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22th February 2023 (9 Topics)

Vostro accounts and functioning

Context

Recently, the government informed that 20 Russian banks, including Rosbank, Tinkoff Bank, Centro Credit Bank and Credit Bank of Moscow have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India.

So, let us analyse its functioning.

About

What is the SRVA arrangement?

  • A vostro account is an account that domestic banks hold for foreign banks in the former’s domestic currency.
  • Domestic banks use it to provide international banking services to their clients who have global banking needs.
  • It is an integral offshoot of correspondent banking that entails a bank (or an intermediary) to facilitate wire transfers, conduct business transactions, accept deposits and gather documents on behalf of the other bank.
  • It helps domestic banks gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.
  • The SRVA is an additional arrangement to the existing system that uses freely convertible currencies and works as a complimentary system.

Freely convertible currencies refer to currencies permitted by rules and regulations of the concerned country to be converted to major reserve currencies (like the U.S. dollar or pound sterling) and for which a fairly active market exists for dealings against major currencies.

How does it function?

  • The framework entails three important components, namely, invoicing, exchange rate and settlement.
    • Invoicing entails that all exports and imports must be denominated and invoiced in INR.
    • The exchange rate between the currencies of the trading partner countries would be market-determined.
    • The final settlement also takes place in Indian National Rupee (INR).
  • The authorised domestic dealer banks (those authorised to deal in foreign currencies) are required to open SRVA accounts for correspondent banks of the partner trading country.
  • Domestic importers are required to make payment (in INR) into the SRVA account of the correspondent bank against the invoices for the supply of goods or services from the overseas seller/supplier.
  • Similarly, domestic exporters are to be paid the export proceeds (in INR) from the balances in the designated account of the correspondent bank of the partner country.

All reporting of cross-border transactions is to be done in accordance with the extant guidelines under the Foreign Exchange Management Act (FEMA), 1999.

What is the eligibility criterion of banks?

  • Authorised banks can open multiple SRV accounts for different banks from the same country.
  • Further, balances in the account can be repatriated in freely convertible currency and/or currency of the beneficiary partner country depending on the underlying transaction, that is, for which the account was credited.
  • Domestic banks must also put forth for perusal, financial parameters pertaining to the corresponding bank.

Significance:

  • To Facilitate Trade: Indian exporters could get advance payments in INR from overseas clients and in the long-term promote INR as an international currency once the rupee settlement mechanism gains traction.

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