What are Correspondent Banks?

The foreign exchange market functions around the system of transfers and payments
established between international commercial banks. This mechanism operates through
nostro and vostro accounts being maintained by banks in different countries. The bank
with whom such a nostro or vostro account relationship is established is called
correspondent bank. This bank essentially acts as an agent of the domestic bank
(principal) and undertakes various functions as follows :
1. Maintaining the foreign currency account and receiving and making payments on
behalf of the counterparty (Principal) bank.
2. Providing temporary overdrafts as and when necessary.
3. Providing credit reports on companies located in the country of the correspondent bank.
4. Assisting the principal bank in all agency functions such as presentation of
documents, advising of LC, confirmation of LC, reimbursing the negotiating bank etc.
5. Providing trade related data and product data to help of principal bank, provide
information for business development to their customers.