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CHAPTER 1

1.1 INTRODUCTION
1.1.1 MEANING OF BANK
Generally, a bank is defined as an institution established by law, which deals
with money and credit. Bank is also meant to be an institution whose debitsusually referred to as bank deposit are commonly accepted in final
statement of other peoples debts. In other words, it is an institution which
transact in money receiving it on deposit from customers, honoring
customers drawing against such deposits on collecting cheques, for
customers and lending or investing surplus deposits until they are required
for repayment. Banks are among the most Important financial institutions in
the economy and business in thousands of local towns and cities. I the
modern time, bank is known as one of the important financial institution
dealing with money credit and financial institution.
Some of the banking experts have defined bank in the following
types:According to Professior Hart, a banker is one who in the ordinary course of
his business, receives money which he repay by the honoring cheques of
persons from whom or one whose account he receives it
According to Sayers, Ordinary banking business consists of changing cash
for bank deposits for cash, transferring bank deposits from one person or
corporation to another; giving bank deposits in exchange for bills of
exchange, government bonds, the secured or unsecured promises of
businessmen to repay, .
According to Crowther, A bank collects money from those who have it to
spare or who are saving it out of there incomes and it lends this money to
those who requires it.
The banking systems of different
countries vary substantially from one another, but there has been during the
present century a universal tendency for each nation to develop a wide
network of banks centered upon the chief trading centre and grouped round
a quiet different institution referred to as the central bank. These wide
networks of banks have been developed due to multi-functions of bank it
has to perform. In the context of Nepal too, we have different sorts of banks
performing different functions and helping in different sectors of economy for
instance, commercial bank, industrial bank etc.
1.1.2 ORIGIN OF BANK
Economists have their own point of view regarding the origin of
bank. The Greeks and the Mesopotamians had banks as the Romans had. But
these civilizations regarded banking as unnatural, but some banks were
allowed to operate. Some say that the word bank has derived from the Latin

word bancus which refers to the bench on which the banker would keep its
money and his records. Where as some trace its origin to the French word
banquee and the Italian word banca.
Modern banking originated in the medieval Italy. The first bank
developed was the Bank of Venice. It was established in 1157 A.D. in Italy.
Following its establishment, the banks established were Bank of Barcelona
in 1401 A.D. and the Bank of Genoa in 1407 A.D. gradually the Bank of
England was established in the late seventeenth century and it enjoyed a
prestigious position. But the drastic development in the field of modern joint
stock commercial banking occurred when the parliament of England passed
the banking act 1883 A.D. it was only in the 19th century that the modern
joint stock commercial banking system developed in the leading countries of
the world.
In Nepal ,however the first bank was established in 1994 B.S.
in the name of Nepal Bank Ltd. and central bank of Nepal was established
in the name of Nepal Rastra bank under Nepal Rastra Bank Act 2012 B.S.
(1956A.D.). But this act has been repealed and the Nepal Rastra Bank, act
2058B.S. (2002A.D.) is being existed. Nepal Rastra Bank , the central bank of
the Kingdom of Nepal , was established in1956 A.D. to discharge the central
banking responsibilities including guiding the development of the embryonic
domestic financial sector . Since then, there has been a huge growth in both
the number and the activities of the domestic financial institutions.
1.1.3 EVOLUTION & DEVELOPMENT OF BANK IN NEPAL
If we look back into the history of the development of banking,
we notice that money lenders, merchants, goldsmith, landlords were ancient
banks of Nepal. In the Nepalese perspective, the first ever recorded
borrowings were in 723 A.D. when Gunakama Dev borrowed money to
rebuild Kathmandu. However, as an organized bank, the first organization
was established in` the name of Tejarath Adda in the period of rana reign
in 1993 B.S. but Tejarath Adda was not the bank in the original sense
because it was established only to grant loan to government employees not
to general people. Infact, the first organized bank established bank in Nepal
was Nepal Bank Limited in 1994 B.S.
Nepal Bank Limited started to provide the services of commercial
bank to the general people and tried to break
the monopoly of
predominance of Sahu Mahajan in financial activities. Nepals first
commercial bank, the Nepal Bank Limited, was owned by the government by
51 percent of the shares in the bank and controlled its operations to a large
extent. Nepal Bank Limited was headquartered in Kathmandu and had
branches in other parts of the country.
For the purpose of promoting monetary and banking activities of
Nepal and also to implement monetary policies of government, it felt the

need of central bank and in this process Nepal Rastra Bank was set up in
2013 B.S. This bank has been functioning as the government bank and has
contributed to the growth of financial sector. After establishment of Nepal
Rastra Bank, the banking sector development became possible.
In this series, NIDC, Nepal Industrial Development
Corporation, a state-owned development finance organization headquarter
in Kathmandu, was established in 1959 with United States assistance to offer
financial and technical assistance to private industry. Although the
government invested in the corporation, representatives from the private
business sector also sat on the board of directors. The Co-operative Bank,
which became the Agriculture Development Bank in1967,was the main
source of financing for small agribusinesses and cooperatives. Almost 75
percent of the bank was state-owned; 21 percent was owned by the Nepal
Rastra Bank and 5 percent by cooperatives and private individuals. The
Agricultural Development Bank also served as the governments
implementing agency for small farmers group development projects assisted
by the Asian Development Bank and financed by the United Nations
Development programme was established as an industrial development bank
and agricultural development bank as an agricultural development bank.
Similarly, to enhance the commercial bank facility in the country, Rastriya
Banijya Bank was established as a second commercial bank of the country.
After establishing the Rastriya Banijya Bank, service of commercial bank
spread in both the rural and urban areas. Till 2041 B.S. government adopted
the principles of protectism to protect the interest of Nepal Bank Limited.
Therefore, the rate of development of banking sector was very low till 2041
B.S. but government followed principle of economic liberalization in 2042
B.S. and after that they allowed establishment of joint ventures bank also
with the cooperation of foreign banks. in this series, the first bank
established was Nepal Arab Bank Ltd. In 2041 B.S. and it provided as a
milestone in the development of banking sector in Nepal. Following the
establishment of Nepal Investment Bank formerly known as Nepal
Indosuez Bank was established in 2042 B.S. likewise, Nepal Grindlays Bank
Ltd. (2021B.S.), Himalayan bank Ltd (2049 B.S.), Nepal S.B.I. Bank Ltd.
(2050B.S.), Nepal Bangladesh Bank Ltd. (2051B.S.), Everest Bank Ltd. (2051
B.S.), Bank of Kathmandu Ltd.(2051 B.S.), Nepal Credit and Commercial Bank
Ltd. And so many other banks were established. Therefore, there are so
many commercial banks in operation in Nepal till date operating with their
main objectives of carrying out activities under the commercial Bank Act
2031 B.S., the Nepal Rastra Bank Act 2058 B.S., the companies Act 2053 B.S.
and Contract Act 2056 B.S. After adopting the Liberalization polices various
development banks were established in Nepal according to Development
Bank Act 1996 A.D. with the objective of providing micro credit services to
rural people under group guarantee basis on five rural development banks
were established in each development region. On the basis of above
analysis, we can say that the history of development of modern bank in
Nepal is not so old but is growing rapidly particularly after 2041 B.S.

1.1.4 TYPES OF BANK


Different types of banks are emerging in the banking industry
specializing in different functional areas. Different types of banks are
explained below:

Development Bank: Development banks are those banks whose aim is


not to earn profit. Development banks are performing their functions under
the Development Bank Act 2052 (1995) & the Nepal Rastra Bank Act 2058
B.S. (2002 A.D.) & the Company Act 2053 B.S. (1995 A.D.) till today.
Development banks are of two types. The first development bank finances
loans to farmers & other agriculture sectors for short ,medium & long term
purposes. The second development bank finances loans in the infrastructure
development in a country.

Industrial Bank: Industrial bank is the kind of bank which provides


loans on the basis of mid-term & long-term to establish industries & their
expansion such as the purchase of land & development, machinery &
equipment etc. It is a bank which is commenced to support the industrial
field of country & its all round development & expansion. This bank is
inspired to develop certain areas. Nepal Industrial Development Corporation
works as the industrial bank in Nepal.

Savings Bank : A bank which is established with the objective of


managing a huge amount of capital by collecting the little amount of money
saved by the people of urban & village areas is called saving bank. It is
specialized institution which induces small income groups to save something
out of their incomes and pool such savings. Saving banks in Nepal are not
opened by different names but in fact; the functions of such banks are
performed by commercial banks, agricultural development bank & the
district post offices. This bank is also called trusty saving bank, guarantee
saving bank, municipality saving banks etc. this bank utilizes the money of
different types of productive areas by collecting the little amount of money
which are scattered through out the country.

Exchange Bank: Exchange banks are those banks which deal in foreign
exchange & specialize in financing in foreign trade. It exchange different
foreign & indigenous currencies & transfers the fund to the foreign countries.
Therefore, it is also called exchange bank. Exchange bank specializes I
financing the foreign trade & they supply the necessary foreign exchange
required for the settlement of transactions between traders engaged in
foreign trade. This bank opens its branches & sub-branches in the country &
abroad. In Nepal, the functions of this bank are done by Nepal Rastra Bank &
other commercial banks.


Indigenous Bank: The bankers who follow the banking profession in
traditional custom & culture are called indigenous bank. Goldsmith,
landlords, merchants are called indigenous bankers. Their interest rate is
very high. This system has its own characteristics. Such banks are in large
number in developing countries than in developed countries.

Rural Development Bank: This bank is established with the objective of


uplifting the standard of the people of rural areas by encouraging them to
start the possible income generating occupation, by providing loan without
security & providing necessary training & bank servicing. In other words, the
banks that are established to improve the economic condition of the farmers,
labourers and masons are called rural development banks. These banks have
the goal of bringing poor class people to a respectable level, giving them an
opportunity to increase income, helping them to create the productive
property, environment & necessary materials providing to discover & apply
peoples hidden & suppressed skills.

