Reconciliation of foreign currency bank accounts
Reconciliation of accounts is basic knowledge; every finance professional possesses. Accounts that are denominated in a foreign currency will have an extra feature of INR equivalent for every entry and for the balance. However, for the reconciliation process, the rupee equivalent numbers are not relevant [as they are relevant for valuation]. Hence reconciliation of foreign currency accounts should not pose any additional challenge. Reconciliation in a corporate’s books e.g. of EEFC account will be therefore very similar to that of any routine bank account in INR. Accountants and auditors generally attribute the seriousness of any unreconciled entry to the amount and its age.
Banks in India maintain several foreign currency accounts with banks abroad in different foreign currencies. They are called Nostro accounts. These accounts are used to make payments for imports, to receive export bill proceeds and make & receive other remittances on account of customers, trade and treasury transactions. The number of transactions is huge and amounts vary. In most banks, the reconciliation of such statements is automated based on the matching of amount, transaction reference number, date, etc. The system output includes reconciled entries, forced matched or possible match-able entries and all types of unreconciled entries. The significance of outstanding entries here is not necessarily based on the amount and age of the entry. Understanding the process of reconciliation of Nostro account entries and the significance of outstanding entries is essential for those who handle these accounts and who audit treasuries of banks. We shall examine these here.
The two statements used to reconcile the Nostro accounts are
- The statement received from the overseas bank through SWIFT in the standard format called MT940 and
- The internally generated statement called a mirror account.
Mirror account is the accounting head in the local bank’s books to capture all transactions that have or will appear in that Nostro account. It is similar to the ‘bank book’ as appearing in Corporate’s accounts. The mirror account has both FC and INR entries and as earlier said, INR entries are ignored for reconciliation purpose. MT 940 is generally received daily and is fed into the reconciliation module of the bank’s software, where the mirror account is already uploaded [at the time of every day EOD] and is waiting to reconcile. Once the reconciliation process is run, all the above said outputs are available.
While we tend to gloss over matched entries, it is necessary to check a few of the matched entries, at least on a test basis. The bank’s treasury risk management policy should specify this. Whether the matched entries have picked up the reference numbers correctly, whether forced matching is done correctly, is there any double matching, etc., are to be test-checked.
What are the types of unreconciled entries?
There are four types of unreconciled entries possible viz.: Nostro debits, Nostro credits, Mirror debits and Mirror credits. It is true that generally if an entry is outstanding for a long time [old age] or if the entry is for a larger amount, it requires higher attention. However, in case of these accounts, each type of unreconciled entry has its own significance besides gravity on account of age and amount, as under:
Nostro debits: An amount has been debited for which there is no corresponding mirror credit. It could be due to small difference in an amount representing bank charge [and hence forced matching after suitable vouchers for the differential], mirror credit outstanding but in another mirror account, bank charge debited which is yet to be accounted [which means the P & L figure as on date is inaccurate], a wrong debit not meant for our bank and hence to be taken up with that correspondent immediately etc. Nostro debit makes the bank out of funds and hence to be attended immediately.
Nostro credits: A credit received has not been acted upon. It could be an export bill realization, inward remittance for a customer or merely a credit of an entry representing interest or such revenue amount. These outstanding entries may have serious implications on customer service.
Mirror debits: The mirror account has been debited without there being a corresponding credit in the nostro account or before sighting it. It could be a case of debiting a wrong bank mirror account [which needs a harmless rectification book entry], an unauthorized entry by any staff member [possibly a fraud], debit for an amount different than the amount received in the Nostro account, etc. Outstanding mirror debit is a serious issue, irrespective of amount and age.
Mirror credits: This signifies that some intended debit to Nostro account has not yet happened. It could be an import bill payment, which means poor customer service or on account of DDs issued by the bank. Generally, such DDs outstand for a longer time of say around ten days and some DDs of smaller amounts remain unpaid for several months. Generally, mirror credits are less serious outstanding entries compared to others.
It is an account maintained by a bank abroad with a bank in India, obviously in INR. E.g. Indian rupee account maintained by Barclays Bank London with SBI Mumbai. As a good customer service, SBI should send bank statements to Barclays Bank by MT 940 every day [or as per agreed frequency]. Barclays will use this to do reconciliation. There is no reconciliation work at SBI Mumbai for this account. However, frequently [atleast annually], the account maintaining bank i.e. SBI here should get a confirmation from Barclays that the balances match to ensure that there are no wrong entries made by SBI.
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