Correspondent Banking Explained:
In banking “Correspondence” refer to a ‘Bank to Bank’ relationship. In general one financial or non-financial institution can have relationship with other institution (financial or non-financial).
A bank in one country opens an account with another bank in other (or same) country this is called as correspondent banking.
Correspondent Banking also refer to an arrangement where two financial institution employ a third party called ‘service providing bank’, this 3rd party bank is called correspondent bank.
Why correspondence required?
When one bank doesn’t wish to invest money in opening a branch in another country but if it wish to accept client’s payments going into that nation where it doesn’t have a branch, then that bank opens an account in other country’s bank residing there, so that it can route payments successfully via that correspondent bank.
The correspondent bank facilitates payments between banks that has no arrangements between each other.
What are different accounts involved in correspondence?
2. Vostro (or Loro)
Ex: SBI India opens an account with CITI US.
In the above example, account opened by SBI India with CITI US (in USD) is called ‘Nostro’ account. From the view of SBI. Same account is called ‘Vostro’ account from the view of CITI.
Ex: If CITI US opens an account with SBI India.
Here the account of CITI bank US in SBI India (in INR) is ‘Nostro’ w.r.t to CITI US and the same account is ‘Vostro’ w.r.t to SBI India
Correspondent banking helps in getting easy and quick clearning and settlement during International payment processing.
Banks generally provide services to a number of financial institutions, and these relationships are governed by contracts negotiated bilaterally.
Mirror accounts are maintained by the banks to keep track of the funds available in their ‘Nostro’ account that they have with it’s correspondent bank. This account is used for reconciliation purpose.
Generally each financial or non-financial institution which are part of SWIFT network will have a BIC and SWIFT maintains it’s participants correspondence details, using which other Banks can identify the route to beneficiary bank. At times payments going out from one country to another country may go though one or more banks which are correspondent with one another.
SWIFT maintains each participants BIC’s (National Id, BIC up to 6th, 8th, 11th position, address of the institution, each institution’s membership with one or more cleaning house, account number, so on..). This is called ‘BIC Directory’ or ‘SWIFT BIC Registry’.
Similarly, SWIFT also maintains each of institution’s correspondence banks list, their accounts, currency, country, asset category, owner BIC, intermediate agents, preferred flag, so on. This registry is called ‘SSI’.