Agricultural Development Bank: This bank is established with the


objective of developing agricultural sector. In Nepal, agricultural
development bank was established in 2024 B.S.(1968 A.D.) under the
Agricultural Development Bank Act 2024 B.S.(1968 A.D.). This bank is formed
for the purpose of improving peoples economic welfare & the facilities with
dynamic changes & to provide capital & loan to the agricultural sector. The
agricultural development banks provide agricultural production loan,
agriculture facility loan, small & cottage industry loan, agro-profession loan,
loan to buy land, loan for agricultural graduate etc. Usually; there are two
types of banks under the agricultural banks. They are the land mortgage
bank & co-operative bank.

Merchant Bank: Traditionally, the main business of merchant banks


have been concerned with the acceptance of credit for the financing of
international trade & rising of loans for oversees borrowers by new capital
issues. They have extended their interests over domestic financing as well.
The main source of capital of merchant banks are the time deposits & by the
issue of securities. They assist business corporations to raise funds for long
term capital requirement by issue of bonds. These bank acts as middleman
between the business corporations & the investors. This bank underwrites
the fresh issue of shares & debentures of business corporations.

Central Bank: Central bank is an important financial institution in every


sovereign, independent state in modern times. It is the apex body of banking
system. It also acts as a banker to the country. The central bank acts as the
banker to the commercial banks government not because the government
finds it comfortable economically but because of the close relationship
between public finance & monetary affairs. The central bank gives
appropriate advice to the government in operating its financial matters. This

bank is established to develop banking through strategy on its own to issue


the notes, to control the credit, to act as the bank of the banks in each
country.
Every country possesses its own central bank. In Nepal, Nepal Rastra Bank is
regarded as the central bank of the country. Nepal Rastra Bank was created
in 1956 as the central bank of Nepal. The Nepal Rastra Bank is established
under the Nepal Rastra Bank Act 201 B.S.(1956 A.D.). But this act has been
repealed & Nepal Rastra Bank Act 2058 B.S. (2002 A.D.) is being existed. Its
function is to supervise commercial banks and to guide the basic monetary
policy of the nation. Its major aims are to regulate the issue of paper money;
secure countrywide circulation of Nepalese currency and achieve stability in
its exchange rates; mobilize capital for economic development and for trade
and industry growth; develop the banking system in the country, there by
ensuring the existence of banking facilities; and maintain the economic
interests of the general public. Nepal Rastra Bank also is to oversee foreign
exchange rates and foreign exchange reserves.
Some of the banking experts have defined bank in the following
ways:According to Crowther, The central bank stands to the member banks in
exactly same relation as the member banks themselves to the public.
According to R.P. Kent, Central bank is an institution which is charged with
responsibility of managing the expansion & contraction of the volume of
money in the interest of the general public welfare.
Central bank is an organization who is authorized to
manage the whole economic system in a country, performs banking services
for the country and maintains the cash reserves of the commercial banks.

Commercial Bank: Generally, the word bank is used in the sense of a


commercial bank. Commercial banks are very important part of our economy.
They are considered as the backbone for the economic development of each
& every country. Commercial banks play an important role for the
development of trade, commerce, industry & agriculture.
Commercial banks in other words can be referred as the constituent
units of the banking system. Commercial banks primary aim of earning
profits. Commercial banks are the creator of the money. They are capable of
attracting people to deposit their saving .Today we can see that many
commercial banks & they are helping in each & every aspects of our
economy. Here they do bear some primary responsibility to hold the money
of people. The bank is not the real owner of money. In fact, the bank is only a
custodian who undertakes to accept the deposit of one person & invests to
other in the form of loans & advances.
Some of the banking experts have defined commercial bank in the following
way:-

According to Section 2(a) of the Commercial Bank Act 2031 (1974),


Commercial bank is a bank which operates currency exchanges
transactions, accepts deposits, provides loan, and performs dealing related
to commerce except the banks which have been specified for the cooperative, agricultural, industry of similar other specific objective. In this
report, the topic based on Nepal Investment Bank Limited is discussed.
Since, Nepal Investment Bank falls into the category of commercial banks.
Therefore, we only here, briefly clarify about commercial banks.
1.1.5 DEFINITION OF BANK
With globalization and have rapid growth in international business, banking
activities are continually changing and have grown manifold and banks are
now entering into new fields of economic activities. Therefore, it is quite
difficult to give a precise definition of bank, acceptable to all and thus, there
are several definitions provided by several scholars in their own way. Some
of the definitions given by renowned scholars are presented below:
A banker or a bank is a person or company having a place of business where
credit are opened by deposits or collection of money or currency or whose
money is advanced or loaned.
- Oxford Dictionary
Banks are financial institutions that accept fund in the form of deposits
repayable on demand or in short time.
- World Bank
Development Report
Any Institutions opening deposits, subject to withdraw on demand, making
loans of commercial or business nature is a bank.
- U.S. Law
A bank is an institution which collects money from those who have it spare or
who are
saving it out of their income and lends this out to those who
require it.
- G. Crowther
Ordinary banking business consists of changing cash for bank deposits and
bank
deposits for cash; transferring bank deposits from one person or
corporation to another; giving bank deposits in exchange, government
bonds, the secured or unsecured promises of businessmen to replay, etc.
- R.S. Sayers
A bank is an organization whose principal operation are concerned with the
accumulation of the temporally idle money of the general public for the
purpose of
advancing to other for expeditor.
- Kent,
Shakespeare Vaidya

Various Nepalese Acts have defined banks in Nepal. The definitions of bank
given by some of the Nepalese Acts are as follows:
Bank means the Nepal Rashtra Bank established under section 3 of this Act.
- Sec. 2 (a) of NRB Act
2002 B.S.
Bank is a commercial bank established under this Act.
- Sec 2 (b) of commercial Bank Act
2031 B.S.
A bank is a bank which is established under the existing laws.
- Sec 2 (a) of Negotiable instrument Act 2034 B.S.
From above definitions, it is clear that a bank is a financial institution
established under the laws of a country and performs functions like
accepting deposits; lending money; creating credit; facilitating foreign
exchange and international trade; providing locker service, information and
advices to customers; transferring funds; and acting as the agent of its
customers. Therefore, banks are of immense importance in the modern
economic world.
Hence, bank can be defined as that financial institution which accepts
deposits from public and organizations, advances loans to needy, transfers
funds to one place to another and performs many other functions as directed
by the central bank and according to the laws of the country.
1.1.6 COMMERCIAL BANKS IN NEPAL
Commercial banks are financial institutions that deal with money, trade,
finance, and commerce and are guided by profit. Their basic functions are to
accept deposits and advance loans. They also perform various other
functions like accepting deposits; lending money; creating credit; facilitating
foreign exchange and international trade; providing locker service,
information and advices to customers; transferring funds; and acting as the
agent of its customers.
Commercial banks are also called Joint Stock banks and Credit banks. They
make significant contribution to the economic and industrial development of
a country and improving the living standard of people. The central bank and
the existing laws of the country guide the activities and functions of any
commercial bank.
Sec. 2 (a) of Commercial Bank Act 2031 B.S. has defined Commercial Bank
as:
A bank which operates currency exchanges transactions, accepts deposits,
provides loan; performs dealing relating to commerce except the banks

which have been specified for the cooperative, agricultural, industry of


similar other specific objective.
Today there are many commercial banks in Nepal but the history is not so
long. The 1st commercial bank, NEPAL BANK LTD. was established only in
1994 B.S. The development started lately but in the early 2040 B.S., after the
formulation & implementation of foreign investment policy to allow foreign
investment in commercial banks in the form of joint venture, the last two
decades has witnessed the development of commercial banks at a rapid
speed and several commercial banks have been established in the private
sector, which have greatly contributed in the development and advancement
of banking system and economic and industrial condition of the country. In
todays date, there are 30 commercial banks operating in Nepal, including
Nepal bank Ltd. and Rashtriya Banijya Bank, the banks with government
shares. The commercial banks operating in Nepal are listed below:
Commercial Banks in Nepal
Commercial Banks
1. Rastriya Banijya Bank
2.Nepal Bank Limited
3.Standard Charter Bank
4.Nepal Bangladesh Bank
5.Himalayan Bank Limited
6.Bank of Kathmandu
7.Nabil Bank
8.Kumari Bank
9.Nepal SBI Bank
10.Siddartha Bank Limited
11.Everest Bank Limited
12.Nepal Investment Bank Limited
13.Nepal Credit and Commerce Bank Limited
14.Lumbini Bank Limited
15Laxmi Bank Limited
16.Global IME Bank Limited
17.Sunrise Bank Limited
18.Machhapuchhre Bank Limited
19.Agriculture Development Bank Limited
20.Citizens Bank international Limited
21.prime commercial Bank Limited
22.NIC Asia Nepal Limited
23.Grand bank limited
24.NMB Bank Limited
25.KIST Bank Limited
26.Mega Bank Nepal Limited
27.Civil Bank Limited
28.Janta Bank Nepal Limited

