Forex
Vostro inward remittance: Meaning, Purpose, and Process Involved
Words in banking are confusing, complex, and intimidating to say the least.
Vostro inward remittance may not be a familiar term, even for businesses regularly involved in remittance transactions.
So in this blog post, we break down the concept of vostro inward remittance, the process flow of vostro inward remittance, and the difference between vostro and nostro accounts for international business transfers.
Let’s dig in!
What is Vostro's inward remittance?
A Vostro inward remittance or Vostro payment refers to the process of receiving funds or money into a Vostro account. A Vostro inward remittance account is an account that a bank holds on behalf of a foreign bank, allowing the foreign bank to provide banking services in the local currency. In the context of inward remittance, it means funds are being transferred from a foreign bank to the Vostro account held by a local bank.
This could involve various types of transactions, such as international wire transfers, deposits, or other financial activities that result in the inflow of funds into the Vostro account.
What is the use of the Vostro inward remittance account?
A Vostro inward remittance account is a tool for foreign banks to engage in cross-border activities with Indian banks. In this setup, the foreign bank holds an account in the local currency of an Indian bank. The term "Vostro" means "yours," indicating it belongs to the foreign bank.
Uses of Vostro accounts:
- Smoother Transactions: They help foreign banks conduct local transactions and hold funds in the local currency, simplifying cross-border trade.
- Banking: Vostro accounts support correspondent banking, enabling foreign banks to serve clients in India without a physical presence.
- International Trade: Vostro accounts to aid in financial transactions related to international trade, like imports and exports.
- Compliance: Regulated by the Reserve Bank of India, Vostro accounts to ensure compliance with laws, promoting transparency in international banking.
What is a Vostro inward remittance account in RBI?
In the context of the Reserve Bank of India (RBI) guidelines for foreign remittance, a Vostro inward remittance account has a type of Nostro/Vostro account relationship. The terms "Nostro" and "Vostro" are used in international banking to describe two sides of a banking relationship.
Vostro inward remittance Account: "Vostro" is also a Latin term meaning "yours." A Vostro account is exactly the opposite function of a Nostro account. It is an account that a foreign bank holds in the local currency of another bank (host country). The foreign bank holds this account to provide services to its clients who need to transact in the local currency.
Vostro Inward Remittance: How does it work?
Before sending money internationally to an Indian account, check the receiving bank's inward remittance instructions. While some banks accept direct international wire transfers, most will provide nostro/vostro details for their correspondent bank abroad. These details vary based on the sending country.
After obtaining the nostro/vostro information, make a record of the SWIFT Payment Code and account number for the transfer. Collect recipient details, such as full name, bank account number, address, contact number, and the SWIFT code.
Pro Tip: Ensure you follow any additional instructions from the receiving bank. To avoid complications, include the RBI Purpose Code for inward remittance when initiating transfers to India. This helps in potential tax savings under the Double Taxation Avoidance Agreement (DTAA) is utilized.
What are the Types of Vostro Accounts?
Given that Vostro accounts are accounts held by foreign banks in India, the RBI has provided the option of different types of Vostro accounts, to help in specific use cases. Here are the 3 major types:
Vostro Pool Account
A Vostro pool refers to the consolidated funds in Vostro accounts held by a local bank on behalf of foreign banks. In the context of inward remittances, a Vostro pool is where the foreign currency remittances arrive, which are later exchanged into local currency. This aggregation of funds facilitates several international payments across borders, such as cross-border payments, trade financing, investments, etc. To any business involved in international trade, the Vostro pool ensures smooth dealings with any number of currencies and offers good liquidity for quick payments, hence enhancing the management of cash flow.
Banks maintain a Vostro pool to ensure smoother and more efficient remittance services with their foreign banking partners and better inward funds from other countries. By maintaining a Vostro pool, Indian banks can clear inward remittances much faster and with minimal delay, thus ensuring that cross-border transactions are maximally effective.
RDA Vostro FIR (Rupee Drawing Arrangement Vostro Foreign Inward Remittance)
The term RDA Vostro FIR stands for Rupee Drawing Arrangement (RDA) Vostro Foreign Inward Remittance (FIR). It is an arrangement governed by the Reserve Bank of India (RBI) whereby foreign banks utilize Vostro accounts to collect inward remittances in Indian Rupees. Through the RDA Vostro FIR system, Indian banks facilitate inward remittances so that foreign companies or individuals can transfer payments to India without error.
