Correspondent banking relationships allow banks to facilitate international financial transactions and provide cross-border banking services. Some key correspondent relations highlighted include facilitating payments, deposits, trade financing, remittances, letters of credit, and access to accounts. For example, Habib Bank Ltd in Pakistan may use its relationship with United Arab Bank to process an international payment from a customer in Pakistan to a firm in the UAE. This allows the two banks to work together to exchange currencies and process the transaction across borders.

1. Question:
What do you mean by correspondent relations? Highlight the 25 correspondent relations
between Pakistani and international banks.
Correspondent Relations:
Simple definition:
Correspondent banking is an essential relation of the global payment system, especially for
cross border transactions. Through correspondent banking relationships, banks can access
financial services in different jurisdictions and provide cross border payment services to their
customers.
The Correspondent relations can be defined as the financial institution that provide or facilitate the
following:
Regular services and dealings.
Conduct business transactions.
Accept deposits.
Gather documents.
Promote trade between two countries.
Check clearing
Payable through accounts.
International Payments or transfers.
All above following facilities are undertaken by one financial institution on the behalf of another
financial institution. Basically in simple words it is like conducting the business transactions and
services from the bank of one city or country on the behalf of bank on other cities or countries.
For example:
A customer of Habib Bank Ltd in Lahore, Pakistan might wish to pay a UAE firm for goods that
the consumers has purchased. Habib Bank Ltd has a correspondent banking relationship with
United Arab Bank in UAE and the both banks agree on the exchange rates of each other so Habib
Bank Ltd takes the cash out of the customer's bank (who is paying) account to instruct United Arab
Bank to take that cash and pay the cash to the UAE firm's account.
So due to above example we very closely came to know about the correspondent relationship
between financial institution of one country and the financial institution of other country. The
Habib Banks Ltd is one financial institution and the United Arab Bank is the other financial
institution in different countries and this is how due to their correspondent relation the trade
promoted between 2 traders of different countries.
Correspondent relations
Nostro and Vostro relation:
The terms nostro and vostro are used to differentiate between the two sets of accounting records
kept by each bank.

2. Nostro for domestic and the vostro for international.
A bank counts a nostro account with a debit balance as a cash asset in its balance sheet. Conversely,
a vostro account with a credit balance (i.e. a deposit) is a liability, and a vostro with a debit balance
(a loan) is an asset.
Nostro:
From the help of above example of two banks HBL and UAB. We refer to HBL so in UAB there
is a nostro account of HBL.
The Bank Alfalah Ltd Pakistan Islamic banking Group has nostro account with the Mashreq bank
New York, U.S.A.
Vostro:
The Vostro account is the term used by the UAB bank where HBL’s money is on deposit. In this
way the nostro and vostro are the correspondent relation with the bank.
The Mashreq bank New York, U.S.A. has vostro account of Bank Alfalah Ltd.
Export and Import Business relations:
When it comes to payment for your imports and/or exports, various arrangements are possible due
to the fact that the degree of trust/security between buyer and seller varies accordingly. One of the
following products may be used:
Open account
Documentary collection
Irrevocable confirmed letter of credit
Irrevocable unconfirmed letter of credit
Payment Guarantee
Standby letter of credit
Prepayment.
Remittances relation:
Remittances related to exports:
Exporters are required to make remittances on account of Agency Commission,
compensation for delay in shipment, breakage costs, compensation or price reduction due
to quality issues, legal fees, demurrage charges, inspection charges, or other costs relating
to exports made by them. The bank facilitates remittance of all such charges for its exporter’s
customers.
Open Account:
If the amount involved is fairly small or mutual trust exists between the buyer and the seller, an
open account will keep the banking cost as well as administrative burden to a minimum.

