Sunday, December 7, 2008

PSBs play it safe with nostro accounts in US

C. Shivkumar

Bangalore, Dec. 5 Public sector banks have now begun restricting their correspondent account balances to a handful of US banks.

Senior banking sources said that nostro account balances or correspondent accounts were maintained with 17 banks, including Wachovia, till about 3 months ago.

A nostro balance is that one bank maintains with a foreign bank in foreign currency.

Bankers said that the Reserve Bank of India has now sought details of the number of nostro account balances with the various US banks. Besides the RBI intervention, a series of US bank failures have made domestic bankers cautious.

Nostro accounts

At least 22 banks have failed in the US. In many of these institutions, domestic banks, both private and public sector, had maintained correspondent accounts.

Domestic bankers said that the RBI also advised them to hold their nostro balances only with large banks that have clearing operations. Accordingly, bankers said that most of them have now restricted their nostro accounts to such clearing banks in the US.

The bankers said nostro balances were parked are Citibank, Wells Fargo, JP Morgan Chase and Bank of America.

But even with these banks, nostro balances were restricted only to trade finance requirements. Consequently, the nostro balances of all the banks in the country were only about one per cent of the export receipts or about $1.6 billion.

Bankers said that most of the balances were either repatriated to India or held in US Government Treasuries at low yields.

Resisting temptation

This was despite the high interest offered on US dollar deposits. Six-month certificates of deposits in the US banks are currently as high as 4 per cent.

Yet given the uncertain financial conditions in the US, Indian banks are staying away from the high-yield offerings. Some banks preferred repatriating the resources and investing them in domestic treasury bills, where the yields were slightly better.

Besides, the bankers said that the failure of some of the US banks and the lack of the coverage under the Federal Deposit Insurance Scheme were likely to lead to provisioning of some of the balances.

Vostro accounts

Nostro balances are treated as assets though they are not risk weighted. This is because Indian banks also maintain a mirror account as a liability in the form of correspondent account of the foreign bank or as a vostro account. This obviated the need for risk weighting such accounts. Yet, there are fears that despite the mirror accounts, the prospects of nostro balances becoming sticky are high.

Consequently, some Indian banks were also resorting to holding correspondent account balances in overseas branches and subsidiaries of other domestic banks as risk mitigation measures. Large domestic banks, like the State Bank of India, already have a large presence in the US.