29.Commerz & Trust Bank Nepal Limited


30.Century Commercial Bank limited
31. Sanima Bank Ltd.
A Letter of Credit is:
A banks written conditional undertaking made on behalf of the buyer
(importer / applicant) To pay a seller (exporter / beneficiary) Up to a given
sum of money Immediately or at a determinable future date Provided that
documents presented by the exporter meet the terms of the DC and are
presented within a specified time and at a specific place.
The Letter of Credit protects the buyer because he knows that the seller will
not be paid until he has presented documents to the bank evidencing
shipment of the merchandise. The seller is protected because he knows that
he will be paid once the merchandise has been shipped and the required
documents are tendered to the bank.
Evolution of Letters of Credit:
In the primitive ages when human civilization and economic development
were not advanced and the desires and needs were limited. With
advancement in civilization and growth in economic development the desires
and needs increased. This resulted in human beings of one locality moving to
other localities to fulfill their unmet desires and needs under a process which
indicated shift from self sufficiency to inter dependence. As a result
Barter Economy came into existence.
Human needs and desires soon became unlimited and produce of a given
locality or vicinity could not meet the demands. Movement of people from
one place to another reduced due to increase in size of family and
development of the culture of settling in families in a location. This forced
people to involve in buying and selling i.e. trading of goods and produces
from one place to another. By then money had already been introduced as
measuring rod for goods and services.
The human desire could not be met by the goods and services produced in
one locality to another and people now wanted to use produce from one
country to another and from one continent to another and from one end of
the globe to another end of the globe. In such a scenario it was impossible
for people to move around and buy the product of their choice or demand
due to geographical distance as well as the risk in carrying money and then
complications faced in carrying back the produces to their habitat.
Concurrently technology had also advanced a lot and facilities like
transportation, communication, etc. had made trade easier as well as more
sophisticated. A person say from Nepal could get in touch with available

there or not. Deals were made to buy particular goods for payment of
specified amount giving birth to the concept of exporter and importer more
commonly known as buyer and seller.
Though by now trading had become easier, settlement of trade transactions
posed problems for the parties involved. Goods bought and sold abroad
started becoming complicated transactions for number of reasons like
voyage time, import/export control regulations, customs formalities and the
very fact that the buyer and seller were separated geographically.
Moreover in much of the cases, the buyer and seller would not have met or
seen one another and possibility of not knowing each others standing and
integrity also loomed large. So the traders felt the need to safeguard and
protect the interest of both buyers and sellers and decided to take help of
bankers who were widely accepted for its credibility and standings to be
involved in financial transactions. The buyer needed to know that he was
getting the right goods what he paid for and the sellers interest was to get
promptly paid for his goods. As a result the banks started arranging and
extending wide use of credit instruments which satisfied the needs of both
buyer and seller. This instrument was called the Documentary Credit or more
commonly Letter of Credit handled by international banking network calling
for the exporter to present to a bank documents evidencing shipment or
dispatch of the required merchandise for which if the documents are in order
he will be paid.
History / Origin:
Letters of Credit were in operation in England before World War I US banks
quickly learned the know-how from London bankers. The Federal Reverse
Act of 1913 permitted member banks to issue Letters of Credit. In the 1930s
England went off the gold standard, which together with her loss of
domination of the world trade, the United States further enhanced the
worldwide importance and recognition of US Dollars as a world currency.
After World War II, USA became the most important supplier of goods in
international trade and the largest buyer of foreign goods. This accelerated
the development of Letter of Credit in the USA and American banks today
play a leading role in the field of issuance of Letters of Credit. Various
customs and practice were developed in USA and foreign countries
concerning the interpretations and users surrounding L/C and in order to
ensure uniformity of practice and interpretations in international trade,
International Chamber of Commerce in Paris, in co-operation with various
national chamber of commerce and banks developed the Uniform Customs
and Documentary Credits. This publication was first published in 1962 and
was in effect from July 1, 1963.tually every country and territory in the world
has accepted these rules.

Reflecting the numerous changes in international trading and transport


techniques occurring since 1962, the rules have been revised and brought up
to date several times in the past. The version currently in use is the UCP 500
(w.e.f. January 1, 2004) which is to be replaced by the UCP 600 which is the
latest in the line of revisions and is to come into force from July 1, 2007. The
new UCP 600 updates and consolidates the UCP 500.
Need of LC:
The goods manufactured in one country can be sold to the market of another
country either for consumption or for resale purpose. This purchase-sale
relationship between two or more countries is the basic feature of foreign
trade.
The need for a LC generally arises whenever any two parties
(importer/exporter) get into a contract to buy & sell something. In any
international trading activity, as the parties to it reside two different places,
often in two different countries, the issue of confidence or credit worthiness
of both the parties arises. A party might be big or prestigious even then
other party always will have to think from worst case scenario, i.e. the other
party might default & might renege in its obligation. It is to tide over such
things that the instrument of LC is invoked.
Importance of LC:
a) To the Buyer:
Provides a specific transaction with independent credit banking and a clear
promise of payment. Assures the buyer that documents required by the
Letter of Credit must be presented in compliance with the terms and
conditions of the Letter of Credit and UCP rules. Assures the buyer that
documents presented will be examined by banking personnel knowledgeable
in Letter of Credit operations.
Assures the buyer that his bank will refuse payment to the seller unless
terms and conditions given by him to his bank as stipulated in the credit are
met. Extended terms of payments which in any other form of payment
means would not be available. Refinance of goods until they are marketed.

b) To the seller:
No need to rely on the willingness and capability of the buyer to make
payment since payment is assured by the bank which issues the Letter of

Credit. Less apprehensive that payment for goods might be delayed or


jeopardized by political acts or other problems in the buyers country.
Enable to obtain loan from banks to prepare goods for shipment prior to
making a shipment or just after making shipment.
c) To the Banks:
Goods source of revenue.
Goods source of foreign exchange earnings
Low risk means of financing (e.g. Trust Receipt, Pre/post shipment loan)
Low uncertainty of realization of payment in case of credit-complaint
documents
Payment is assured on the basis of documents along and not based on the
goods or service to which they may refer.
Parties Involved in LC:
Applicant:
Beneficiary:
Issuing Bank:
Advising Bank:
country
Confirming Bank:
Reimbursing Bank:
reimburse the
bank making payment
Nominated Bank:
Bank
drawings

Buyer / Importer
Supplier / Seller / Exporter
Applicants Bank
Issuing Banks agent in Beneficiarys place /
Bank which assumes the risk of Issuing Bank
Bank authorized by the Issuing Bank to
nominated by the Issuing Bank to honor

1.1.9 LETTER OF CREDIT (L/C) MEANING


Payments for purchase of goods & services can be made through various
modes of payments such as cash payment, cash against delivery of goods,
cash against documents, cash against acceptance of bills of exchange,
telegraphic transfer, cheques, drafts, hundis, and so on. But there are risks
involved in them and furthermore, the transacting parties may be
conspicuous of the other party that they might not act in good faith. This
becomes even bigger & serious problem when it comes to international
trade. The use of L/C as mode of payment reduces this problem & dilemma.
It is the most safe and convenient means of payment among all other
methods of payment existing.
The documentary Credit, Letter of Credit, Documentary Letter of Credit,
Commercial Letter of Credit, Bankers Commercial Credit, or simply L/C is a
conditional & Written instrument or an undertaking by a bank to honor draft

(bill of exchange) and effect payment at sight or at a future date to the seller
in accordance with the instructions of the buyer, up to a prescribed amount
within a prescribed time period against prescribed documents, provided that
they are correct and in order, i.e. they conform to the condition of the credit
letter. It is an arrangement whereby a banker acting at the request of the
customer, undertakes to pay a third party, by a given date, according to the
agreed stipulations and against presentation of documents, the counter
value of the goods and services rendered otherwise. It is a mechanism by
which a buyer enables a seller to get the value of the bill of this supplies
effected as per agreed terms and on his tendering the stipulated documents
of the relative consignment to a banker on or before a given date.
L/C is a letter or an advice issued by a bank on behalf & as per the
instructions of the buyer of the goods, the importer, authorizing the seller or
its agent, the exporter, to draw a stated amount of money from the issuing
bank, its branches, or other associated banks or agencies against
presentation of necessary & valid documents specified in it. Payment under
L/C is strictly based on documents. It specifies the documents required to be
presented by the exporter to receive payment. The issuing bank an L/C has
nothing to do with the consignment. If the bank finds the documents
presented by the seller complying with the terms & conditions of the L/C, it
will remit the contract amount to the seller and reimburses the same amount
from the buyer.
It is the responsibility of the issuing bank to ensure, on behalf of its client,
the buyer, that all conditions have been met before the L/C funds are
released. L/C guarantees payment to the seller on the condition that he
presents the specified documents valid & correctly evidencing shipment of
contracted goods, and does so independently of the underlying contract of
sale or the financial condition of the buyer at the time of presentation. All the
financial risk involved in the transaction is passed on the issuing bank, and
this assurance for the seller makes L/C so popular. On the other side, the
buyer on his part is assured of receiving the correct documents & payments
being made only after their receipt. It is a guarantee to the exporter from the
bank that he will receive his payments if the terms and conditions of the L/C
are complied with and simultaneously assures the importer that he will
receive the documents complying with the contract that means that the
goods received are in accordance with the proforma invoice or sales
contract. This has made it the most acceptable mode for arranging payments
for exports as it offers the greatest protection to the parties concerned, so it
is widely accepted by both exporters and the importers as a basis of
settlement for payment. In conclusion, we can point out the following
characteristics of a letter of credit:

It is an undertaking of bank.

It is an undertaking on behalf of the buyer.

It is an undertaking given to the seller.


It is a conditional undertaking subject to compliance with certain
conditions i.e. the presentation of stipulated documents.
1.1.10 TYPES OF L/C
There are different types of L/C that are classified as per the nature and the
function of the credit. Various types of L/C are explained below:

Revocable L/C
A revocable letter of credit can be altered, modified, amended, withdrawn,
cancelled or revoked by the issuing bank at any time without the consent
and notification of the beneficiary, often at the request and on the instruction
of the applicant. There is no commitment on the part of the issuing bank to
honor the bills under the L/C. In a revocable L/C there is no conformity of
payment to the beneficiary and therefore, rarely acceptable for the
beneficiary. However, the credit can be revoked or the negotiating of the bills
under it. The issuing bank is compelled to make payments as per the credit
terms before the amendment or revocation for negotiations made prior to
the receipt of the notification of amendment or revocation.

Irrevocable L/C
An irrevocable letter of credit is a L/C that cannot be amended or revoked by
the issuing bank without the consent of all other parties to the credit i.e. the
applicant, the confirming bank, if any, and particularly, the beneficiary. The
bank guarantees the payment if the credit terms and conditions are fully met
by the beneficiary. It constitutes a definite undertaking by the issuing bank
that it will accept the bill of exchange drawn under the credit and reimburse
the beneficiary if the terms and conditions under the credit are complied
with. This credit is more favorable from the beneficiarys point of view. Any
L/C that does not explicitly specify revocable is an irrevocable L/C.

