Strategic Financial Management

Nostro A/C ; Vostro A/C & LORO Account Nostro A/C: [Ours Account with You]
Nostro Account is a Current account maintained by a domestic bank/dealer with a foreign bank in foreign currency. For example, Current Account of SBI Bank (an Indian bank) with Swiss Bank in Swiss Franc (CHF) currency is a Nostro A/C. India Indian Bank Switzerland Swiss Bank Nostro Account of Indian bank Indian Bank opened a Current Account with Swiss Bank in CHF currency. This Bank account is known as Nostro Account for Indian.

Vostro A/C: [Yours Account with us]

Vostro A/C is a Current account maintained by a foreign bank with domestic bank in Rupee currency. For example: Account of Swiss bank in India with SBI in Rupee () Currency.

India

Switzerland

Indian Bank Vostro Account of Swiss bank Swiss Bank opened a Current Account with Indian Bank in currency. This Bank account is called Vostro Account by Indian.

Swiss Bank

Loro A/C: [Our Account of their money with you]

Loro Account is a Current Account Maintained by one Domestic Bank on behalf of other domestic bank in foreign bank in foreign currency. In other word Loro Account is a Nostro Account for one bank who opened the bank and Loro Account for other bank who refers first one account. For Example: SBI opened Current Account with Swiss bank. If PNB refers that account of SBI for its correspondence, then it is called Loro Account for PNB and it is Nostro Account for SBI. India SBI Bank opened a Current Account with Swiss Bank in CHF currency. Indian Bank (SBI) Swiss Bank Nostro Account of Indian bank Indian Bank (PNB) Switzerland

PNB Bank refers Account of SBI for its transaction then it is called Loro Account for PNB

Email: ca_npsah@icai.org

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Maintaining Exchange position and Nostro A/C

[Nov-05] [RTP-Nov-08]

General information: - Currency of Switzerland is Swiss Franc (CHF) - Zurich is a city of Switzerland - Telegraphic Transfer or Telex Transfer , often abbreviated to TT, is an electronic means of transferring funds overseas Exchange position: (Think it as Bank book) Exchange position (for CHF currency) of an Indian bank/dealer will affect by: Purchase/sale of foreign currency, (the purchase/sale of currency may be spot or forward) - Issue/cancellation of demand draft, - Purchase/sale of Bills receivable, Remittance of foreign currency [Remember that Indian bank do not remit foreign currency (say CHF) in Nostro account from India. All receipt in
Swiss franc (CHF) and all payment/remittances in CHF will be made through Nostro account maintained with Switzer land bank]

Cash Position (Nostro A/C): (As bank Reconciliation statement: think it as Pass book which is maintained by bank) Nostro A/C of an Indian bank/dealer maintained with Switzerland bank will affect by: Spot Purchase/Sale of foreign currency (CHF) (Forward Purchase/Sale of CHF do not affect Nostro A/C because there is no delivery of
currency as on today) -

Receipt/payment in CHF.

Note: Spot purchase/Sales of CHF affects both exchange position as well as Nostro A/C (Cash Position). However, forward purchase/sale affects only the exchange position.

Transaction through demand draft (DD)

At the time of issuing DD Indian Bank will decrease its exchange position Nostro A/C will decrease only after presenting DD by Mr. S to his banker If before presenting DD it will cancel, then Indian Bank will increase its exchange position.
i.e. Bank book (to understand)

India Indian Bank

Think all transaction for Indian Bank and not for Mr. S and Mr. B

Switzerland Swiss Bank Nostro Account of Indian bank

2 Mr. Buyer

3 DD in CHF Import 1

6 CHF Mr. Seller 4 Pay by way of DD

5 DD

After step-3 Indian bank will reduce exchange position. After step-6 Nostro Account of Indian bank will decrease. If DD canceled due to some reason the step 6 & 5 will not applicable and Mr Buyer will get money back and Indian bank will increase Exchange position. No effect on Nostro A/C

CA. Nagendra

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Strategic Financial Management

Transaction through Bills Receivable (B/R):

. Bank buys bills receivable India Indian Bank 5 Present B/R at Maturity Switzerland Swiss Bank Nostro Account of Indian bank Mr. Seller 2 Received by way of B/R Export Invoice in CHF 6 1 CHF Mr. Buyer

3 B/R in CHF

After Step-3 Indian bank will increase exchange position. After Step-5 & 6, Nostro A/C of Indian bank will increase. If B/R dishonor, Indian bank will decrease exchange position and in this case there will be no effect on Nostro Account.

Cancellation of forward Contract:

Suppose a person enters forward contract on date A (i.e. today) for delivery on 3 month time. Due to some reason contract cannot be performed and hence he approaches for cancellation. We are discussing the position for 4 different situations. 3 month 2 month

Today

before due date

Due date

after due date

(Due date + 15 days)

Originally entered F. Contract for due date 1 2 3 4

Applicable Rate for Cancellation 1. 2. 3. 4. Cancellation at 2 month time (i.e. before due date) Cancellation at due date Cancellation after due date Automatic cancellation

Email: ca_npsah@icai.org

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