Have you ever stopped to wonder how an Indian bank completes a transaction in the USA, Singapore, or Europe within seconds—even without having a single physical branch there? Isn’t it surprising that global trade worth trillions flows smoothly every day, and NRIs can send money back home instantly?
Most banking students and CAIIB aspirants find the topic confusing because of heavy terminology—Nostro, Vostro, Loro, Mirror, Reconciliation, Non-account-based services, LC advising, etc. But in reality, once explained in a simple, relatable manner, this topic becomes one of the most interesting and easiest parts of Module A.
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This guide breaks down everything:
- How correspondent banking works
- Why banks depend on it
- How NRI remittances flow
- What Nostro, Vostro, Loro really mean
- Why mirror accounts exist
- When banks act as agents
- How global payments settle
- And how all this helps in global trade and CAIIB exam preparation
Whether you’re a CAIIB candidate, a bank employee, or simply someone curious about international banking, this blog will give you crystal-clear understanding.
👉 Before we dive in, watch the complete video explanation here:
What Exactly Is Correspondent Banking?
If an Indian bank doesn’t have a branch in the USA, how will it complete a transaction there?
The answer is: It uses a foreign bank as its partner – the Correspondent Bank.
For example:
- ABC Bank (India)
- XYZ Bank (USA)
ABC Bank ties up with XYZ Bank so it can serve customers in the United States. XYZ Bank becomes the “agent” or “representative” of ABC Bank.
This arrangement:
- Saves cost
- Avoids licensing hurdles
- Gives global reach
Why Banks Need Correspondent Banks
- Global reach without opening branches
- Cost-efficiency by avoiding capital-heavy overseas branches
- NRI remittances and cross-border transfers
- International trade support
- Regulatory flexibility in foreign jurisdictions
Correspondent banking = Low cost + High efficiency + Worldwide access.
NRI Remittances and Why They Depend on Correspondent Banks
For an NRI working abroad, sending money to India isn’t a direct process.
His foreign bank sends the money to its Indian correspondent bank, which then credits his account in India.
This network ensures safe, regulated, and fast remittances.
Types of NRI Accounts
1. NRE Account (Non-Resident External Rupee Account)
- Held in INR
- Only foreign income allowed
- Tax-free
- Fully repatriable
2. NRO Account (Non-Resident Ordinary Rupee Account)
- Held in INR
- Can receive foreign + Indian income
- Taxable
- Limited repatriation
3. FCNR(B) Account (Foreign Currency Non-Resident Account)
- Held in foreign currency
- Only foreign earnings accepted
- No tax on interest
- No exchange rate risk
Why Correspondent Banking Is Critical
- Supports international payments
- Handles LC advising & confirmation
- Facilitates trade document flow
- Helps NRIs remit funds easily
- Reduces compliance burden
Correspondent Bank as Intermediary & Document Handler
Correspondent banks act as:
- Intermediaries – for wire transfers, remittances, settlements
- Document handlers – for LCs, guarantees, trade papers
- Representatives – for the home bank in a foreign country
Account-Based Correspondent Relationships
When two banks maintain accounts with each other, we call it an Account-Based Relationship.
Account-based services include:
- Clearing
- Collection
- Payments
- Overdraft/credit lines
- Investment of idle funds
Nostro, Vostro & Loro Accounts
⭐ Nostro: “Our account with you”
SBI’s USD account with Citi Bank USA = SBI’s Nostro
⭐ Vostro: “Your account with us”
Citi Bank USA’s INR account with SBI = SBI’s Vostro
⭐ Loro: “Their account with them”
Third-party bank’s reference to another two banks’ account
CAIIB BFM | TCS (Tax Collected at Source) & LRS (Liberalised Remittance Scheme) | Part 3
Mirror Account
A internal shadow copy of the Nostro account.
Used for:
- Daily reconciliation
- Error detection
- Foreign exchange management
Maintained in both:
- Home currency
- Foreign currency
Non-Account-Based Correspondent Services
When banks do not hold accounts for each other, they still work together as agents.
Services include:
- LC Advising
- LC Confirmation
- Bank Guarantees
- Supplier’s Credit
- Buyer’s Credit
- Banker’s Acceptance
All are non-fund-based facilities.
Conclusion
Correspondent Banking may look complex at first, but once you understand why banks need foreign partners and how accounts like Nostro, Vostro, and Loro operate, everything becomes simple. You now know how NRIs remit funds, how trade finance flows work, and how banks settle global payments without branches abroad.
Have questions? Drop them in the comments.
Happy Learning! 🌍📚✨
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