Inter corporate deposits investopedia forex

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The rate of interest on such deposits is not fixed. It depends upon the amount involved and the tenure of lending. It is uncertain source of finance, as deposit can be withdrawn any time—so it is risky also. Advantages of Inter-company Deposits: The advantages of inter-corporate deposits are: i. Surplus funds can be effectively utilized by the lender company. Such deposits are secured in nature.

Inter-corporate deposits can be easily procured. A company cannot lend more than 10 per cent of its net worth to a single company and cannot lend beyond 30 per cent of its net worth in total. The market for such source of financing is not structured. A reserve requirement is the amount of money a bank must keep in their vaults.

Deposits, as well as loans, are among the many types of transactions that take place between banks that help them meet these conditions. These transactions also provide the market with a great deal of liquidity. When two banks make an arrangement for an interbank deposit, the holding bank sets up a due to account for the corresponding bank— the institution that makes the deposit. The due to account is a holding account, also known as a payable account.

Banks use a special interest rate on deposits and short-term loans. This rate is known as the interbank rate. The interbank rate depends on maturity, market conditions, and the credit ratings of the institutions involved. Special Considerations As mentioned above, the bank for which the due to account is held is referred to as the corresponding bank.

This designation is generally held for deposits that take place between domestic banks. But the terms change when the correspondent bank is a foreign institution. In this case, the due to account is a nostro —derived from the word ours in Latin—account for the bank holding the deposit. Put simply, this is an account held by a bank in a foreign currency at another institution. This is in contract to a vostro —the Latin word for yours—account for the foreign correspondent bank.

A vostro account is the term bank uses to describe accounts that other firms have on their books in their home currency. So the correspondent bank will call its account at the holding bank a nostro account, while the holding bank calls it a vostro account.

Here's an example to help make it easier to understand. Let's say Bank A makes an interbank deposit with Bank B, which is in a different country.