You want to send ₹100 to your friend in the US via your bank SBI. SBI deducts your account by 100, credits the same to BoA’s account held in SBI in INR, SWIFTs BoA, BoA pays dollar equivalent to your friend. (Your friend staying in the US obviously wants dollars, as rupees aren't a legal tender there)Now you might ask, how is this last transaction different from the case of payment to Amazon? In both cases I paid in rupees, the other party got in dollars. Why was nostro account used in the former and vostro in the latter?The two transactions are different in the aspect that while in case of purchase from Amazon the payment was denominated in dollars, in case of your voluntary transfer to your American friend, the transaction was denominated in rupees.You would argue - But still the Indian entity paid in rupees and the American entity received dollars. The overall result is the same. Isn't it?No. There is a crucial difference-In the first case where the deal was denominated in dollars, SBI actually paid the dollars on your behalf through its nostro. You had to simply compensate SBI at the prevailing exchange rate. There are 2 implications of this:The exchange rate risk is borne by you. If today the exchange rate is 65, you pay ₹650 to SBI for the $10, if tomorrow the rate suddenly jumps to 70, you got to pay ₹700 for the same product.SBI’s dollar holdings are reduced by $10 (transferred to Amazon, US). In effect, India's dollar holdings are reduced by $10. Any payment in foreign currency amounts to outflow of foreign currency from the country.In the case of you transferring ₹100 to your friend, you paid SBI in rupees, SBI paid BoA in rupees (by crediting its Vostro account) and BoA paid your friend in dollars. So the exchange rate risk was borne by your friend when he approached BoA for the dollar equivalent of ₹100. Also, it did not result in any outflow of dollars from India. It rather resulted in inflow of rupees for America!

The quick answer is: This can be a difficult question to know where to look. ✔https://www.sec.gov/about/offices/ocie/aml2007/fincen-factsheet1205.pdf“Section 312 of the USA PATRIOT Act requires U.S. financial institutions to perform due diligence and, in some cases, enhanced due diligence, with regard to correspondent accounts established or maintained for foreign financial institutions and private banking accounts established or maintained for non-U.S. persons. The formal rule issued today implements the general due diligence requirements pertaining to foreign financial institutions as well as the due diligence and enhanced scrutiny requirements pertaining to private banking accounts. The notice of proposed rulemaking addresses the enhanced due diligence requirements pertaining to correspondent accounts maintained for certain foreign banks”Good luck and stay safe out there folks! 🧐