Confirmed Irrevocable L/C


In a confirmed irrevocable L/C, the authenticity of the issuing bank is
confirmed by the advising or another bank and adds its confirmation or
guarantee to the credit. Thus, there is double confirmation in such credit:
one from the issuing bank and the other from the another bank known as the
Conforming Bank. Therefore, this is more favorable to the beneficiary. The
beneficiary desires this type of credit when the issuing bank is unknown to
him or when it is expected that the issuing bank might not be in a position to
reimburse the payment. This is also used to localize the risk involved in the
credit and so that he can deal more easily with a local bank than with a
foreign bank abroad. However, this is more expensive and
the confirmation can be added only on the advice of the issuing bank and is
available only on irrevocable L/C.

Unconfirmed Irrevocable letter of credit


An irrevocable L/C in which the advising bank does not add its confirmation
to the credit is known as an Unconfirmed Irrevocable L/C. It is the converse

of Confirmed Irrevocable L/C. In this credit, there is the undertaking to pay


from only on bank and that is the issuing Bank.

Restricted Negotiable Letter of Credit


The L/C in which the authorization from the is suing bank to pay the
beneficiary is restricted to a specific nominated bank is known as a restricted
negotiable L/C.

Freely negotiable letter of credit


In a freely negotiable L/C, the authorization from the issuing bank to pay the
beneficiary is not restricted to a specific bank. Any bank can be a nominated
bank
as long as the bank is willing to pay, to accept draft (s), to incur
a deferred
payment undertaking, of to negotiate the L/C.

Transferable L/C
The original beneficiary of the credit can transfer in whole or in a part a
transferable L/C to a second beneficiary (ies). Such credit must necessarily
be
irrevocable and explicitly specified as Transferable on the credit.
However, the
transfer can be made only once and only by the original
beneficiary and not by the
second beneficiary (ies). Such transfers is
to be made without any modification in
the original terms and
conditions of the credit but in exception with the amount of
the credit,
unit price, percentage of insurance terms, and period of validity and
shipment, for transfer to one or more second beneficiaries, it is essential that
credit must permit partial shipment.

Back to Back L/C


A Back-to-Back L/C or a Countervailing Credit is a L/C opened with the
backing or against the security of another credit i.e. the original L/C, called
Overriding Credit or Principal Credit. A beneficiary opens this type of L/C
when he is not the actual supplier of the consignment. This beneficiary opens
another L/C as an applicant and in favor of another beneficiary, the supplier
of the consignment to him, and backing the Principle Credit. Thus, it is
opened by an intermediary in favor of actual supplier and for the actual
buyer. This type of L/C is similar to a Transferable L/C because both of them
serve the same purpose.

Revolving L/C
When a L/C is specifically designated Revolving L/C, it is a Revolving L/C and
when the L/C amount is drawn, the L/C is reinstated or revived without the
need
to amend the original L/C i.e. the amount becomes available
again without
issuing another L/C and usually under the same terms
and conditions. The
amount of the credit can revolve in relation to
time or value. This type of credit is
usually issued when the buyer has

regular transactions with the seller or when the


buyer and seller have
agreed to buy and sell fixed goods over a period of time or
when the
relationship of the buyer and seller is that of supplier and agent. This
type of credit saves time and money for the buyer, the applicant, as he does
not
have to open new L/C repeatedly. It is beneficial when there is
short supply of
goods or the supplier is a monopolist.

Anticipatory L/C
Generally, payment to beneficiary is made post-shipment of consignment
against
presentation of necessary documents under the credit.
However, In Anticipatory L/C, payment is made to the beneficiary at preshipment in anticipation of his actual shipment and submission of bills at a
future date. The payment may be full or partial amount of the credit and the
remaining amount are settled at the time of submission of final documents.
Anticipatory L/C may be a Red Clause or
a Green Clause Credit. A Red
Clause Credit authorizes the advising or
confirming bank to provide
advances to the beneficiary prior to the shipment and tender of documents
for the purpose of pre-shipment expenses like purchase & processing of raw
materials, packaging of goods and the like. The advance will be adjusted
later from the proceeds. A Green Clause Credit is an extension of
Red
Clause Credit and in addition to make payment pre-shipment; it also permits
advances for warehousing and insurance charges of the goods at port. In
general, advances are made after the goods are kept in bonded warehouses
etc. In such cases warehouse warrants are given as security.

Deferred Payment L/C


Deferred Payment L/C and/or Acceptance Credit is a Usance Credit where
the buyer accepts the documents and agrees to pay the issuing bank over a
period of time i.e. the payment of goods is deferred to some future time. The
exporter and importer agree upon the payment along the principle interest
within a specified time. This credit also gives the applicant a grace period for
payment like Usance L/C. Acceptance Credit is like a Deferred Payment L/C
but it has an additional
feature that the accepted bill can be
discounted in the money market.

Sight L/C
In a sight L/C, payment to the beneficiary is made at the first sight of
presentation of the documents at the counter of issuing bank. However, the
issuing bank must verify and satisfy itself with the documents received as
whether they comply with the credit terms and whether all the quoted
documents
are received or not. Reimbursement can be claimed by
the negotiating bank
directly from the reimbursing bank after
examination of documents by the
issuing bank.

Usance (Time) L/C

Usance (Time) L/C is the L/C with a time (tenor) for payment i.e. the
payment
should be made after the time specified in the credit.
Therefore, the buyer receives a grace period for making payments later in
the future. The Usance period is generally 30 to180 days.

Stand by L/C
It is a special kind of standby or backup L/C. It is rarely used and is generally
not seen in practice in Nepal. This form of L/C is issued in specific situations
such as when the law restricts banks from issuing guarantees. In such
conditions, it is used as a substitute for performance guarantee or other
financial guarantees or for securing loans.
Not all these types of L/C are in practice in Nepal. The L/C that
Machhapuchchhre Bank issues, uses or accepts in general is the Sight L/C,
Usance L/C, Revolving L/C, transferring L/C and Back-to-Back L/C.
oviding guarantee to secure advances made to us nationals or companies
resident abroad.
Documents under Letter of Credit

Commercial Documents:

a) Proforma Invoice:
Proforma invoice is basically a form of quotation by seller to a potential
buyer. Its a short of invitation to the buyer from seller to place a firm order
on him. The Proforma invoice normally shows the terms of trade & prices in
addition to the description of goods so that ones the buyer has accepted the
order, there is a firm contract to be performed as per the terms & conditions
mentioned on it.
b) Commercial Invoice:
Contains a detailed description of goods consigned, selling price per unit,
and total amount, quantity shipped, LC and contract numbers, payment and
delivery terms, country of origin, etc issued on the letterhead of the exporter.
c) Packing List:
May be combined with Weight List. Gives full details of goods, viz. number of
cases, bales, pieces or packages, net and gross weights, shipping marks,
numbers, etc.
d) Weight List:

Lists the weights of individuals packages and/or gross and net weight. Detail
of weight of goods.

Official Documents

a)

Export / Import License

Proof that appropriate government authority has approved the transaction


under import or export.
b)

Certificate of Origin

Proof of origin of goods. Third Party Pre-shipment Inspection Certificate


confirms goods confirm to the certain standards and indicates value can be
requested by the Importer (as commercial document).
c) Quality certificate
A proof that shows goods satisfy the conditions relating to quality
control and are certified as export worthy.
d) Certificate of Analysis
Related to those goods whose chemical analysis is required.
Health/ Veterinary/ Phyto-sanitary Certificate Called usually for export of
foodstuffs, marine products, animal meat, livestock, fruits and vegetables,
herbs, etc. A proof that the merchandise is free from any harmful insects,
disease and fit for human consumption.

Transport Documents

a) Bill of Landing
A receipt for goods. An evidence of having entered into contract of carriage A
quasi negotiable document and title can therefore pass from holder to
another. A document of title and release of goods is therefore contingent
upon its production at port of destination of goods.
b)

Airway Bill or Air Consignment Note

Issued by Air carriers? Transporters. A receipt for goods. An evidence of


having entered into contract of carriage does not represent title to the goods
and therefore not negotiable instrument. Rail or road Consignment Note.
c)

A receipt for goods

An evidence of having entered into contract of carriage. Road Consignment


Note also known as truck Receipt or Lorry Receipt.
d)

Post Parcel Receipt

Issued by Post Offices


Evidence of receipt as well as dispatch of goods packed in parcels
Does not represent title to the goods
Used for articles of small size but proportionately of a larger value

Insurance Documents

Insurance Policy
A contract outlining what risks are insured, what insurance premiums are to
be paid by the policyholder
Defines the rights of both insured and insurer
Can be assigned merely by endorsement and delivery
Marine or Similar
Covers transit period
Done usually for warehouse to warehouse basis

Financial Documents

Financial documents are those documents, which performs the function of


obtaining finance, collection of payment etc. The most common financial
documents used is a Bill of Exchange. A Bill of Exchange (or B/E shortly) is
also referred to as Draft or Hundi. In many countries, a bill of exchange is
recognized as legal documents.
Bill of Exchange has three basic parties namely Drawer, Drawee & Payee.
1.
The person who draws the bill is called the Drawer.
2.
The person whom the bill is addressed (on whom the bill is drawn) is
called the drawee.
3.
The person whom the payment is to be made is called the Payee.

LC Negotiation:

UCP 600 which is to come into force from July 1, 2007 defines
negotiation as follows:
Negotiation means the purchase by the nominated bank of drafts (drawn on
a bank other than the nominated bank) and/ or documents under a
complying presentation, by either advance in or agreeing to advance funds
to beneficiary.

The process of negotiation starts right after the presentation of shipping


documents (invoice, transport documents, certificate of origin, insurance
documents etc.) together with financial documents (bill of exchange or draft)
by the beneficiary at the counter of a bank nominated for negotiation in the
Letter of Credit or a bank of sellers choice. After examination of documents
and ensuring their compliance with the Letter of Credit, the nominated bank
agrees to purchase the draft or bill exchange drawn under the Letter of
Credit and gives the value of the draft/ bill of exchange to the beneficiary
charging interest for up to the maturity of draft depending on reimbursement
method incorporated in Letter of Credit or as per credit arrangement.
In order for a negotiation to take place, a Bill of Exchange or Draft
(sight or time) must be called for in the credit and is required to be accepted
by the issuing bank or the nominated bank or the confirming bank.
Negotiation is possible for both restricted as well as freely negotiable Letters
Of Credit and payment under a negotiation is usually with recourse.