3. Documentary Collections:
Where the parties are looking for a higher level of security, documentary collection may be used
mediating two banks to exchange the shipping documents with proceeds. However it still does not
have any commitments on the banks involved. It is worth mentioning that documentary collection
may be against payment or against acceptance of seller’s draft or against a collection bank
guaranteeing to pay at respective maturity.
Irrevocable Confirmed L/C:
A confirmed letter of credit means that in addition to the issuing bank a second Bank (the
confirming bank) assumes the commitment to pay if the terms & conditions of the credit are
fulfilled. The seller thus avoids the credit and sovereign risk.
Irrevocable Unconfirmed L/C:
An irrevocable unconfirmed letter of credit commits the issuing Bank to pay to the seller Bank
provided that proper shipping documents are presented within the time and according to the
condition stipulated in the documentary credit. No commitment on the part of the advising bank
exists.
Payment Guarantee:
A payment Guarantee contains the promise of a Bank to pay an exporter on first demand if the
letter presents a statement to the bank confirming that he has not been paid for the goods or services
he has supplied. The Payment Guarantee is frequently used with the “Open Account” method of
payment.
Standby Letter of Credit:
A Standby Letter of Credit is essentially a substitute for a Payment Guarantee.
Letter of Credit relation:
 Advising
For example:
Bank A is now advising the B to make confirmation of payment.
 Confirmation
Now B sent confirmation to A about the payment.
 Negotiation/Discounting
 Reimbursement
Prepayment:
In small sized transactions as well as lack of trust between the buyer and seller when the seller is
in better position that enables him to set his rules, the seller will option to bear any risk and obliges
the buyer to pay in advance.

4. Letters of Guarantee:
Instruments for securing performance that enables the buyer to be certain that the seller is in a
position to honor his commitment as offered or contracted. Due to the correspondent relations
between Pakistani and international bank there will be trading between two person the bank
facilitate that trading so it will be safe trading no threat of money loss and any theft will be there
so there is a guaranteed relation between banks.
Advance Payment Guarantee:
Contracts frequently stipulate that the seller is to receive an advance payment. This payment is
intended to allow the seller to purchase raw material or to cover initial production costs to ensure
that such funds are not used to purposes other than those stated in the contract to the buyer to
reconcile this payment when paying further installments an advance payment guarantee will be
demanded to serve these purposes.
Bill acceptance/forfeiting/discounting/negotiation:
We offer different products that can streamline a business’s finances and cash flow.
Bill Acceptance:
Acceptance means that a bank guarantees payment of the instrument that was accepted by it
whether it is a bill of exchange or a set of documents presented under a L/C. The acceptance of the
bank give value to the payment instrument in the Market and give the opportunity to its holder to
discount it and positively improves its cash flow.
Forfeiting:
Forfeiting is the purchase (without recourse to any previous holder of the specific form of trade
instruments) of debt instruments due to mature in the future.
Discounting:
Discounting Bills gives customers short term working capital finance by discounting accepted
Bills of Exchange or Promissory Notes.
Negotiation:
Negotiation is another variation of discounting whereby bank decides to pay a document’s value
to the beneficiary with recovers. This product differs from discounting in that it does not require
waiting for the acceptance of documents from the issuing Bank.
Transfer of participating loan funds:
Mutual funding that invests in loans made usually to stable firms that have low credit ratings.

5.  Purchase or sale of federal funds.
 Processing of customer transactions.
Term Loan:
A loan with a specific amount for a set period of time that it may be repaid as a bullet loan
according to a repayment schedule after a relevant grace period of time.
Revolving Credit:
This Facility is also available for a specific amount for a set period of time but will offer the
borrower the flexibility to borrow, repay and redraw the loan partially or in full at its sale
discretion.
Online access:
Customers gain access to their account details via their Business Online system, which enables
you to closely monitor your positions and payments.
Transfer and settlement of securities transactions:
Transaction settlements, which is the date that ownership of a security changes from the seller to
the buyer. It also refers to the date that the buyer must pay for and the seller must deliver the
securities to the correspondent bank.
Other relations:
 Processing loan participations
 Facilitating secondary market loan sales
 Performing data processing and payroll services
 Exchanging foreign currency.