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Correspondent Banking
A correspondent account is an account (often called a nostro or vostro account) established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for another financial institution. Correspondent accounts are established through bilateral agreements between the two banks.
Commonly, correspondent accounts are the accounts of foreign banks that require the ability to pay and receive the domestic currency. The accounts allow them to pay others from the account or receive money from others into the account. This allows the bank to offer various services to their customers such as foreign exchange and foreign currency denominated loans and deposits, despite their not having a bank licence for the foreign country in that country's currency.
Such accounts are necessary for international trade that requires people and businesses to pay for things in a currency other than their own. It is impractical to transport large amounts of currency around the world and physically exchange domestic currency for the currency that a customer/supplier demands. Instead, money is taken out of an account at a local bank (which is in local currency) and an equivalent amount of money is put in the customer's or supplier's account at their local bank (in a foreign currency). The money from the buyer's account goes to an internal account of your bank. The money to the customer or supplier comes from an account the buyer's local bank holds with a bank in the supplier's country—the buyer's bank's correspondent account, at their correspondent bank.
A correspondent bank is a financial institution that provides services on behalf of another, equal or unequal, financial institution. It bank can conduct business transactions, accept deposits and gather documents on behalf of the other financial institution. Correspondent banks are more likely to be used to conduct business in foreign countries, and act as a domestic bank's agent abroad.
Correspondent banks are used by domestic banks in order to service transactions originating in foreign countries, and act as a domestic bank's agent abroad. This is done because the domestic bank may have limited access to foreign financial markets, and cannot service its client accounts without opening up a branch in another country.
1. Corresponding Banking is the relationship between two banks which have mutual accounts with each other, r one of them having account with the other.
2. Functions of Corresponding Banks:
A. Account Services
i. Clearing House Functions
ii. Collections
iii. Payments
iv. Overdraft and loan facility
v. Investment Services
B. Other Services
i. Letter of Credit Advising
ii. LC confirmation
iii. Bankers Acceptance
iv. Issuance of Guarantees – Bid-bond, Performance
v. Foreign Exchange services, including derivative products
vi. Custodial Services etc.
3. Types of Bank Accounts: The foreign account maintained by a Bank, with another bank is classified as Nostro, Vostro, and Loro Accounts.
4. Nostro Account: “Our Account with you”. DLB maintains an US $ account with Bank of Wachovia, New York is Nostro Account in the books of DLB, Mumbai.
5. Vostro Account: “Your account with us”. Say American Express Bank maintain a Indian Rupee account with SBI is Vostro Account in the books of American Express bank
6. Loro Account: It refers to accounts of other banks i.e. His account with them. E.g. Citi Bank referring to Rupee account of American Express Bank, with SBI Mumbai or some other bank referring to the USD account of SBI, Mumbai with Citi Bank, New York.
7. Mirror Account: While a Bank maintains Nostro Account with a foreign Bank, (Mostly in foreign currency), it has to keep an account of the same in its books. The mirror account is maintained in two currencies, one in foreign currency and one in Home currency.
8. Electronic Modes of transmission/ payment gateways
SWIFT, CHIPS, CHAPPS, RTGS, NEFT
9. SWIFT: Society for Worldwide Interbank Financial Telecommunications.
10. SWIFT has introduced new system of authentication of messages between banks by use of Relationship Management Application (RMA) also called as SWIFT BIC i.e.Bank Identification Code.
11. CHIPS: (Clearing House Interbank Payment System) is a major payment system in USA since 1970. It is established by New York Clearing House. Present membership is 48. CHIPS are operative only in New York.
12. FEDWIRE: This is payment system of Federal Reserve Bank, operated all over the US since 1918. Used for domestic payments.
13. All US banks maintain accounts with Federal Reserve Bank and are allotted an “ABA number” to identify senders and receivers of payment
What Does ABA Transit Number Mean?
A unique number assigned by the American Bankers Association (ABA) that identifies a specific federal or state chartered bank or savings institution. In order to qualify for an ABA transit number, the financial institution must be eligible to hold an account at a Federal Reserve Bank. ABA transit numbers are also known as ABA routing numbers, and are used to identify which bank will facilitate the payment of the check.
14. CHAPS: Clearing House Automated Payments system is British Equivalent to CHIPS, handling receipts and payments in LONDON
15. TARGET: Trans-European Automated Real Time Gross Settlement Express Transfer System is a EURO payment system working in Europe. And facilitates fund transfers in Euro Zone.
16. RTGS + and EBA: RTGS+ is Euro German Based hybrid Clearing System. RTGS+ has 60 participants.
17. EBA-Euro 1 is a cross Border Euro Payments
18. RTGS/NEFT in India: The RTGS system is managed by IDRBT- Hyderabad. Real Time Gross Settlement takes place in RTGS. NEFT settlement takes place in batches.
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