LC Related Fraud & Precaution

Fraud can be defined as Any loss, or attempt to cause a loss, involving


deception
Fraudsters who are they?
External
Habitual
Circumstantial
Internal
Collusion between Staff and Customers
Some causes to Staff fraud
Financial problems
Frustrated personal / career aspiration
Greed / envy
Fear
Poor morale
Fraud Example
LC issued favoring non-existent beneficiary
LC issued for forbidden commodities
Forged documents presented without making shipments fraudulent issue
of Bill of Lading by shipping line employee
LC established with payment to be made against stale documents
Applicant cleared against shipping guarantee without production of original
Bill of Lading
Cash deposit offered as security by unknown customer to secure issue
shipping guarantee unlimited by amount
Beneficiary shipping inferior goods
Goods cleared.. importer disappears
Inferior goods / empty containers

Gradual increase in limit


Inadequate managerial checks on business premises
LC issued with unclear and ambiguous terms like all discrepancies are
acceptable
Fraud. Possible Risk Precautions
Check carefully authenticity of LC
Do not get drawn into issuing unworkable LCs
Do not pay against LCs with unclear terms
Goods inspection
Vessel check on sailing / route
Be suspicious for requests for quick payment etc.
Only handle if deal is min line with customers core business.
NRB rules and regulations regarding LC
Nepal Rastra Bank, being the central bank of the country has issued several
directives relating to Letters of Credit in order for a smooth operation of
Letter of Credit transactions and to put a check over the irregularities in
foreign exchange transactions. All banks in Nepal are bound to adhere to
these directives.
Some key NRB Guidelines:
Charges / Margin can be deducted from the applicants account only. Firms
other than the companies cannot enjoy L/C facility more than 20 times their
capital 10% additional margin must be collected for Reimbursement L/Cs at
the time of opening the L/C.
For sight L/Cs where value is more than $50000, a Business Credibility Report
of the Beneficiary is needed. BCR cannot be more than 1 year old. Words like
Credit Risk, high Credit Risk Rating not determined are not acceptable
in the BCR. Various banks can share BCR obtained by one bank. All import
letters of Credit shall compulsorily specify the border customer point from
which the goods will be brought into Nepal LCs opened at the request of
Nepalese importer can be sent to the foreign beneficiaries through
correspondent banks only LC Issuing Bank can accept shipping documents
under FCY LCs received through correspondent banks only. Payment cannot
be made directly to the beneficiary by way of drafts or otherwise under FCY
LCs.
Where LC transaction is being done for the first time with any firm, detail
information as to the firms standing, experience, address, phone no., fax as
well as confidentiality of the owners has to be obtained.
Export and Import transaction through LC between Nepal and Bhutan is
required to be done Indian currency only. Import of live Poultry i.e. fowls of

the species Gallus Domesticus, Ducks, Chicken, Geese, Turkeys and others;
meat and edible offal of the poultry; birds eggs; unprocessed/ unworked
products of birds origin is prohibited from all Asian countries except India,
Bangladesh, Sri Lanka and Bhutan
Terms and Conditions under Letters of Credit
Definitions of some of the terms used in L / C
a) Tenor
the length of time a draft is drawn to run before presentation for payment.
b) Tolerance
The level up to which the quantity and / or value of the LC may exceed or
reduce.
c) Delivery Terms
The terms stated in abbreviated from which clearly specify where the sellers
responsibility for the merchandise ends and where the buyers begins during
the course of transportation.
Some examples of delivery terms are FOB, CIF, CFR, FCA, Ex-works etc.
c)

Place of Loading

Place/Port from where the shipment is to be made.


d)

Place of Discharge

The place/port where the goods are to be unloaded.

f) Final destination
The place where goods are to be finally delivered.
g) The latest shipment date
The last date by which the shipment must be made.
h) Presentation period

Every credit which calls for a transport document should also stipulate a
specified period of time after the date of shipment within which the
documents must be presented for payment, acceptance or negotiation.
In order to avoid difficulties for the beneficiary, the applicant should pay
attention to the time which the beneficiary may need to collect the
documents from their issuers, to prepare the documents for presentation and
to presenter the documents under the credit, taking into account the time for
the delivery by mail to the bank.
i) Date of Expiry
The last date by which a beneficiary must present the documents at the
counters of a negotiating bank.
Under UCP 1993 Article 42, all credits must stipulate an expiry date. The
validity of the credit should be in accordance with the circumstances of the
transaction, i.e. time for manufacturing of goods and presentation of
documents.
j) Place of Expiry
This is the city and/ or the country where the documents have to be
presented by the expiry of the credit.
k) Partial Shipment
Shipment on more than one vessel or one means of conveyance (more than
one truck (lorry), ship, aircraft, etc.) is a partial shipment.
l) Transshipment
Transshipment means unloading and reloading from one vessel to another
vessel during the course of ocean carriage from the port of loading to the
port of discharge stipulated in the credit.
m) Bank Charges
To avoid difficulties it should be clearly defined in the contract between the
importer and the exporter and in the credit by whom the bank charges, e.g.
advising commission, postage, confirmation commission, handling
commission and so on, have to be borne.
n) Business Credibility Report (BCR):

A Report that shows the credibility position (e.g. current performance,


standing, profitability, conduct of account, etc.) of business entities usually
provided by internationally accredited Credit Rating agencies (e.g. Dun &
Bradstreet) and banks which have been dealing with such entities directly.
A BCR is required for Sight L/Cs where value is more than $50,000. in DC
operations, it is essential that the wording of the instrument itself is
expressed in clear and absolutely unambiguous terms. Both buyer and seller
as well as issuing and advising / confirming / negotiating banks must be able
to understand these terms and are also able to adhere to them.
Since a Letter of Credit intends to protect the interests of both buyer and
seller, LC staff should carefully check LC application and ensure the
following:Documents which beneficiary cannot obtain or provide are not called for
in the LC.
LC does not require a document to contain details which are not within
the issuers
Knowledge
LC dose not state conditions or events whose observance cannot be
ascertain from the
Face of the documents.
A certificate as to performance of such conditions or events can be asked in
the LC as a supportive document.
o) Letter of Credit Issuance:
Application

Should be correctly and completely filled.

Alternations should be authenticated.

Signatures should be verified.

If FOB CFR, Insurance should be obtained.

Check whether the goods fall under any kind of Government


restrictions or if the goods require any kind of Government / NRB / other
approvals.

Check if Beneficiary Credibility report is required.

Ensure that information mentioned in Performa Invoice tallies with the


LC Application.

Performa Invoice or Sales Contract/ Sales Indent/ Sales Confirmation

Performa Invoice should contain the following:

Name of the Product/Goods

Model/Brand

Quantity, Purchase Price Unit, Total Price

8 digit harmonic code

Country of Origin

Delivery Terms (INCOTERMS)


A Performa Invoice should not contain clauses like All discrepancies
acceptable
p) Bi. Bi. Ni. 3
Is a controlling mechanism developed by NRB. Bi. Bi. Ni. 3 needs to be
submitted to the bank by the customer while requesting FCY L/C issuance for
import from outside Nepal. For each convertible currency L/C opened, banks
need to submit Bi. Bi. Ni. 3 report to NRB.
Bi. Bi. Ni. 3 gives certain details of L/C. Filled in part by the applicant, filled in
part by the bank. NRB collects Bi. Bi Ni. 3 data from various banks and
submits them to Banijya Bivag (on Tuesdays & Thursdays) and Banijya Bivag
transmits the same to Royal Nepalese Consulate in Kolkotta. The list is
popularly known as RNC list.
For the goods to be released in Kolkotta Port, details of our L/C should be in
the RNC list.
q) Disbursement Sheet
A statement that reflects the credit facilities approved by the bank in the
name of a credit and utilization made by the client as of a particular date
indicating the request made by the client to use the particular approved line.
Must be prepared for both regular as well as clients should include all the
credit facilities/ limits approved by the bank in the favor of the customer
together with the customers outstanding position as of date and any
irregularities either in the financial status or the terms and conditions of the
requested LC should be mentioned in it.
For new customers, disbursement sheet should be raised showing the
amount of the requested LC along with irregularities if any.
r) Discrepancies
When the Issuing Bank receives the documents, the bank has to check them
against the LC conditions, to determine whether or not the requirement of LC
has been fulfilled.
If any of the documents do not satisfy the requirements of the LC or are not
consistent with each other, this inconsistency or deviation is termed as
Discrepancy.
All such discrepancies must be noted down after the examination of the
documents. A decision then should be made by the Issuing bank what action
is to taken. Depending on the circumstances, the documents may be
accepted, rejected or corrected.

Following are
documents:

few of

the commonly

observed

discrepancies

in

the

Credit expired
Late shipment
Claused Bill of Lading
Late presentation or presented after permitted time from date of issue of
shipping documents
Short shipment
Credit amount exceeded
Under-insured
Description of goods on invoice differing from that in the LC
BL, insurance documents, Bill of Exchange not endorsed correctly
Absence of documents called for in LC
Charter BL presented instead of Master BL
Insurance risks covered not being those specified in LC
Insurance risks specified in LC not covered
BL does not bear Shipped on Board stamp
BL does not mark freight pre-paid when sor required by the LC
Transshipment/ port shipment effected when prohibited by LC
CP 500 & 600 Compared:
Some changes / improvements offered by UCP 600 over UCP500:
Working of UCP500 changed into a plain, simple, precise and concise
language with inclusion of terms that are easy to comprehend. Less wordy
and better organized than its predecessors. Elimination of phrases like
reasonable care, reasonable time and on its face (except in article 14)
from the rules.
Introduction of separate articles 2 and 3 on Definitions and Interpretations
which contain the novel concept of honor along with the inclusion of certain
ISBP working in UCP. The definitive description of negotiation as purchase of
drafts and/ or documents. UCP has been recognized as rules. Credit (LC) is
recognized as irrevocable, so there is no place for revocable credit.
Addresses of applicant and beneficiary appearing in any stipulated document
need not be same as long as they are within the same country. It is banks
and not all parties that deal with documents and goods.
It is the issuing banks responsibility to honor drafts and / or documents
drawn under LCs, it is how clear that credit MUST NOT call for drafts drawn
on the applicant, and not just that they SHOULD NOT.

