In order to improve the monitoring of nostro accounts, banks have been directed by the Reserve Bank of India (RBI) to reduce the number of such account.

The decision has been taken by the central bank subsequent to banks expressing practical difficulties and heavy expenditure in the elimination of outstanding entries in nostro accounts. "Banks are also advised to leverage technology to avoid building up of such unreconciled balances," said RBI.

Nostro account is an account that is opened by a bank with an overseas bank in the currency of the foreign country. The account is opened by a bank to facilitate easy clearing of their transactions in the foreign country. On the other hand a similar account opened by a foreign bank in an Indian bank is known as "vostro account."

Further RBI said that banks should "minimize the number of nostro accounts to have a better control over reconciliation and put in place a system of past reconciliation and close monitoring of pending items ... by top management at short intervals."

As per the new norms for reconciliation of nostro account and treatment of outstanding entries, banks are free to dismiss reconciled debit accounts with less than $2,500 or equivalent in nostro and mirror accounts originated upto March 31st, 2002 against the provision. However for entries of value $2,500 and above, banks will continue to make efforts for reconciliation.

On the other hand, outstanding credit entries of less than $2,500 or equivalent in nostro account originated up to March 31st 2002, banks can transfer the credit balance to the profit and loss account. But this amount would have to be appropriated to the general reserve and cannot be used for declaring dividend.

Banks had been allowed to reconcile their 'nostro' accounts and have to make 100% provisions each year for unreconciled debit entries in the nostro accounts that are outstanding for more than three years.

Meanwhile unreconciled credit entries in the nostro accounts which are outstanding for more than three years are transferred to blocked account and are shown as outstanding liabilities which will be considered for the purpose of CRR or SLR.