Dhiraj's Final Report

1
An internship report on Letter Of Credit

Prepared by: Dhiraj Shrestha Batch 2060-2064
Chapter I
Introduction

1.1. Definition of Bank
Bank accepts deposits and lends it to people who require money in the form of cash.
Therefore it deals with money.
-According to Crowther The bankers people to offer his own in exchange, thereby
create money.
- Sayers defined the bank as Ordinary banking business consists of changing cash for
bank deposit and bank deposit for cash; transferring bank deposit from one person or
corporation to another; giving bank deposits in exchange for bill of exchange,
government bond, the secured or unsecured promises of businessmen to repayment.
Bank should be differentiated from other financial institution as they cannot create
credit through they accept deposits. According to us Law, any institution offering
deposit to withdrawal on demand and making loans of a commercial or business nature
is a bank.
Therefore summarizing the above, banks are those financial institutions that offers the
widest range of financial services especially credit, saving and payments and perform
the widest range of financial functions of any business firm in the economy. This
multiplicity of bank services and functions had led to banks being labeled financial
supermarkets and to such familiar advertising slogans.
1

According to White Horace in last Bank is a manufacturer of credit and a
machine of facilitating exchange.
2

1
Shakespeare Vaidya: Banking Management
2
White Horace: Money And Banking
2
1.2 Background of fieldwork study
Financial institutions play an important role in accelerating development of the country.
These institutions mobilize savings & make investment in different enterprises of the
national economy that consequently provide opportunities and help developing the
society and country as a whole. Thus, the development of the commercial banks or
financial institutions has become one of the bases for measuring the level of economic
development of a nation.
Commercial banks can also play a vital role directing the economys development
overtime by financing the requirements of trade and industry in the country. They draw
the community's scattered savings into organized sector and allocate among the
different economic activities according to the priorities laid down by planning
authorities in the country.
In any economic development plan, capital occupies a position of strategic importance.
No economic development of sizeable magnitude is possible unless there is an adequate
degree of capital formation. A very important characteristic of an underdeveloped
economy is deficiency of capital formation that is the result of insufficient savings made
by the community. In the underdeveloped countries, not only is the capital stock
extremely small but also the current rate of capital formation is also very low. The
serious capital deficiency in underdeveloped countries is reflected in the small amount
of capital equipment per worker and in limited knowledge of training and of scientific
advancement. There are serious handicaps in economic development where the banks
can play a vital role. Therefore, the commercial banks are the purveyor of finance for
the whole economy of the country. Such commercial banks or financial institutions are
the custodian and distributor of liquid capital, which is the lifeblood of the commercial
and industrial activities.
In the overall development of the banking system in Nepal, the Tejarath Adda may be
regarded as the father of modern banking institutions and for a quite a long time it
tendered a good service to governments servants as well as to the general public. But
the concept of modern financial institutions in Nepal was introduced only after the
establishment of Nepal Bank Limited in 1937 under the Nepal Bank act 1936 during the
3
Prime Minister Juddha Samser Jung Bahadur Rana. Before the credit needs of the
people for commercial and other purpose were met mostly from the unorganized market
of the private moneylenders. Nepal Bank Limited as a modern banking help to fulfill
the demand and need of people and to remove all the inconveniences prevailing during
the past time.

1.3 History of Bank
There is no unanimity among the economist about the origin of the word Banking.
The term bank derives from the Latin Bancus which refers to the bench on which the
banker would keep his money & its records. Some persons trace its origin to the French
word Banque & Italian words Banca which means a bench for keeping, lending &
exchanging of money or coins in the market place by moneylenders & moneychangers.
The first bank called the Bank of Venice was established in Venice, Italy in 1157 to
finance the monarch in his warns. Following establishment of the bank were the Bank
of Barcelona (1401), Bank of Genoa (1401), Bank of Amsterdam (1609), Bank of
Hindustan (1770).
According to Alfred Marshal in Greece temples of Delphi & other safer places acted as
store house for the precious metal before the day of coinage, & private purpose at
interest, though they paid none themselves.
History tells that it was the merchant banker who first involved the system of banking.
The next stage was the goldsmith in the growth of banking. The business of goldsmith
was such that he had to take deposits such as bullion, money & ornaments for the
security from theft. This makes possible to goldsmiths to change something for taking
care of the money & bullion. On the other hand, on the evidence of receiving valuables,
he used to issue a receipts to the depositors, it because like a modern cheque, on a
medium of exchange & a means of payment.