Clear cut definition of Nomination which means authorization by the issuing


bank to prepay or purchase a draft accepted or a deferred payment
undertaking incurred by that nominated bank.
Attempt has been made to establish a definite undertaking of issuing and
confirming banks to reimburse on maturity whether or not the nominated
bank prepaid or purchased its own acceptance or deferred payment
undertaking.
Removal of reasonable time, not to exceed 7 banking days for checking
documents and its replacement by 5 banking days.
Resolution of the problem of inconsistency in the data by stating that data
in a document need not be identical to, but must not conflict with data in
that document or any other stipulated document.
The option, while refusing documents on account of discrepancies, to hold
documents until receipt of wavier, provided such waiver is acceptable,
should free the issuing bank from many unwarranted obligations towards the
beneficiary (concerning unauthorized wavier and delivery of documents to
the applicant without prior authority of the beneficiary/ negotiating bank),
and/or the applicant forcing the issuing bank to take up documents upon the
applicants wavier of the discrepancies.
Strong language in the credits vs contracts article discourages applicant
from including contracts and Performa invoices as integral parts of credits.
Permitting presentation of originals where a credit calls for copies
The addition of character to the list of authorized signatures for a charter
party bill of lading.
The change in insurance documents is that risks must be covered at least
between the place of taking in charge or shipment and the place of discharge
or final destination specified in the credit, in addition to the existing
requirement that the cover must enter into effect not later than the date of
shipment.
Another overall improvement in UCP 600 is that the phrase unless otherwise
stipulated in the credit or words to that effect is not repeated countless
times. A new separate article defining what constitutes an original
documents transfers this necessary information from an ICC Decision to
where it belongs in the rules.
Collection:
Collection is an arrangement whereby the goods are shipped and the
relevant bill of exchange (draft) is drawn by the seller on the buyer, and/or

document(s) is sent to the sellers bank with clear instructions for collection
through one of its correspondent bank located in the domicile of the country.
As per Article 2 of ICC Uniforms Rules for Collections.
Collection means the handling by banks of documents (financial an
commercial) in accordance with instructions received, in order to:
i.
Obtain payment and / or acceptance,
ii.
Deliver documents against payment and / or against acceptance,
iii.
Deliver documents on other terms and conditions.
Where, Financial Documents have been defined as bills, of exchange,
promissory notes, cheques, or other similar instruments used fo obtaining
the payment of money and;
Commercial Documents are defined as invoices, transport documents,
documents of title or other similar documents, or any other documents
whatsoever, not being financial documents.
Clean Collection
As per URC522, Article 2(c), Clean Collection means collection of:
i.
ii.

Financial documents accompanied by commercial documents;


Commercial documents not accompanied by financial documents

Flow Chart under Documentary Collections

The seller ships the goods and obtains the shipping documents and
usually draws a Draft, either at sight or with a tenor of x no. of days, on the
buyer for the value of the goods shipped.

The seller submits the Draft(s) and /or document(s) to his bank which
acts as his agent (the Remitting Bank). The bank acknowledges that all
documents as noted by the seller are presented.

The sellers bank (the Remitting Bank) sends the Draft and other
documents along with a collection letter to a correspondent bank (the
Collecting Bank) usually located in the same city as the buyer,

Acting as an agent for the Remitting Bank, the Collecting Bank notifies
the buyer upon receipt of the Draft and documents, and

All the documents, and usually title to the goods, are released to the
buyer upon his payment of the amount specified or his acceptance of the
draft for payment at a specified future date.

ICC Uniform Rules for Collection (URC)


ICC Publication no. 522
In force from January 1, 1996
Applicable to all collections (clean and documentary) if such rules are
incorporated into the text of the collection instruction and are binding on all
parties there to clear definition of several terms such as clean collection,
documentary collection, documents, financial documents, commercial
documents, principal, remmiting bank, collecting bank, presenting bank,
drawee, presentation, etc.
Standard LC Transaction
Established of a LC always takes place at a bank. However, establishment of
LC is made only upon due acceptance & negotiations between the buyer &
seller. A standard process of C transaction can be outlined as below:
Flow chart of Standard LC Transaction

1 Negotiation between buyer & seller thus finalization of deal.


2. Buyer approaches its bank to open import LC.
3. Issuing bank issues the LC through its advising bank.
4. Advising bank informs and advises the LC to exporter.
5. Exporter prepares the goods and makes the shipment through the
carrier.
6. Exporter prepares the documents demanded in the credit & furnishes to
its Negotiating
bank.
7. Negotiating bank forwards the documents to issuing bank for payment.

8. Issuing bank obtains payment from importer & provides the documents
9. Importer obtains the goods shipped by exporter through carrier (or its
agent)
10. Issuing bank releases the payment to negotiating bank through
reimbursing bank.
11. Exporter receives payments through negotiating bank.

Procedures for opening an import letter of credit:


STEP 1.

Scrutiny of L/C Application Form:

Signature verification: Ensure/determine that L/C application form is


duly signed by authorized person(s) of the applicant firm.

Availability of Limit: See whether L/C limit is available for the request. If
the party does not enjoy L/C limit or the sanctioned limit is not sufficient for
the request, refer the matter to Credit Department.

Type of Applicant Firm: Is it Industry or Trading? Trading firm has more


restrictions.

Beneficiary Firm: Ensure that it is not the blacklisted. Refer Annex. 1 for
the current blacklist.

Description of Goods: Ensure


(i) The item is not restricted by NRB or HMG/N
(ii) The goods to be imported fall under the nature of activity of the
Concerned firm
(iii) Harmonic code given corresponds the goods mentioned
(iv)The goods is not capital item, for capital item special L/C limit
is required
(v) The goods to be imported as are per pro forma invoice submitted.
a.
Tenor: Whether it is Sight or Usance. If it is Usance, approval has to be
obtained from M.D. even if it is within sanctioned limit.
b.
Currency: Whether we can settle the payment for the currency or not.
c.
Country: Following care should be taken: (a) India: Import from India in
Convertible Foreign Currency: Circulars issued by Nepal Rastra Bank, Foreign
Exchange Department is to be referred to. (b) Bhutan: L/C can be established
in Indian Rupees Only. (c) Members of ACU (except India): Payment should be
effected through central banks of respective countries as per ACU Dollar
Payment Mechanism; (d) Countries Sanction by U.S.A.: Normally L/C should
not be established in those countries as payment can not be made to those
countries in USD.

d.
Shipment Terms: Shipment terms should be mentioned as per the
proforma invoice and documents (or wording in the documents) be required
accordingly.
e.
Date and Place of Expiry: Date of expiry should be normally latest date
of shipment plus period provided for presentation of documents.
f.
Document Details: Except of an inland L/C within Nepal, compulsory
documents are:
(1) Invoice
(2) Transport Document,
(3) Certificate of Origin,
(4) Insurance Policy (if insurance to be arranged by the supplier as per
the terms). In addition to these, packing list is usually asked for. Bills of
Export for Duty Free Goods are to be necessarily asked for if the goods are
being imported from India in convertible foreign currency.
g.
Special Terms & Conditions: Are they acceptable to the Bank? Are any
terms and condition contradictory to any other terms and conditions in the
application or proforma invoice? Are documents called for all the terms and
conditions required to be fulfilled by the Beneficiary or any other party?
h.
Confirmation Required? Confirmation terms to be checked and
mentioned in the L/C. We should have line of credit with the confirming bank
so as to enable them for adding confirmation. Normally T. T. reimbursement
authority is provided, if an L/C has to be confirmed. Confirming bank charges
some commission for the confirmation added by them and it should be
checked in the L/C opening form and mentioned in L/C whom the
confirmation charges are for to avoid future disputes.
i.
TT Reimbursement Facility: In case of prime/excellent customers TT
reimbursement facility may be provided only after the approval from the
competent authority and should me mentioned in the documentary credit.
Authorizations for reimbursement for the required amount to be provided to
the Nostro bank through swift or filling and dispatching their reimbursement
form.
j.
Enclosures:

Proforma Invoice indicating


(i) Description of goods,
(ii) Quantity,
(iii) Rate,
(iv) Total amount,
(v) Country of origin,
(vi) Harmonic code,
(vii) Shipment terms and duly signed by both buyer and seller.

Up-to-date Firm Registration Certificate and Income Tax Registration


Certificate (not required if the same has been obtained and kept in separate
file.)

Bi. Bi. Ni. Form No. 3 - three copies (not required for NRS. and IRS. &
L/Cs). In case of Branches, four copies are required.

Special License or Permission Letter if required


Insurance Policy (in case the insurance is to be covered by the
applicant) covering risks appropriately.
STEP 2.
Obtain Approval from Appropriate Authority for Opening of L/C.
Approval Sheet to be prepared as per annex xx.
STEP 3.
Opening the L/C:
a.
Entry in the L/C opening Register for obtaining a L/C No.
b.
Preparation of vouchers. Entries are:

Liabilities Entry:
Constituent Liabilities in L/C Open A/C (Currency) Dr.
L/C Open Account (Currency) Cr.

Margin , Commission and Telex/Postage Charge Entry:


Party Account Dr.
L/C Margin Account Cr.
Party Account Dr.
Commission L/C Cr.
Party Account Dr.
Charges Telex/Postage Cr.
Note: Commission & Charges to be recovered as per banks rules I.

