Different Kind of Accounts in Use in Banking World
(a) ‘Nostro Account’
A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts are used to facilitate settlement of foreign exchange and trade transactions. The term is derived from the Latin word for “ours.” Conversely, accounts that are held by the domestic bank in its home country for foreign banks are called vostro accounts, derived from the Latin word for “yours.”
For example, a U.S. bank may have nostro accounts with one or more Canadian banks. These accounts will be denominated in Canadian dollars, which enables efficient settlement of transactions that are Canadian dollar denominated. Nostro accounts also minimize the exposure of the U.S. bank to undue exchange rate risk.
(b) ‘Vostro Account’
The account that a correspondent bank, usually located in the United States or United Kingdom, holds on behalf of a foreign bank. A vostro account is one in which the domestic bank (from the point of view of the currency in which the account is held) acts as custodian or manages the account of a foreign counterpart. Also known as a loro account.
For instance, if a Spanish life insurance company approaches a U.S. bank to manage funds in an account for the Spanish life insurer’s behalf, the account would be deemed a vostro account of the insurer.
The term vostro is Latin for “yours,” thus when translated literally, it means “your account.”
(c) NRE Account:
In this account rupee denominations can be maintained. The account can opened in the names of two or more non-resident individuals provided all the account holders are persons of Indian nationality or origin. Amount held in the NRE account are freely repatriable and you cannot send money by any other means except as remittance from abroad or transfer from another NRE account.
NRE account may be in the form of savings, current, recurring or fixed deposit accounts. Such accounts can be opened only by the non-resident himself and not through the holder of the power of attorney.
Taxation
Accrued interest income and balances held in NRE accounts are exempt from Income tax and Wealth tax, respectively
Currency
Account holder is exposed to the fluctuations in the value of INR.
Interest rates
Banks are free to determine the interest rates of saving’s and term deposits of maturity of one year and above.
Interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits.
(d) NRO Account:
NRO accounts may be opened / maintained also in the form of rupee denomination could be in the form of current, savings, recurring or fixed deposit accounts. The account can be held jointly by residents. You can transfer money into an NRO account from any account – even other individuals residing in india can transfer money into an NRI’s NRO account.
Repatriation
Not repatriable except for the following:
i) current income
ii) up to USD 1 (one) million per financial year (April-March), for any bonafide purpose, out of the balances in the account, e.g., sale proceeds of assets in India acquired by way of purchase/ inheritance / legacy inclusive of assets acquired out of settlement subject to certain conditions.
Currency
Account holder is exposed to the fluctuations, in the value of INR to the extent of interest amount.
Interest rates
Banks are free to determine their interest rates on savings deposits under Ordinary Non-Resident (NRO) Accounts.
However, interest rates offered by banks on NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits. Tax is deducted at source in NRO accounts, unlike NRE accounts.
However, funds from NRO to NRE accounts can be transferred, vice- versa.
(e) ‘Suspense Account’
In accounting, the section of a company’s books where unclassified debits and credits are recorded. The suspense account temporarily holds unclassified transactions while a decision is being made as to their classification. Transactions in the suspense account will still appear in the general ledger, giving the company an accurate indication of how much money it has.
In investing, a suspense account is a brokerage account where an investor places cash or short-term securities temporarily while deciding where to invest them for a longer term.
Suppose a doctor’s office has two patients named Bob Smith, each with an outstanding balance of $100. One day at lunch, one of the Bobs stops by the office to pay his bill and leaves $100 cash and his name with the receptionist. Unfortunately, the receptionist does not ask for his address or account number and when the office bookkeeper returns from lunch, she doesn’t know which Bob Smith has paid his bill. The bookkeeper would classify the transaction in the suspense account until she could determine which patient to attribute the $100 to.
(f) ‘Call Deposit Account’
A bank account for investment funds that offers the advantages of both a savings and a checking account. A call deposit account, like a checking account, has no fixed deposit period, provides instant access to funds and allows unlimited withdrawals and deposits. Like a savings account, a call deposit account pays interest. The rate of interest a call deposit account pays depends on the amount of money in the account, a system commonly referred to as banded interest rates. Also, different currencies may earn different interest rates. Depositors may have to meet a minimum balance threshold before they earn any interest.
Call deposit accounts allow investors to deposit and withdraw funds in several currencies, which commonly include the U.S. dollar, the euro and the British pound. This flexibility reduces investors’ exposure to foreign exchange expenses and currency risk. Call deposit accounts often have minimum deposit requirements to establish an account and may have minimum daily balance requirements, too.
