Vostro Account: Definition, Purpose, Services, and Example

Context

Recently, government officials informed the public that 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.

Probable Questions

What are Special Rupee Vostro Accounts? (150 words, 10 marks)

About Special Rupee Vostro Accounts (SRVA)

• A vostro account is an account that domestic banks hold for foreign banks in the former’s domestic currency, in this case, the rupee. 
• The SRVA is an additional arrangement to the existing system that uses freely convertible currencies and works as a complimentary system. 
• Freely convertible currencies refer to currencies permitted by rules and regulations of the concerned country to be converted to major reserve currencies (like the U.S. dollar or pound sterling) and for which a fairly active market exists for dealings against major currencies. 
• The existing systems thus require maintaining balances and positions in such currencies.
• Usage: Domestic banks use it to provide international banking services to their clients who have global banking needs. 

Significance of Vostro Accounts

• Vostro account is an integral offshoot of correspondent banking that entails a bank (or an intermediary) to facilitate wire transfers, conduct business transactions, accept deposits, and gather documents on behalf of the other bank. 
• It helps domestic banks gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.

Functioning of Special Rupee Vostro Accounts (SRVA)

• The framework entails the following three important components:
  • Invoicing entails that all exports and imports must be denominated and invoiced in INR. 
  • The exchange rate between the currencies of the trading partner countries would be market-determined. 
  • To conclude, the final settlement also takes place in Indian National Rupee (INR). 
• SRVA accounts are opened for correspondent banks of the partner trading country by the authorized domestic dealer banks (those authorized to deal in foreign currencies). 
• Domestic importers are required to make payment (in INR) into the SRVA account of the correspondent bank against the invoices for the supply of goods or services from the overseas seller/supplier. 
• Similarly, domestic exporters are to be paid the export proceeds (in INR) from the balances in the designated account of the correspondent bank of the partner country.
• Priority: The domestic bank would be responsible for giving top priority to making sure that the available funds are used to meet existing payment obligations, i.e., from the already completed export orders or export payments that are scheduled. 
• Follow FEMA guidelines: All reporting of cross-border transactions is to be done in accordance with the extant guidelines under the Foreign Exchange Management Act (FEMA), 1999.

Eligibility Criteria for Banks

• To open an SRVA account, partnered countries’ banks will approach an authorized domestic dealer bank.
• An authorized domestic dealer bank would then seek approval from the apex banking regulator providing details of the arrangement.
• An authorized domestic dealer bank would also ensure that the correspondent bank is not from a country mentioned in the updated Financial Action Task Force (FATF) Public Statement on High Risk & Non-Co-operative jurisdictions.
• Domestic banks must also put forth for perusal, financial parameters pertaining to the corresponding bank.
• Multiple SRV accounts for various banks from the same nation can be opened by authorized banks. 

Purpose of the SRVA account

• Reduce Forex demand: The framework could largely reduce the “net demand for foreign exchange, the U.S. dollar in particular, for the settlement of current account related trade flows” as per the Economic Survey (2022-23). 
• Reduce dependence on Foreign currencies: The framework would also reduce the need for holding foreign exchange reserves and dependence on foreign currencies, making the country less vulnerable to external shocks. 
• Promote INR: Indian exporters could get advance payments in INR from overseas clients and in the long term promote INR as an international currency once the rupee settlement mechanism gains traction.

News Source: The Hindu

https://www.thehindu.com/business/Economy/explained-vostro-accounts-and-how-they-facilitate-trade/article66537848.ece

Frequently Asked Questions

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