Sberbank and JSC VTB, two Russian banks, have been granted permission by the RBI to open Vostro accounts for rupee trade.
Continue reading to learn more about the differences between a Vostro account and a Nostro account. Two Russian banks, Sberbank and JSC VTB have been granted permission by the Reserve Bank of India (RBI) to open specialized Vostro accounts for rupee trade. The approval came months after the rules for rupee trade were announced by the Indian central bank. UCO Bank also received RBI approval to open Vostro accounts with Russia’s Gazprom at the beginning of September.
How does a Nostro account work?
An account held by one bank in another bank is known as a Nostro account. Customers can use it to transfer funds from one bank account to another. When a bank does not have branches in a foreign country, it is frequently used.
Assume that while bank “B” does have locations in the United States, bank “A” does not.” A” will now open a Nostro account with “B” in order to receive the deposits in the United States.
Now, any US customer can deposit money into “A”‘s account in “B” to send money to “A.”The funds will be transferred to A by “B.” The fact that a deposit account is held by individual depositors and a Nostro account is held by foreign institutions is the primary distinction between the two.
How does a Vostro account work?
A Nostro account can also be referred to as a Vostro account. It is a bank account that gives customers the ability to deposit funds on behalf of another bank. A Vostro account belongs to the bank that opened the Nostro account. The account for bank “B” will be referred to as a Vostro account in the preceding example. The payments are accepted on the account holder’s behalf by the Vostro account. The money that is deposited into a Vostro account will be sent to the account holder’s bank.
According to SBI executives, the RBI has made it abundantly clear that sanctioned entities and any Financial Action Task Force negative list are exempt from the requirement to open such special accounts. Due to its substantial presence in developed markets that have imposed sanctions against Russia, SBI would not have to deal with a large number of Russian banks and other entities. A specialized Vostro account has piqued the interest of some banks from nations with significant trade ties to India. They added that the talks are still in their preliminary stages.
To open a special rupee Vostro account (SRVA) for invoicing in Indian currency, the State Bank of India (SBI) is willing to collaborate with Russian banks that are not subject to sanctions and remain on the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. In a statement, the nation’s largest lender said that it had not been chosen as the primary bank to handle Russia-related transactions. Subject to certain safeguards, the Reserve Bank of India (RBI) granted banks in India, including SBI, permission to open an SRVA in July to promote invoicing in Indian rupees.
In accordance with the RBI’s guidelines, the bank stated in a statement that it is “making necessary arrangements and processing requests received from various banks, including Russian banks.” In July, the banking regulator granted Indian banks permission to establish SRVAs with lenders from other nations in order to settle international trades in Indian currency.
A domestic bank opens a Vostro account with a foreign correspondent bank to serve as the domestic bank’s agent. Numerous Western nations are imposing sanctions on Russian banks as a result of the standoff between Russia and Ukraine. Additionally, they have been taken out of the SWIFT network. This resulted in a disruption in payments for Russia’s valuable energy and agricultural exports as well as the loss of access to the usual smooth and instantaneous transactions made possible by the network. Sanctioned banks now have to deal directly with other banks, which takes time and costs more.
In order to circumvent US sanctions, public sector lender UCO Bank was selected in 2018 to handle payments from India for oil imports from Iran. The money for oil imports from Iran was to be deposited into escrow accounts held with the state-run UCO Bank by five of their banks as part of the payment method.
The Nostro and Vostro accounts are held in another currency. Sberbank and JSC VTB will now be permitted to open Vostro accounts that will accept payments in Indian rupees made by Russian traders on behalf of Indian banks. It will no longer be necessary for the traders to make payments to India in US dollars. Now all they have to do is deposit the rupees into the Vostro accounts at the two banks. The funds will then be transferred to Indian banks that hold account holders’ accounts.