STEP 4.
Preparation of LC message & communicating the same to the
'Advising Bank'. LC message should be prepared as per the instructions of
the applicant. While preparing the message, NRB directives & UCPDC should
be taken into consideration.
STEP 5.
Maintenance of LC file: LC file should prepared which should
contain all related documents like application form, proforma invoice, B.B.N.
Form 3, approval, office copy of LC message, red copy of voucher,
amendments, documents etc.
STEP 6.
Reporting to Concerned Authorities:

In case of LC in convertible foreign currency, 3 copies of B.B.N. form 3


should be obtained and reported to NRB on daily basis & concerned Customs
Office on weekly basis after properly filling the same. In case of branches,
one more copy should be obtained and reported to Head Office.

The details should also be entered & transmitted to NRB, I. T. Dept.,


through a special program/software in computer developed provided by NRB
on daily basis. This message is again transmitted by NRB to Calcutta Port via
Department of Customs..

If an L/C is opened by obtaining more than 50% cash margin, this


should be reported to NRB, Foreign Exchange Department within 7 days from
month end.


Branches should advise their respective head Office the particulars of
L/C opened having value of more than USD 50,000.00.
Amendment of an L/C:
Step 1: Scrutiny of Amendment Request:
a.
Signature Verification.
b.
Availability of Limit: If value of the L/C is to be enhanced, check
whether L/C limit is available for the request.
c.
Enclosures:

Proforma Invoice in case value/description of goods or terms is to be


changed.

Bi. Bi. Ni. Form No. 3 - three copies (not required for NRs. and IRs.
L/Cs). In case of Branches, four copies are required.

Special License or Permission Letter if required. For instance, if


Customs Entry Point is to be changed, a permission letter from HMG/N,
Department of Commerce is required.

Insurance Policy (in case the L/C is amended making the applicant
responsible for covering the insurance) covering risks appropriately.
Step 2: Approval from Appropriate Authority: In case of value enhancement
only. Branches should also obtain approval from head Office if the value to be
enhanced is more than 10% of original L/C value and is greater than USD
1,000.00.
STEP 3.

Amendment:

a.
Entry in the L/C opening Register for obtaining a L/C No.
b.
Preparation of vouchers. Entries are:

Liabilities Entry (If value is enhanced):


Constituent Liabilities in L/C Open A/C (Currency) Dr.
L/C Open Account (Currency) Cr.
Note: If value is to be reduced, reverse entry of above should be passed.

Margin , Commission and Telex/Postage Charge Entry:


Party Account Dr.
L/C Margin Account Cr.
Party Account Dr.
Commission L/C Cr.
Party Account Dr.
Charges Telex/Postage Cr.
STEP 4.
Preparation of amendment message & communicating the same
to the 'Advising Bank'. Amendment message should be prepared as per the
instructions of the applicant. While preparing the message, NRB directives &
UCPDC should be taken into consideration.

STEP 5.
Maintenance of LC file: LC file should be updated with all related
documents like amendment request, proforma invoice, B.B.N. Form 3,
approval, office copy of LC message, red copy of voucher etc.
STEP 6.
Reporting to Concerned Authorities:

Reporting of B.B.N. form 3 to NRB & Customs Office same as L/C


opening.

Reporting to NRB, I. T. Dept., through a special computer


program/software.
Settlement of Letters of Credit:
STEP 1.
Examination of documents received from negotiating bank:
Check Lists for examining the documents:
Documents received from the negotiating bank should be examined
thoroughly to determine:

They appear on their fact to comply with all the terms and conditions
of the letter of credit. Article 13 of UCPDC 500 should be referred for this
purpose.

They do not violate any of NRB guidelines.


STEP 2.
Communication of Discrepancy Message to the Negotiating Bank.
This should be done within 7 (seven) working days from the date of receipt of
documents as per UCPDC. Article 14 of UCPDC 500 should be referred for the
purpose. The discrepancy message should also be notified to the applicant. If
the applicant accepts the documents despite of discrepancies, the
documents can be retired and payment may be remitted to the negotiating
bank deducting the discrepancy fee.
STEP 3.
Entry of details of the documents in Import Bills (IB) Register and
intimation of the same to the concerned applicant.
STEP 4.
Retirement of Documents: When the applicant approaches the
bank for retirement of the documents,
1.
Request Foreign Exchange Department for a fresh exchange rate.
However if the transaction amount is less than USD 1,500.00, prevailing
common selling rate (CSR) should be applied. Discount on exchange rate of
USD/Euro up to 5 Paisa can be provided to prime customers, but only after
the receipt of the approval from the concerned authority.
2.
Preparation of vouchers, Entry & Verification. Entries are:

Liability Entry:
L/C Open Account (Currency) Dr.
Constituent Liabilities in L/C Open A/C (Currency) Cr.

Entry for Nostro Account (Document Value):


Party Account Dr.

Nostro Account Cr
Commission Account (discrepancy fee, if any) Cr.

Entry for Margin, Commission, Interest & Charges:


Party Account Dr.
2% L/C Margin Account Cr. (for industries)
10% L/C Margin Account Cr. (for trading unit)
L/C Margin Account Dr.
Party Account Cr. (Refund of L/C Margin retained)
Party Account Dr.
Commission L/C (Document Handling Charge) Cr.
Party Account Dr.
Interest Income L/C Cr (in case our nostro is debited before the settlement
date).
Party Account Dr.
Charges Swift/Telex/Courier Cr.

Entry for Disbursement of TR loan (if applicable):


Trust Receipt Loan Account Dr.
Party Account Cr
3.
Disbursement of Trust Receipt Loan (If applicable):
Approval from appropriate authority should obtain and separate TR Loan
account must be opened. The amount is normally rounded to lower
thousand. While opening account, one should be very careful about, TR loan
amount, rate of interest, due date etc. The TR loan details including TR Loan
No., date of disbursement, amount, validity period and interest rate should
be entered in TR Register also.
4.
Entry in Import Payment Certificate (IPC) Register:
Bills (documents) details should be entered in IPC register and allocate an
IPC number to the bills. (In case of NPR & INR LC, there is no need to do so.)
5.
Preparation of documents for Kolkata (in case of shipment by sea and
coming through Kolkata Port). Documents required:
(a) Duly endorsed Original Bill of Lading, (b) Invoice, (c) Packing List, (d)
Insurance Policy (copy). (e) Certificate of Origin, & (f) other documents
mentioned in L/C.
6.
Preparation of documents for Customs Office: Documents required:
(a) Invoice, (b) Transport Document, (c) Packing List, (d) Insurance Policy
(copy). (e) Certificate of Origin, (f) First two copies of Bi. Bi. Ni. Fa. No. 4
(required for LCs in convertible foreign currency to be prepared in printed
security form by the bank) & (g) other documents mentioned in L/C. All the
documents must be stamped and signed by authorized signatory of the bank
and enclosed in covering schedule. The envelope should be sealed with wax
and special stamp before delivering the same to the applicant.

D.
Reporting to Concerned Authorities:
a.
In case of LC in convertible foreign currency, third copy of B.B.N. form
4 should be reported to NRB, Foreign Exchange Department on daily basis.
b.
The details should also be entered & transmitted to NRB, I. T. Dept.,
through a special program in computer developed provided by NRB on daily
basis.
c.
If documents are received after 45 days from the date of transport
document, the same should be reported to NRB, Banking Operation
Department within 7 days from the month end.
E.
Payment of Documents under the LC to Negotiating Bank:
a.
As per the instruction of the negotiating bank, payment message
should be prepared and transmitted preferably by SWIFT or Telex. In case of
payment by demand draft, DD will me made accordingly completing the
banking procedure required if any .After getting the draft , a covering letter
should be prepared and sent to the negotiating bank enclosing the draft.
b.
The details should also be entered & transmitted to NRB, I. T. Dept.,
through a special program in computer developed provided by NRB.
Procedures for Copy Document Settlement:
Copy documents settlement means retirement of copy documents submitted
to bank by the concerned customer by recovering 100% document value &
margin (if any) as per NRB guidelines. However, payment can be remitted to
the negotiating bank (not the beneficiary) only on receipt of ORIGINAL
DOCUMENTS from them.
On receipt of copy documents for settlement/retirement, the documents
should be thoroughly examined to determine whether the documents appear
on their face to be in conformity with the terms & conditions of the letter of
credit. Bank should also obtain an undertaking from the customer that: (1)
they accept all the discrepancies in original documents; (2) accept prevailing
exchange rate; (3) indemnify the bank against all the consequences arising
due to copy document settlement etc.
Following entries should be passed while settling copy documents:

Entry for Document Value:


Party Account Dr.
L/C Margin (USD) Account Cr.
Commission Account (for discrepancy fee, if any) Cr.

Entry for Margin, Commission, Interest & Charges:


Party Account Dr.
2% L/C Margin Account Cr. (for industries), or
10% L/C Margin Account Cr. (for trading unit)
L/C Margin Account Dr.
Party Account Cr. (refund of margin retained while opening L/C)
Party Account Dr.
Commission L/C (Document Handling Charge) Cr.

Party Account Dr.


Interest Income L/C Cr (in case our nostro is debited before the settlement
date).

Entry for Disbursement of TR loan (if applicable):


Trust Receipt Loan Account Dr.
Party Account Cr
Liability entry, entry for nostro account and communication charge entry
should be passed after receiving the original documents. While passing
nostro entry, L/C Margin (USD) account would be debited instead of the
customer account. Exchange rate applied while settling copy documents is to
be treated as final.
Document retirement and reporting procedures are same as procedures for
'Settlement of Letter of Credit'. Only payment has to be effected on receipt
of original documents.
Procedures for settlement of Usance L/C
Documents received under Usance L/C should be handled in the same way
as other original documents received. For retirement of documents, customer
should accept the document and undertake to pay the document value on
maturity date. On the basis of the acceptance of customer, the documents
should be retired in same way as described in procedures for 'Settlement of
Letter of Credit (after passing the following entries:

Liability Reversal Entry:


L/C Open Account (Currency) Dr.
Constituent Liabilities in L/C Open A/C (Currency) Cr.