Importantly, RDA Vostro FIR helps the inward remittances to Indian businesses, whose payments come from abroad. This is because the foreign bank maintains the Vostro account for the remittance in INR, making it easy for Indian businesses to access the funds.
Special Vostro Rupee Account (SVRA)
Special Vostro Rupee Accounts (SVRA) were introduced more recently by the Reserve Bank of India (RBI) to facilitate rupee-denominated trade settlements with specific countries. These accounts allow Indian exporters and importers to receive and make payments in INR, bypassing the need for foreign currency settlements, which can be beneficial in dealing with certain geopolitical or currency challenges.
The Special Rupee Vostro Account (SRVA) differs from the existing Rupee Vostro Account under Foreign Exchange Management (Deposit) Regulations, 2016, by requiring prior approval from the Reserve Bank of India (RBI) and being used specifically for settling international trade transactions in Indian Rupees (INR). This new arrangement complements the existing system that uses freely convertible currencies, aiming to reduce dependence on hard currencies like USD or EUR. The approval process involves stringent requirements, ensuring that banks involved have solid financial health, business resilience, and experience in handling trade and investment transactions.
This bank-to-bank arrangement functions similarly to correspondent banking and facilitates trade settlements between partner countries by using INR, which benefits Indian traders by minimizing exchange rate risks. Multiple SRVA accounts can be maintained by foreign correspondent banks with various Authorized Dealer (AD) banks, and the exchange rate is determined by market dynamics, typically in relation to global currencies. Moreover, balances in the SRVA can be repatriated, invested, or transferred, and income from these accounts can also be repatriated, following applicable regulatory and tax provisions.
Vostro inward remittance: What is the difference between Vostro and Nostro Accounts?
The terms "Nostro" and "Vostro" are used in the context of correspondent banking to describe two sides of a relationship between two banks. Here's the difference between Nostro and Vostro accounts:
- Nostro Account:
- Definition: "Nostro" originates from Latin, meaning "ours." A Nostro account refers to a bank account held in a foreign currency at another bank, typically located in a foreign country.
- Ownership: The reporting bank owns the Nostro account, i.e., the bank whose books the account is held.
- Perspective: It is viewed from the perspective of the account-holding bank. For example, if an Indian bank has a Nostro account in the United States, it's an account held by the Indian bank in U.S. dollars in an American bank.
- Vostro Account:
- Definition: "Vostro" originates from Latin, signifying "yours." A Vostro account is an account maintained by a foreign bank in the local currency of another bank, typically in the foreign bank's home country.
- Ownership: The foreign bank, where the account is held, possesses the Vostro account.
- Perspective: It is viewed from the perspective of the account-holding foreign bank. For example, if a U.S. bank has a Vostro account in India, it's an account held by the U.S. bank in Indian Rupees in an Indian bank.
Vostro Inward Remittance: 3 Things To Keep in Mind
- Currency Exchange Rates: Familiarize yourself with the current exchange rates and be mindful of possible fluctuations throughout the transfer.
Make Note: The currency conversion rates in international bank transfers tend to be higher than the mid-market rate visible on Google searches.
- Confirm Recipient Information: Ensure accuracy in the recipient's details to prevent potential delays or complications in the transfer.
- Assess Transfer Charges: Find out about added transfer fees and include them in your financial planning.
Is a separate Vostro inward remittance account allowed in RBI?
Yes, the RBI allows the existence of Vostro inward remittance accounts. A Vostro inward remittance account is formed when a foreign bank maintains an account in the local currency of an Indian bank, usually within India.
Vostro accounts help in fostering banking relationships and enabling international transactions. The RBI regulates and supervises these banking activities to ensure adherence to relevant laws.
In a Vostro account arrangement, the Indian bank oversees the account on behalf of the foreign bank, allowing the foreign bank to perform local transactions and hold funds in the local currency. This setup streamlines international financial transactions, offering support to cross-border trade and commerce.
Which countries have Vostro accounts in India?
Indian central bank has permitted banks from 22 partner countries, including Russia and the UK, to create "vostro" accounts within the nation.
Banks from additional countries, including:-
- Singapore
- Botswana
- Fiji
- Tanzania
- Uganda
- Kenya
- Malaysia
- Maldives
- Belarus
- Seychelles
- Mauritius
- Myanmar
- New Zealand
- Oman
- Guyana
- Kazakhstan
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