A vostro account is the account a correspondent bank holds on behalf of another bank.
These accounts are an essential aspect of correspondent banking in which the bank holding the funds acts as custodian for or manages the account of a foreign counterpart.
A vostro account is established to enable a foreign correspondent bank to act as an agent or provide services as an intermediary for a domestic bank to execute wire transfers, withdrawals and deposits for customers in countries where the domestic bank does not have a physical presence. The term vostro translated from Latin means “yours,” as in your account. From the correspondent bank’s point of view, the funds held on the behalf of other banks are referred to as vostro accounts and are denominated in the local currency.
This should not be confused with Nostro accounts.
From the perspective of domestic banks, the funds deposited at correspondent banks are referred as nostro accounts. Nostro translated from Latin means “ours,” as in our accounts. Nostro accounts are denominated in the foreign currency of the correspondent bank.
It would be more clear from the definitions below
Nowadays, bank operations are not confined within a national border. Banks are opening branches in foreign countries. But the problem is – Is it possible for a bank to open branch in each and every country?
Obvious answer is No. Then what is the easiest way to handle this situation?
Open an account in the foreign countries’ bank!!
Here Nostro, Vostro and Loro accounts come into play.
Italian word ‘nostro’ means ‘ours’. Hence, Nostro account points at – “Our account with you”.
Nostro accounts are generally held in a foreign country (with a foreign bank), by a domestic bank (from our perspective, our bank). It obviates that account is maintained in that foreign currency.
For example, SBI account with HSBC in U.K. (may be).
Italian word ‘vostro’ means ‘yours’. Hence, Vostro account points at – “Your account with us“.
Vostro accounts are generally held by a foreign bank in our country (with a domestic bank). It generally maintained in Indian Rupee (if we consider India).
For example, HSBC account is held with SBI in India. (may be).
Again, Italian word ‘loro’ means ‘theirs’. Therefore, it points at – “Their account with them”.
Loro accounts are generally held by a 3rd party bank, other than the account maintaining bank or with whom account is maintained.
For example BOI wants to transact with HSBC, but doesn’t have any account, while SBI maintains an account with HSBC in U.K. Then BOI could use SBI account. (again may be).