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Thought Paper
Access to users
Reconciliation is an important activity with only authorized users permitted to do it. To ensure and manage operational risk in the reconciliation process, generally two independent teams from the bank are involved. Normally treasury back office users handle settlements, whereas middle office users take care of Nostro reconciliation.
Process of reconciliation
Nostro debit entries are reconciled against the mirror credit entries
Nostro debits may arise due to: Honoring the payment messages sent by the bank/payment of draft issued by the bank Charges debited in the Nostro accounts Reimbursement to negotiating bank, under Letters of Credit transactions Payments on account of interbank deals This is to ensure that all the payment settlements are acted upon by the correspondent bank and are reflected in the Nostro statement accordingly. Inward remittances received on behalf of customers Interest amount credited Receipts from interbank deals Realization of bills sent for collection Reimbursement of negotiated bills This is to ensure that all the receipt settlements are acted upon by the correspondent bank and are reflected in the Nostro statement accordingly. Credit in the Nostro mirror is to be reconciled with debit in the actual Nostro account. Credit in actual Nostro is to be reconciled with debit in Nostro mirror accounts.
Nostro credit entries are reconciled against the mirror debit entries
Nostro credit may arise due to:
Fully matched: Reconcile only when all the given conditions like currency, amount,
Thought Paper
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Forced matching: This is a manual process where the user can choose transactions and force match them. In forced matching: One-to-many (one credit with multiple debits or vice versa) reconciliation can also be done. Most of the reconciliation solutions support uploading of SWIFT statements MT940 and MT950 along with other types of file formats. Illustration: XYZ Bank, Mumbai prepares a Nostro Reconciliation Statement for its USD Nostro Account with ABC Bank in its books as under. Reconciliation Statement of ABC Nostro in USD Currency for the month ending XXX Amounts in USD Balance as per the Mirror Account (Debit Balance) XXXX Less: Un-reconciled Mirror Debits XXXA Less: Un-reconciled Nostro Debits XXXB Add: Un-reconciled Mirror Credits YYYA Add: Un-reconciled Nostro Credits YYYB Balance as per the Nostro Statement (Credit Balance) ZZZZ Balance as per the Nostro Statement is the derived figure, which should match with the actual Nostro Balance. On matching, the Nostro Reconciliation process is deemed complete and thereafter banks aim to minimize un-reconciled or open items. The following section lists each un-reconciled entry in the order of importance or risk to the bank:
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Thought Paper
Fails management
Banks can charge interest on delayed interbank payments or ask for back validation of the payment. The latter is preferred if the bank has run into overdraft due to non-receipt of funds.
Thought Paper
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