Entry for Booking into Acceptance (Document Value):


Customers Liability for Acceptance (Currency) Dr.
FC Liability for Acceptance (Currency) Cr.

An acceptance message also confirming the maturity date should be sent to


the document forwarding bank.
On maturity, payment must be effected to the negotiating/accepting bank
after passing following entries:

Entry for Reversing Acceptance Entry (Document Value):


FC Liability for Acceptance (Currency) Dr.
Customers Liability for Acceptance (Currency) Cr.

Entry for Nostro Account (Document Value):


Party Account Dr.

Nostro Account Cr
Commission Account (discrepancy fee, if any) Cr.

Entry for Margin, Commission, Interest & Charges:

L/C Margin Account Dr.


Party Account Cr. (Refund of L/C Margin retained)
Party Account Dr.
Interest Income L/C Cr (in case our nostro is debited before the settlement
date).
Party Account Dr.
Charges Swift/Telex/Courier Cr.

Entry for Margin, Commission, Interest & Charges:


Party Account Dr.
2% L/C Margin Account Cr. (for industries)
10% L/C Margin Account Cr. (for trading unit)
Party Account Dr.
Commission L/C (Acceptance Commission) Cr.
Commission L/C (Document Handling Charge) Cr.
Party Account Dr.
Charges Swift/Telex/Courier Cr. (for acceptance message)
A form called Bi.Bi.Ni.Fa. No. 4'Ka' should prepared for the purpose of
reporting to NRB, Foreign Exchange Department.
Procedures for booking into 'Devolvement of Bills under Import L/C (DBills)':
If a customer (applicant) does not settle the L/C within the expiry period for
remitting the payment as per the L/C terms or UCPDC and documents are in
order, payment to the negotiating bank should be remitted after obtaining
approval from appropriate authority for debiting an account called
'Devolvement of Bills under Import L/C'. The details should be recorded in a
register also. The transporter should be contacted for arrangement of
secured storage of the goods imported under the L/C. Depending on the
situation, necessary action should be initiated to take the custody of the
goods which may later be auctioned also, if necessary. Further L/Cs should
not be opened except the settlement of such dues.
Entries while remitting payment by booking into 'Devolvement of Bills under
Import L/C':

Liability Reversal Entry:


L/C Open Account (Currency) Dr.
Constituent Liabilities in L/C Open A/C (Currency) Cr.


Entry for Nostro Account, Margin, Commissions & Charges
Nostro Account (Currency) Cr.
2% L/C Margin Account Cr. (for industries)
10% L/C Margin Account Cr. (for trading unit)
Commission L/C (Docs. Handling Charge) Cr.
Interest Income L/C (If any) Cr.
Charges Swift/Telex/Courier Cr. (for Payment message)

etc:

L/C Margin Account Dr.


Party Account Dr. (By available amount, if any)
Devolvement of Bills under Import L/C Dr. (By Remaining Amount)

For Settlement of Dbills:


Party Account Dr.
Devolvement of Bills under Import L/C Cr.
Interest Income L/C Cr.

Post Settlement Follow-up & Reporting:


One copy of Bi.Bi.Ni. Form No. 4 should be received back by the bank within
90 days from the date of issue from concerned Customs Office. If the same is
not returned, a reminder should be sent to Customs Office & c.c. to Nepal
Rastra Bank & customer concerned also as reminder and reporting.
After receipt of the form, signature should be tallied with the specimen
signature received from the Customs Office.
LC margin retained at the time of retirement of documents can only be
refunded when:

A copy of Bi.Bi.Ni. Form No. 4 is received back from Customs Office and
signature verified;

Copy of Customs Declaration Form (Pragyapan Patra) & Customs


Receipt (duly verified with original) has been submitted.
NRB L/C Margin account should be reconciled with the statement received
from Nepal Rastra Bank on monthly basis. Any item not reconciled should be
taken care of immediately. Long pending item should be reported to
Management.
1.9) RESEARCH DESIGN:The research design is less vivid but more standpoints because the
chronological derived date has been mainly engaged for analysis. For the
conceptual framework and literature part more sensibly pragmatic books are
followed as for basic familiarity about this report. For the logical purpose,

some questions have been to the concerned personnel, who are measured as
primary data, secondary data embrace annual reports published by the
banks, financial testimonial of NRB, review material composed from different
concerned magazines, newspaper, library etc. such datas information has
been processed through various processes like auditing, tabulating and result
have been interpreted in the form of ratio percentage and diverse nature of
diagrams for clear view.
Basically, this research design is prepared for the student of Banking &
Insurance practical fieldwork report of BBA 8th semester. Research has been
done by the following ways:1.9.1) Research Process:Figure No:-2

This research rapidly develops the conceptual framework. For building up the
conceptual framework, the researcher notices hypothesis research question.
Mitigating the research question the researcher reviews correlated literature
on the basis and assembles the necessary data in sequence from the field.

After analyzing and interpretation of the data, some empirical observation is


done. It raises authentic preposition of the project. This formulated
preposition and supports to the framework.

The researcher analysis and research problem in order to justify the problem
sampling work. The researcher collects some data and interprets to make the
final report.

RESEARCH PROBLEM

The number of banks in Nepal is in the increasing trend every year. Although
there are huge numbers of LC transactions which has conveyed some
problems in opening Letter of Credit. There are various problems some are
presented below:a) LC deals with the document not with goods.
b) Chances if fraudulent are high.
c) The changing rules and regulations in the international market.
d) Lengthy clause may involve plenty amount of time.
e) Govern by USPDC 600 which might change at times.
1.9.3) DATA COLLECTION METHOD
Any figures and information presented numerically is called data. Data are
useful in every field. As far as out topics is concern, the required data has
been collected from following two sources which are being prescribed below:
Primary Data Collection: Primary data are those data collected
originally and from the field or direct personal contact. Data is collected
personally through face- to face interview.

Secondary data collection: secondary data are those data which has
been collected by internal and external sources.
Internal sources
External sources
a) Annual Report
b) Balance Sheet
c) Cash Flow Statement
d) Income Statement of Bank
by NRB

a) Various Books on Subject


b) Journal & Published articles
c) Internet
d) Various Bulletins Published

e) Website of Bank

e) Libraries

STATISTICAL TOOLS USED


Statistical tool is a mathematical process through which we can forecast
future by analyzing the primary and secondary data. This tool is also suitable
to minimize risk. The following are the statistical tools used in this research:a)
c)
d)

Simple Bar Diagram


b)
Multiple Bar Diagram
Trend Line
Pie Chart

OBJECTIVE OF THE STUDY


The main objectives of the fieldwork are being highlighted below:a)
To examine the official instructions of Nepal Rastra Bank in L/C
activities.
b) To gain the work experience of the field visit.
c) To access the contribution, sources and tackles.
d) To find out the process and problems of L/C opening.
e) To develop practical knowledge and skill in report writing.
f)
To get knowledge about Commercial Banks & specially about GBL.
NEED TO STUDY
Today knowledge is the biggest assets and valuable resource of mankind.
Without knowledge, we are handicapped in every share of our life.
Knowledge has been accumulated over the centuries which are the result of
the ever hanging social phenomena and the environment which surrounded
them. In this world; there are repositories of vast knowledge.
Knowledge can be acquired through various sources. However research
is the prime source of knowledge generation. Research opens new frontiers
of knowledge. It is through research that new evidence is discovered, old
evidence is recorded, new facts are gathered and new insights are brought to
light. Research thus provides broader and deeper understanding.
The student of BBA 8th semester needs this study to get the
knowledge about the related sector (i.e. Letter of Credit). Due to which we
can understand the sector, their condition, their position, their environment,

working style which helps to increase our mental abilities in the related field.
This helps in obtaining practical experience related with that topic.
As far as the study of the bank GBL is concerned; it is the first joint
venture bank having maximum Nepali shareholders, the need of this study is
to know about position of Letter of Credit in Nepal, the management system,
loan and credit policy of GBL.

ORGANIZATION OF STUDY:The study has been organized into the chapters as presented in the format to
cover partial fulfillment of BBA program.
The titles of the chapter are as follows:Chapter One
Chapter Two
Chapter Three

:
:

Introduction
Presentation & Analysis Data

Summary & Conclusion

The rationale behind this kind of study is to follow a simple research


methodology approach. The contests of each of the chapter of this study are
briefly mentioned here:
The Introduction deals about the meaning and definition of the bank,
its role, functions and objectives towards the nation and customer. This
chapter deals with the Letter of Credit of Global Bank Limited. The process,
rules, criteria, principle, its function and procedures are the major area of the
study. This chapter emphasizes on the objectives, need and organization of
study.
The presentation & Analysis of Data emphasizes on the performance of
Global Bank Limited with table & figure. The data shows the shareholding
pattern and other LC related items.
The last chapter Summary & Conclusion explains the whole report in briefly.
Technical know-how as well as the summary of the study is presented in this
chapter.
LIMITATION OF STUDY

The report on Letter of Credit has been prepared by the details study of
international or foreign trade especially for the partial fulfillment of the
sector area of Banking & Insurance course provided by the curriculum of
Purbanchal University for Bachelor of Business Administrative. The effort has
been taken to detect the true condition of international trade of the Banking
sector of Nepal which has certain limitations. Some of the limitation faced
during the preparation of this study is prescribed below:a)
b)
c)
d)
e)

Limited to Letter of Credit


Doesnt deals with other aspect of the bank as a whole.
Data based on secondary basis, probability of error is high.
Time Constraints.
Lack of proper knowledge of the related study in banking sector.

RESEARCH QUESTION
While preparing the report the main emphasis was given to the question
regarding the bank Global Bank Limited and the research topic Letter of
Credit. These questions played vital role in collecting data & make report in
accordance with my report objective. The related question as follows:a)
b)
c)
d)
e)
f)

What is letter of Credit (L/C)?


What is L/C policy of GBL used?
What are the objective, policy & strength of GBL?
What is the todays level of GBL is standing?
How the GBL is handling L/C program?
Major drawback of L/C