(g) ‘Margin Account’
A brokerage account in which the broker lends the customer cash to purchase securities. The loan in the account is collateralized by the securities and cash. If the value of the stock drops sufficiently, the account holder will be required to deposit more cash or sell a portion of the stock.
In a margin account, you are investing with your broker’s money. By using leverage in such a way, you magnify both gains and losses.
(h) Money Market Account. This type of bank account pays interest at a higher rate than the rate paid on interest-bearing savings and checking accounts. Often, money market accounts impose a minimum balance for the account to start earning interest. The minimum required balance on a money market account is usually higher than that imposed on a checking or savings account. With a money market account, withdrawals are limited to six per month. No more than three of these withdrawals can be by check.
(i) Time Deposits, frequently referred to as certificates of deposit (CDs), are bank accounts that require the account holder to make a deposit and agree to leave funds in the account for a specific amount of time. In return for this agreement, the financial institution pays interest to the account. Often, the interest paid on a CD is higher that the rate paid on other types of bank account. The account holder is required to keep his or her money in the account until the specified term is over. However, some financial institutions allow account holders to withdraw interest, without affecting the principal. In some cases, account holders may be allowed to withdraw their principal funds before their CD matures, but a penalty is typically charged.
(j) No-Frills Bank Accounts. A no-frills bank account may allow the holder to pay bills and cash checks without paying the high fees associated with completing such transactions without an account. An account of this type will likely allow for only a limited number of checks, deposits, and withdrawals to be processed in any given month. In most cases, interest is not paid on a no-frills bank account.
(k) Checking Account is a bank account that uses checks as the primary instrument for withdrawing money. With a checking account, you can make purchases, pay bills, and give or loan money to anyone you choose. You can also use a check to transfer money from your checking account to a bank account at a different financial institution. Usually, financial institutions allow account holders to make as many deposits and withdrawals as they wish. Many allow account holders to make withdrawals and deposits through automatic teller machines (ATM) as well.
(l) ‘Negotiable Order of Withdrawal (NOW) Account’
An interest-earning bank account with which the customer is permitted to write drafts against money held on deposit. Also known as a “NOW account”.
Typically commercial banks, mutual-savings banks and savings-and-loan associations can offer this type of account to individuals, some nonprofit organizations and certain governmental units.
(m) Definition of ‘Bank Trust Custodial Account’
A type of Individual Retirement Account (IRA) allowed by the Employee Retirement Income Security Act of 1974 (ERISA) in which contributions are paid into the bank’s interest-bearing financial instruments or a self-directed account. The difference between a self directed account and the bank’s interest bearing financial instrument is that the investor is in charge of investment decisions. Self-directed accounts are usually set up by a brokerage and the investor is charged an amount above trading costs.
ERISA is federal legislation enacted to ensure that pension/retirement plans of employers are fair and secure. It is the law that established rules and regulations to govern private pension plans, including vesting requirements, funding mechanisms, and general plan design and descriptions.
(n) Definition of ‘Official Settlement Account’
A type of account used in balance of payments accounting to keep track of central banks’ reserve asset transactions with each other. The official settlement account keeps track of transactions involving gold, foreign exchange reserves, bank deposits and special drawing rights (SDRs). Essentially, this account keeps track of transactions related to international assets.
The other account types used in balance of payments accounting are the current account and the capital account. The current account keeps a record of a country’s imports and exports of goods, services, income and transfers, and whether the country is a net creditor or net debtor. The capital account records the change in foreign and domestic ownership of assets.
(0) FCNR
FCNR deposits stands for Foreign Currency Non-Repatriable account deposits. This is a Fixed Deposit Foreign Currency account and not a savings account. Deposits in this account can be made in any of the major currencies like US Dollar, UK Pound, Canadian Dollar, Deutsche Mark, Japanese Yen and Euro.
(p) Non-Resident Accounts
Non-Resident bank accounts are those, which are maintained by Indian nationals and Persons of Indian origin resident abroad, foreign nationals and foreign companies in India. Bank branches can open ordinary non-resident accounts in the names of private individuals provided initial deposits for opening the accounts are received from abroad in an approved manner or the initial amount is tendered in foreign currency while on a visit to India or transfer of funds from the existing non-resident account of the same person.