Types of Accounts in International Trade Finance

International trade finance involves various types of banking accounts to facilitate smooth transactions between buyers and sellers across different countries. These accounts help manage foreign exchange, settlements, and banking relationships. The most common types of accounts in international trade finance are Nostro, Vostro, and Loro accounts.

01. Nostro Account

A Nostro account is a bank account that a domestic bank holds in a foreign country’s bank in that country’s currency. The term "Nostro" is Latin for "ours." In simple words, it is "our account in a foreign bank."

Example: Suppose an Indian bank, XYZ Bank, wants to facilitate transactions in the US. It opens a Nostro account with a US-based bank, ABC Bank, and maintains funds in US dollars. This account helps XYZ Bank handle transactions in US dollars without needing to open a branch in the US.

Why is a Nostro Account Needed?

• It allows a bank to make transactions in a foreign currency without having a physical presence in that country.
• It is useful for businesses that engage in international trade.
• It helps in settling international payments efficiently.

02. Vostro Account

A Vostro account is a foreign bank’s account held with a domestic bank. The term "Vostro" is Latin for "yours." Simply put, it is "your account in our bank."

Example: Continuing from the previous example, if ABC Bank (a US bank) holds an account with XYZ Bank (an Indian bank) in Indian Rupees, then this is a Vostro account for ABC Bank. For XYZ Bank, it is a Nostro account because it belongs to a foreign bank.

Why is a Vostro Account Needed?

• It allows foreign banks to offer banking services in a country where they do not have a direct presence.
• It facilitates currency exchange and international transactions.
• It helps foreign businesses or banks to handle payments in the local currency of another country.

03. Loro Account

A Loro account is a third-party account. It refers to an account that one bank holds for another bank but refers to it in relation to a third bank. The term "Loro" means "theirs" in Latin.

Example: Suppose Bank A in India has a Nostro account with Bank B in the US. If Bank C in the UK wants to refer to this account, it will call it a Loro account. Essentially, it is "their account in another bank."

Why is a Loro Account Needed?

• It is mostly used for interbank communications and reference purposes.
• It helps banks track accounts held by other banks for international transactions.

04. EEFC Account (Exchange Earners’ Foreign Currency Account)

An EEFC account is a special type of account maintained by Indian exporters to hold their foreign exchange earnings. The funds in this account can be used for making payments in foreign currency without converting them into Indian Rupees.

Example: If an Indian exporter receives payment in US dollars, they can keep the money in an EEFC account rather than converting it immediately into Indian Rupees. This helps them save on currency conversion charges.

Why is an EEFC Account Needed?

• It allows exporters to retain their foreign earnings in foreign currency.
• It helps reduce currency conversion losses.
• It provides flexibility in making payments in foreign currency without needing to reconvert funds.

05. RFC Account (Resident Foreign Currency Account)

An RFC account is designed for Indian residents who have earned foreign currency and wish to retain it for future needs.

Example: A person who worked abroad and returned to India can deposit their foreign earnings into an RFC account without converting them into Indian Rupees.

Why is an RFC Account Needed?

• It helps returning NRIs manage their foreign currency earnings.
• Funds can be freely converted or used for international transactions.
• It offers protection against exchange rate fluctuations.

06. DDA (Direct Debit Authorization) Account

A DDA account is used for automatic payments and collections in international trade.

Example: An Indian importer can authorize its bank to debit payments automatically when an invoice is due, ensuring timely settlement.

Why is a DDA Account Needed?

• Ensures automatic, on-time payments.
• Reduces transaction delays and manual processing.
• Simplifies recurring international payments.

07. FCNR (Foreign Currency Non-Resident) Account

This account is specifically designed for Non-Resident Indians (NRIs) to hold their foreign currency earnings in India.

Example: An NRI working in the UK can deposit their earnings in a UK pound-denominated FCNR account in India.

Why is an FCNR Account Needed?

• Protects deposits from exchange rate fluctuations.
• Provides tax-free interest income in India.
• Offers multiple currency options for deposits.

08. Escrow Account

An escrow account is used to hold funds securely until the terms of a trade agreement are met.

Example: In a large export transaction, the buyer may deposit funds into an escrow account, which are released to the seller only after delivery confirmation.

Why is an Escrow Account Needed?

• Provides security to both parties in international trade.
• Reduces the risk of fraud.
• Ensures funds are released only after contractual obligations are fulfilled.

How These Accounts Work Together

Let’s consider an example to understand how these accounts work together in an international transaction.

1. A company in India wants to pay for goods imported from the US.
2. The Indian company instructs its bank (XYZ Bank) to transfer the payment.
3. XYZ Bank holds a Nostro account in ABC Bank (a US bank), which has funds in US dollars.
4. XYZ Bank debits the amount from its Nostro account and credits it to the seller’s account in the US.
5. If another bank (let’s say Bank C in the UK) needs to refer to this account, it will call it a Loro account.
6. If an Indian exporter receives payments in foreign currency, they can deposit it into their EEFC account for future use without immediate conversion.
7. If an NRI wants to keep their foreign earnings in India without converting, they can use an FCNR account.
8. If two international traders want to ensure secure transactions, they can use an escrow account.