NOSTRO Account: What it is and How it Works for International Transactions

NOSTRO Account: What it is and How it Works for International Transactions
Sukanya6 December 2023

‘Good Things Take Time,’ and for hypothetical situations, this may give you hope and keep you going. But what about real-life situations? Is it good that you stand at the corner of the shop waiting for your online payment to succeed? Do you always have time to stand and look at the ‘Processing’ box, taking minutes while you think about the limited cash you have with you?

Now, imagine the same when you execute foreign currency transactions with the receiver in a foreign country, expecting you to pay immediately. A slow transaction processing speed can present you or your business in an unprofessional light and result in losing suppliers or vendors.

Almost every bank in India has different processing speeds for international transactions. The following factors explain the reasons behind fluctuating transaction speeds.

Factors affecting the processing speed of Foreign Currency Account Transactions

Every bank in India processes foreign currencies at different speeds as they rely on complex systems and operations to manage transactions, customer interactions, and regulatory compliance. Some key factors that can impact the processing speed of banks include the following.

1. Technological Infrastructure

The technology infrastructure of a bank, including its hardware, software, and network capabilities, plays a critical role in processing speed. Modern, well-maintained systems are more likely to handle transactions quickly and efficiently.

2. Correspondent bank relationships

Correspondent banks have extensive networks and relationships with other banks worldwide. They can route payments through the most efficient and cost-effective channels, reducing delays and transaction costs. However, with such extensive interconnected transactional systems, it is a hassle for a bank to execute transactions quickly. 

While this network is designed to optimise the routing of international payments, it can also introduce some complexity. Each bank involved in the transaction needs to verify and process the payment. The more intermediaries involved, the more potential points of friction or delay in the process.

For example, an Indian business seeks to make an international payment of USD 10,000 to a U.S. supplier. To do this, the Indian business bank (Bank A) must use the services of correspondent banks in the U.S. due to its lack of a direct presence there. The payment travels through three banks: Bank A, Correspondent Bank X, and Correspondent Bank Y. Each bank conducts checks and verifications, potentially leading to delays and increased costs. 

Additionally, international transactions can span different time zones and require communication between banks in various regions worldwide. This can lead to time lags as banks coordinate and confirm the transfer of funds. Delays may occur due to differences in working hours, holidays, or operational procedures across different countries.

The better the link between the two banks, the faster the processing time. 

3. Compliance and regulatory adherence

Since foreign currency transactions fall under FEMA, correspondent banks must assist respondent banks in navigating the complex regulatory landscape of cross-border transactions. If the correspondent bank is well-versed in international banking regulations and compliance requirements, the processing time often takes less time. 

4. Geographic reach and presence

Geographic reach significantly impacts the speed of foreign currency processing in international banking. Variations in time zones, specific payment timings, and using batch processing introduce delays. Banks operate within their local time zones, which can lead to misaligned working hours. 

Batch payments, weekends, and holidays can further affect processing times. Banks with a global presence have an advantage, but real-time or emergency payments may come at a higher cost.

Notably, a specific category of banks can process these payments, known as AD-1 banks.

What are AD-1 Banks and Why do AD-1 Banks Process Foreign Currency Faster than Others?

What are AD-1 Banks and Why do AD-1 Banks Process Foreign Currency Faster than Others?

Banks are categorised into AD-1 (Authorised Dealer Category 1) and AD-2 by the Reserve Bank of India (RBI). AD-1 banks are a significant presence in the international financial market and are authorised by the RBI to deal in foreign exchange transactions. These banks have a more extensive network of correspondent banks and are better equipped to facilitate foreign currency transactions more efficiently. 

AD-1 banks provide a NOSTRO account service denominated in various foreign currencies. These accounts are held with correspondent banks or financial institutions in the respective foreign countries where the currencies are used. Therefore, for your business, you must choose an AD-1 category bank that provides a NOSTRO account service.

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