Consider the following statements: 1. A rupee Vostro account is an account that an Indian bank holds for a foreign bank in the domestic currency (rupee) to enable domestic banks to provide international banking services. 2. Insurance density, i.e., average insurance premium per capita does not fully capture the financing gap in the event of a premature death because most of the insurance products sold in India are savings-linked with a small component of protection. Which of the statements given above is/are correct?
- (a)1 only
- (b)2 only
- (c)Both 1 and 2
- (d)Neither 1 nor 2
Correct — C, Both 1 and 2. Statement 1 states the Vostro relationship the right way round. In correspondent banking, Nostro means 'our account with you' and Vostro means 'your account with us', so a rupee Vostro account is a rupee account that an Indian bank maintains on behalf of a foreign bank — the arrangement the Reserve Bank formalised in July 2022 as the Special Rupee Vostro Account, through which a partner country's bank can settle trade with India in rupees. Statement 2 is the standard caveat about insurance density. Density is simply total premium divided by population, so it counts every rupee of premium alike; but most Indian life policies are savings-linked endowment or money-back products in which only a small slice of the premium buys death cover. A high density can therefore sit alongside a large protection gap — the shortfall between what a family needs on a premature death and what the policy actually pays.
- (a)1 only — Rejects statement 2, but the savings-linked nature of Indian life products is exactly why premium per capita understates the protection shortfall.
- (b)2 only — Rejects statement 1. The definition given is the correct one — Vostro is the foreign bank's account held with the Indian bank, not the reverse.
- (d)Neither 1 nor 2 — Both statements survive checking, so rejecting both is the weakest available reading.
Correspondent banking runs on paired mirror accounts. From the Indian bank's point of view, a Nostro account is the account it holds abroad in foreign currency; a Vostro account is the account it holds at home, in rupees, for a foreign bank. The Reserve Bank's July 2022 framework for international trade settlement in Indian rupees uses precisely this second kind of account — the Special Rupee Vostro Account — so that invoicing, payment and settlement of exports and imports can happen in rupees. Insurance density, separately, is a market-size ratio: gross premium divided by population.
Both halves are definition questions dressed as current affairs. Statement 1 is answered by remembering whose account it is: Vostro, from the Latin for 'yours', is the foreign party's account sitting on the Indian bank's books. Statement 2 rewards knowing that density measures money collected, not risk covered; a market that sells mostly savings products can look well insured on density and still leave families badly short on a death claim. Nothing in either statement is exaggerated enough to be the planted error, which is the signal that the answer is 'both'.
- Nostro is 'our account with you' abroad in foreign currency; Vostro is 'your account with us' at home in rupees.
- The Reserve Bank issued its framework for international trade settlement in Indian rupees in July 2022, using Special Rupee Vostro Accounts opened by authorised dealer banks in India for correspondent banks of the partner country.
- Insurance density is gross premium per head of population; insurance penetration is premium as a share of GDP.
- The protection gap is the difference between the cover a household needs and the cover it actually holds — savings-linked products keep it wide even where density is rising.
- Flipping Nostro and Vostro — the commonest error, and the whole of statement 1 turns on it.
- Treating a rising insurance density as proof that families are adequately covered.
- Confusing density (premium per person) with penetration (premium as a share of GDP).
Usually as a two-statement item pairing one banking definition with one insurance ratio, or as a direct 'what is a Special Rupee Vostro Account' single-answer question.
No directly related past PYQ was found.
- practice — not a real PYQ
In correspondent banking, an account maintained by an Indian bank for a foreign bank in Indian rupees is called
- (a)a Nostro account
- (b)a Vostro account
- (c)an escrow account
- (d)a current account
Answer(b) a Vostro account — 'yours with us'; the Indian bank's own account held abroad in foreign currency would be a Nostro account.
- practice — not a real PYQ
Insurance density is best described as
- (a)premium as a percentage of GDP
- (b)premium per capita
- (c)the number of policies per thousand people
- (d)claims paid as a share of premium collected
Answer(b) premium per capita — premium as a share of GDP is insurance penetration, a different ratio.