GROWTH IN VOSTRO ACCOUNTS OF RUSSIAN BANKS IN INDIA

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GROWTH IN VOSTRO ACCOUNTS OF RUSSIAN BANKS IN INDIA

Mains General Studies: Paper -III

(Economic Activities Related to Foreign Banks)

Why in News:

  • Recently 20 Russian banks including Rosbank, Tinkoff Bank, Centro Credit Bank and Credit Bank of Moscow have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India.

Key points:

  • Recently the Reserve Bank of India (RBI) permitted HDFC Bank Limited and Canara Bank Limited to open a special "Vostro Account" for doing business with Russia.
  • Permission was granted to open nine special Vostro accounts in two Indian banks (UCO Bank and IndusInd Bank) for making rupee payments for trade between India and Russia in July 2022.
  • Russia's two largest banks 'Sber Bank' and 'VTB Bank' are the first foreign lenders to be permitted by the Reserve Bank of India to conduct international business transactions in rupees.
  • Authorized banks in India have to take approval from the central bank for business with foreign banks.

What are Special Rupee Vostro Accounts (SRVA):

Vostro Account:

  • Vostro is a Latin word meaning "yours", therefore, a Vostro account means that it is "your account".
  • Vostro Account is another name for Nostro Account. It is an account set up by a bank which provides the facility to the customers to deposit money on behalf of another bank.
  • For example, if a US life insurance company asks an Indian bank to manage funds on its behalf, this would be an example of a Vostro account.
  • An example of such an account is the HSBC Vostro account operated by SBI in India.
  • Domestic banks provide international banking services to customers of foreign banks through Vostro accounts.
  • The following economic activities are carried out from the Vostro account:
  • Performing wire transfers
  • foreign exchange
  • Deposit and Withdraw
  • Increasing international trade
  • This account is most commonly used for settlement of foreign transactions or foreign trade.
  • As per the instructions issued by RBI in India, no interest is paid on Vostro account.
  • The benefit of overdraft facility is given to the foreign bank only when it is specifically approved.

Nostro Account:

  • Nostro is a Latin word meaning "our", therefore, a nostro account means it is "our account".
  • Nostro account means an account opened by one bank with another bank. This gives the customers the facility of depositing money in any other bank's account. It is used when a bank does not have any branch abroad.
  • Nostro account is a Vostro account for the bank that opened the account.
  • When a person deposits money into a Vostro account, the money is transferred to the account holder's bank.
  • Both Nostro and Vostro accounts are always opened in foreign currency .
  • Vostro accounts are maintained in home currency, while Nostro accounts are maintained in foreign currency.

Loro Account:

  • A LORO account is a current account maintained by a domestic bank for another domestic bank as a third party account, as opposed to Nostro and Vostro. This is a kind of bilateral correspondence.

Rupee Payment System:

  • Only authorized banks in India are permitted to open Special Rupee Vostro Accounts (SRVA) (an account maintained by one authorized bank on behalf of another bank).
  • Through this payment system, Indian importers make payments in Indian Rupees, in which the invoices for the supply of goods or services from the foreign seller are deposited in a special Vostro account of the authorized bank of the partner country.
  • Through this payment system, Indian exporters are paid for their exports in Indian Rupees from balances held in a designated special Vostro account with an authorized bank in the partner country.
  • Through this payment system, Indian exporters can also receive advance payment for exports in Indian Rupees from foreign importers.
  • Before allowing any such receipt of advance payments for exports, Indian banks need to ensure that the funds available in these accounts are utilized only for specific payment obligations already executed.
  • Balances deposited in special Vostro accounts can be used only for the following economic activities:
  • Payment for projects and investments,
  • Export/Import advance flow management,
  • Investment in Government securities etc

Current Rupee Payment System:

  • At present, India always transacts exports or imports from countries other than countries like Nepal and Bhutan in a foreign currency only.
  • At present, in case of imports to India, foreign companies have to pay in foreign currency only. India has to maintain sufficient foreign exchange reserves to make payments to foreign companies.
  • This foreign exchange reserve is received by Indian companies from the export of goods in the form of foreign currency like Dollar, Euro, Pound, Yen etc.

Advantages of Current Rupee payment system:

  • Development will get a boost.
  • Global trade will get a boost.
  • It will be easier to resolve sanctions payment related issues.
  • The risk of foreign exchange fluctuations can be reduced.
  • The fall of rupee-value can be controlled.

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Preliminary Exam. Question:

With reference to the currency payment system, consider the following statements-

  1. Authorized banks in India have to take approval from the central bank for business with foreign banks.
  2. Both Nostro and Vostro accounts are opened in foreign denominations.

Which of the statements given above is/are true?

  1. 1 only
  2. 2 only
  3. both 1 and 2
  4. neither 1 nor 2

 

Answer: Option C

 

Mains Exam Question:

Write about India's foreign exchange payment system.