The Reserve Bank of India (RBI) has approved two Russian banks, Sberbank and JSC VTB, to open dedicated Vostro accounts for trading in rupees. The approval came months after India’s central bank announced its norms for rupee trading.

Earlier in September, UCO Bank also received RBI’s approval to open Vostro accounts with Russia’s Gazprom.

What is a nostro account?

A nostro account is an account held by one bank at another bank. It allows customers to deposit funds into the bank’s account at another bank. It is often used when a bank does not have branches abroad.

Suppose bank “A” has no branches in the US, but bank “B” does. In order to receive the deposits in the USA, “A” opens a nostro account with “B”.

Now, when US customers want to send money to “A”, they can deposit it into A’s account in “B”. “B” transfers the money to “A”.

The main difference between a deposit account and a nostro account is that the former is held by individual depositors while the latter are held by foreign institutions.

What is a Vostro account?

A Vostro account is just another name for a Nostro account. It is an account maintained by a bank that allows customers to deposit funds on behalf of another bank.

A nostro account is a vostro account for the bank that opens the account.

In the example above, the account is identified as the Vostro account for bank “B”. The Vostro account accepts payments on behalf of the account holder’s bank.

When a person deposits money into the Vostro account, it is transferred to the account holder’s bank.

Nostro and Vostro accounts are maintained in foreign denominations.

In the case of Sberbank and JSC VTB, these two banks are now allowed to open Vostro accounts that accept payments on behalf of the Indian banks in Indian rupees from the merchants in Russia.

Merchants no longer need to send payments to India in US dollars. You can now simply deposit the money in rupees into the Vostro accounts at the two banks.

These two banks then wire the money to the account holder’s banks in India.