Nostro and Vostro Relationships and the INDA/INGA Settlement Method in Reject and Return Flows

A nostro account is an account that a bank holds with another bank in a foreign currency, and the word means our account with you. For example, when JPMorgan Chase holds a euro account with Deutsche Bank in Frankfurt, that euro account is a nostro account from the JPMorgan Chase point of view. A vostro account is the same account seen from the other side, and the word means your account with us, so Deutsche Bank calls that same euro account a vostro account. The two words describe one account from two directions, and that is the first thing to fix in your mind, because every settlement instruction in correspondent banking depends on knowing which side you are standing on. In a normal cross border payment, the nostro and vostro accounts are the rails that carry the settlement. When a customer of Citibank in New York pays EUR 200,000 to a supplier who banks with Societe Generale in Paris, Citibank may settle by debiting its euro nostro account with Societe Generale, or by asking Societe Generale to debit the vostro account it holds for Citibank. The pacs.008 carries the settlement method that tells the receiving bank which account to use, and the receiving bank posts the debit and credit accordingly. If the settlement method is wrong, the debit lands on the wrong account, the nostro balance goes out of line, and the payment can fail even though the customer instruction was perfect. In a reject flow, the nostro and vostro accounts are usually untouched, because a reject means the payment never settled and no money moved. When Deutsche Bank rejects a USD 100,000 pacs.008 from JPMorgan Chase for an incorrect account number, it sends a pacs.002 and does not debit any nostro account, because there is nothing to return. JPMorgan Chase, on receiving the pacs.002, simply releases the funds it had reserved and credits its customer back. The nostro balance at Deutsche Bank never changed, so there is no reconciliation break to fix. That is one reason a reject is operationally cleaner than a return, and why banks prefer to catch errors before credit wherever they can. In a return flow, the nostro and vostro accounts are central, because the pacs.004 is a new settlement instruction that must move money back through the chain. When BNP Paribas returns EUR 50,000 to Barclays in London, it must settle that return by debiting an account, and the settlement method tells Barclays which account to debit. If the method is INDA, Barclays debits the account of the instructed agent, which is the account BNP Paribas holds with Barclays. If the method is INGA, Barclays debits the account of the instructing agent, which is the account Barclays holds with BNP Paribas. The two codes point at opposite accounts, so reading them correctly is not a detail, it is the settlement itself. A worked check helps to lock the logic in place, and it is worth doing slowly. Suppose Bank A in Tokyo holds a USD nostro account with Bank B in New York, and Bank B therefore holds a USD vostro account for Bank A. Bank A instructs Bank B to return USD 80,000 to a debtor in London, and the pacs.004 says INGA, instructing agent. Bank B must debit the account of the instructing agent, which is Bank A, so it debits the vostro account it holds for Bank A. If the message had said INDA instead, Bank B would debit the account of the instructed agent, which is itself, and that would be wrong for this flow. Always ask two questions before posting. Who is instructing, and who is instructed, and then let the code follow the answer.