Nostro, Vostro and Loro Accounts: To facilitate dealings in foreign exchange, a bank in India maintains bank accounts at selected foreign centers. For example, it may maintain an account with Grindlays Bank, London. Obviously, the account would be in pound-sterling. Similarly, it may have a dollar account with Bank of America, New York. While corresponding with the foreign bank, the Indian bank would refer its account with former Nostro account, meaning ‘our account with you’. So for the Indian bank Nostro account means the bank account it maintains abroad in foreign currency.
All foreign exchange transactions are routed through Nostro accounts. For example, if the bank issues a demand draft on London payable in pound-sterling, it would be drawn on Grindlays Bank, London. When the draft is presented in London, the Grindlays Bank will debit the Indian bank’s account with it. Likewise, when a bill drawn on London is presented to the bank, it would send it for collection to Grindlays Bank. The bank would collect and credit the account of the Indian bank with it.
A foreign bank may open rupee account with an Indian bank. While corresponding with the foreign bank maintaining an account with it, the Indian bank would refer to the account as Vostro account, meaning ‘your account with us’. For example, a bank in Middle East may open an account with an Indian bank, and draw drafts on the account. The Indian bank on presentment of the drafts to it would pay to the debit of the foreign bank’s account with it. For exchange control purposes such accounts are known as ‘non-resident bank accounts’.
People’s Bank of India is having an account with Chasemanhattan Bank, London. When the Janata Bank of India likes to refer to this account while corresponding with the Chasemanhattan Bank, it would refer to it as Loro account meaning ‘their account with you’.