Vostro Accounts & Its Functioning

• In order to facilitate the settlement of rupee payments for trade between India and Russia, 20 Russian banks have established Special Rupee Vostro Accounts (SRVA) with partner banks in India.
• The nodal officers for all major domestic banks have also been mentioned in order to resolve concerns that exporters may encounter under the arrangement.

SRVA Agreement:

• A Vostro account is a balance held in the domestic currency of the domestic bank—in this case, the rupee—for the benefit of the foreign bank.
• For instance, ICICI Bank would have a Vostro Account if CITI Bank, New York opened an account in rupees there.
• It is used by domestic banks to offer international banking services to their customers who have needs for international banking.
• Wire transfers, business transactions, receiving deposits, and document gathering on behalf of another bank are all examples of banking services.
• Foreign financial markets are more accessible to domestic banks, and they can provide services to international clientele without having to set up shop abroad.
• The SRVA is a separate arrangement that uses freely convertible currencies and functions as an adjunct to the current system.
• For commerce to be facilitated by the current systems, positions and balances in such currencies as the US dollar and the pound must be maintained.

Framework:

• There are three crucial elements: invoicing, currency rate, and settlement.
• All exports and imports must be valued in Indian National Rupee (INR) and invoiced in that currency.
• The market would decide the exchange rate between the currencies of the trading partners.
• The Final Settlement is also paid in Indian Rupees.

Eligibility Criteria of Banks:

• In order to start an SRVA, banks from partner nations must first approach an authorized domestic dealer bank, which will then request permission from the top banking authority.
• It would be the responsibility of the domestic banks to make sure that the correspondent bank is not from one of the nations listed in the most recent Financial Action Task Force (FATF) Public Statement on High Risk & Non-Cooperative Jurisdictions.
• Several SRV accounts for various banks from the same nation may be opened by authorized banks.

Functioning:

• Correspondent banks from the trading partner countries must open SRVA accounts with authorized domestic dealer banks.
• Domestic importers must pay the bills for the supply of goods or services from the international seller/supplier (in INR) into the SRVA account of the correspondent bank.
• Similarly, balances in the designated account of the correspondent bank of the partner country are to be used to pay domestic exporters the export earnings (in INR).
• Under the aforementioned rupee payment mechanism, Indian exporters may get advance payments in Indian rupees from foreign purchasers against exports.

Vostro vs. Nostro account Comparison:

• Latin terms that mean "ours" and "yours," respectively, are Nostro and Vostro. A Vostro Account is one that is once again administered by a correspondent bank on behalf of another bank.
• A Nostro Account is described as a record of deposits kept by a bank with a foreign bank in the currency of the country holding the funds.
• The distinction between the two is that it is written from the perspectives of the depositor and holder, two different banks.
• LORO Account: If two banks each hold a Nostro Account with a third bank, then in this case, one bank's Nostro Account with the third bank would be another bank's Loro Account.

The desire for the SRVA:

• The SRVA would decrease the net demand for foreign money, for the settlement of current account-related trade flows, according to the Economic Report (2022-23).
• Also, it would lessen the necessity for keeping foreign exchange reserves and the reliance on foreign currencies, reducing the vulnerability of the nation to outside shocks.
• Indian exporters may receive advance payments in INR from foreign customers and, after the rupee settlement system gains traction, may promote INR as a global currency.
• Reduced Exposure to External Shocks: A nation would be less at risk from external shocks if it depended less on foreign currencies.
• Rupee as an International Currency: After the rupee settlement system develops traction, it will eventually promote the rupee as an international currency.
• According to the Bureau for International Settlements Triennial Central Bank Survey 2022, 88% of all transactions are conducted in U.S. dollars. The INR contributed 1.6%.