3.7: FOREIGN CORRESPONDENT
The term “Foreign correspondent” in banking sector can be defined in two of ways-
- Foreign Correspondent Relationship
- Accounting Relationship
No bank has its own branch network all over the world. To operate International banking business, it must depend on other foreign banks in different countries. Without establishing correspondent relationship, a bank can not advise its import L/Cs to the foreign beneficiaries, getting export L/Cs or run remittance business (inward/outward). Correspondent Relationship is a relationship established between two banks under which each bank act as agent bank of their counterpart bank to facilitate all sorts of foreign exchange business.
Before establishing correspondent relationship with a new bank generally following factors to be considered:
- Selection of a bank before establishment of Correspondent Relationship
- Rank and Status of Banks
- Financial Statement Analysis
- Obtaining Credit Report
- Country Risk Analysis
After selection of a bank as foreign correspondent, it is necessary to send formal proposal for establishment of correspondent relationship with the following documents
- Draft Schedule of Agency Arrangement
- Last three years Annual Report
- Terms and Conditions
- Other Publications (if any)
It is not mandatory to maintain an account with each correspondent bank. It depends on the requirement of the bank. Since foreign exchange transaction involve movement of fund from one place to another, one bank to another and one account to another so each bank specially AD bank has to open and maintain foreign currency account with their correspondent/branches aboard for settlement of their international transactions. These accounts are called foreign exchange accounts.
Foreign currency accounts are frequently termed as ‘Nostro’, ‘Vostro’ and ‘Loro’.
Notro account means “our account with you”. A Nostro account is a foreign currency account of a bank maintained with its foreign correspondents abroad. For example- IBBL, Dhaka’s US dollar account maintained with Citibank, N.A. New York, USA. From the point of view of IBBL it is their Nostro account.
Vostro account means “Your account with us”. The account maintained by a foreign correspondent in a bank of particular country is known as Vostro account. For example- State Bank of India’s Taka account maintained with IBBL. From the view point of IBBL, it is a Vostro account held for State Bank of India.
Loro account means “their account with you”. Account maintained by third party is known as Loro account. Suppose SIBL maintained a Nostro account with AMEX Bank N.A. New York and simultaneously IBBL have also maintained a Nostro account with AMEX Bank ,N.A. from the point of view of SIBL IBBL’s Nostro account with AMEX Bank regarded as Loro account.
All authorized dealer banks in Bangladesh, may open and maintain accounts with their correspondent aboard without prior approval from Bangladesh Bank. The following points are to be considered by any bank in Bangladesh before opening of a Nostro Account:
- Whether the proposed Nostro account will be interest bearing
- Whether any minimum balance would be required
- Whether overnight investment of surplus fund will be made
- How statement of accounts will be sent
- Whether there will be transactions/account maintenance charges etc.
- Whether overdrawn facility will be given
Considering the above, once two banks have reached an agreement the next steps is to open said account. After opening of the accounts intimation is to be sent to Bangladesh Bank within 15 days from the date of opening of such account.