You come across the term “Corresponding Bank” when you initiate an international wire transfer. It functions to facilitate cross-border payments. It is not feasible for a domestic bank to set up foreign branches in every country. So, what they do is partner with a foreign bank, which acts as a corresponding bank for our domestic bank.
And, to handle transactions, domestic banks open a corresponding account with the foreign bank.
What is a Corresponding Bank?
A corresponding bank is a bank that acts as an intermediary bank to help a domestic bank facilitate foreign currency transactions. This completely does away with the requirement to set up a foreign branch for a domestic bank. Our domestic bank would maintain a corresponding account (Nostro/Vostro) with the foreign bank.
How does it work?
When we initiate an International Wire Transfer, mostly it is through SWIFT. In most cases, our domestic won’t have a relationship with the beneficiary’s bank. And, that is where corresponding banks come to the rescue. Our domestic bank doesn’t deal with the beneficiary’s bank. But, the corresponding bank does.
So, our domestic bank would transfer the money to the account maintained with the corresponding bank. The corresponding bank thereafter, sends the money to the beneficiary’s bank with credit instructions to the beneficiary account.
The following details for the Corresponding bank are required at the time of the Wire transfer:
- Correspondent Bank Name,
- Correspondent Bank Swift Code,
- Nostro/Vostro Account Number.
Once we initiate a Wire Transfer, our domestic bank would send the money to the Nostro account they maintain with the corresponding bank. And, from there the corresponding bank sends the money to the beneficiary’s bank.
The opposite happens when we receive money from a foreign entity. The entity’s bank would send the money to the corresponding bank. They credit the money in the Vostro account of our domestic bank. And, notify the domestic bank about the credit.
A Nostro account is mainly the account that domestic banks hold with the corresponding bank. The foreign bank would call the Nostro account a Vostro account.
It takes time when the corresponding bank is required to complete the transfer. Apart from that, they may charge fees to facilitate the transfer.
Important: This material is provided only for information purposes only. We shouldn’t be held liable for the decisions readers take. We encourage readers to act at their discretion. Lastly, when in doubt, contact your bank for more information.