4
1.4 Development of Banking System in Nepal
In the contest of Nepal like in other countries, the goldsmiths & landlords were the
ancient bankers. The Nepalese people were highly exploited by Sahu Mahajan by
charging higher interest rate, compound interest rate & even by manipulating the
principal amount.
In the 14
th
century King Jayasthiti Malla divided people into castes based on their
occupation in society. According to the division the Tankadhariclass was the one
responsible for dealing with money. So people used to borrow from Tankadhariat that
time. Only in 1989 B.S. was Taksar for scientific& systematic mint established but
there was no institutional transaction for lending & depositing. The introducing of
Tegarath Adda during the tenure of the Prifafame Minister Ronoddip Sing (1993B.S.)
was the first step towards the institutional development of banking in Nepal but it did
not work like the bank of today. It was just for government staff& was used to provide
loan against security of gold& silver for the general public.
The established of Udhyog Parishad (1993B.S.) proposed the company Act & Nepal
bank Act. Under the company act, Biratnagar Jute Mill was established. The first
commercial bank Nepal Bank Limited was established on 30
th
Kartik 1994B.S.under
the Nepal bank Acts started to perform proper banking activities. King Tribhuvan
inaugurated it.
In order to facilitate all part of the country with banking facilities & to develop
monetary policy as well as to have proper control over Commercial bank & Banking
sectors the Nepal Rastra Bank Act 2012, was formulated & Nepal Rastra Bank was
established on 14
th
Baishakh 2014B.S. under the act (2012). From 2016B.S. Nepal
Rastra Bank issued Nepali Currency & eliminated the duo monetary system (Nepali &
Indian currency). Likewise, Rastriya Banijya Bank under the full ownership of
government was established on 10
th
Magh 2022 B.S. as per Rastriya Banijya Bank act
2012.
In this way the banking field gradually developed. Nowadays bank have a rule to
promote equitable development so that for every two branches opened in town area, one
branch must be opened in a rural area.
5
1.5 Concept of Commercial Bank
In general Bank refers to commercial bank. Commercial banks are the heart of the
financial system. They hold deposits of many persons, government establishment &
business unit. They make fund available through their lending &investing activities to
borrowers, individuals, business firm, and government unit. In doing so they assist both
the flow of goods& services from the producers to consumers& the financial activities
of the government. They dispense the large portion of medium through which monetary
policy is affected. This shows consequential role in the smooth functioning of economy.
According to the America Institute of Banking definition Commercial bank is a
corporation which accepts demand deposit subject to check& makes short term loan to
business enterprise regarding of the scope of its other services.
3
In the Nepalese
Contest, the Nepal Commercial bank act 2031B.S. defines A commercial bank is one
which exchange money& deposit money; accepts deposits; grant loan& perform
commercial banking function.
4

Summarizing the above it can be known that commercial banks play the most important
role in Modern economic organization. Their business mainly consists of receiving
deposit, giving loan &financing the trade of a country. They provide short-term credit
i.e. lend money for short period. This is their special feature.

1.6 Introduction of Commercial Banks in Nepal

Before globalization and financial liberalization, in the mid 1980s, only two
commercial banks namely Nepal Bank Limited and Rastriya Banijya Bank were in
operation. The financial liberalization paves the way for the establishment of private
sector banks including the foreign joint ventures. As a result, as of now seventeen
commercial banks are in operation. Out of seventeen commercial banks, nine banks

3
Principle of Bank Operation, USA pp345
3
Commercial Bank Act 2031

6
were established in joint venture. However, at present there are six joint venture banks,
after withdrawal of foreign investment in three banks. Rastriya Banijya Bank is fully
owned by the HMG of Nepal, while in case of Nepal Bank Limited, HMG of Nepal
remains the signal largest shareholder. Remaining ten banks are fully owned by
Nepalese investors
The listed names of the commercial banks operating in the current Nepalese Economy
with their establishment dates and collation of head office are as follows:

Table1.1 : List of commercial Banks

S.No Name of the commercial bank Establishment
year (in B.S)
Head office
1 Nepal Bank Ltd 1994-07-30 Kathmandu
2 Rastriya Banijya Bank 2022-10-10 Kathmandu
3 NABIL Bank Ltd. (formally known as Nepal
Arab Bank Ltd)
2041-03-29 Kathmandu
4 Nepal Investment Bank Ltd.(formally known
as Nepal Indosuez Bank)
5 Standard Chartered Bank Ltd. (formally known
as Grindlays Bank Ltd.)
6 Himalayan Bank Ltd. 2049-10-05 Kathmandu
7 Nepal SBI Bank Ltd 2050-03-23 Kathmandu
8 Nepal Bangladesh Bank Ltd 2050-02-23 Kathmandu
9 Everest Bank Ltd 2051-07-01 Kathmandu
10 Bank of Kathmandu Ltd. 2051-11-28 Kathmandu
11 Nepal Credit and Commerce Bank Ltd
(formally known as Nepal Bank of Ceylon)
2053-06-28 Siddhartha
Nagar
12 ini bank Ltd 2055-04-01 Narayangadh
13 Nepal Industrial and Commercial Bank Ltd 2055-04-05 Biratnagar
14 Machhapuchhre Bank Ltd 2057 Pokhara
15 Kumari Bank Ltd 2057-12-21 Kathmandu
16 Laxmi Bank Ltd 2058-06-11 Birgunj
17 Siddhartha Bank Ltd 2058-06-12 Kathmandu

7
Nepals first commercial bank, the Nepal Bank Limited, was established in 1994 B.S.
the government owned 51 percent of the shares in the bank and controlled its operations
to a large extent. Nepal bank Limited has headquartered in Kathmandu and had
branches in other parts of the country.
Nepal Rastriya bank was created in 2013 B.S. as the central bank. Its function was to
supervise commercial banks and to guide the basic monetary policy of the nation. Its
major aims were to regulate the issues 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, thereby ensuring the existence of banking facilities; and maintain the
economic interest of the general public. NRB also was to oversee foreign exchange
rates and foreign exchange reserves.
The major objective of the commercial bank is to earn profit. For this purpose, they are
investing on different sectors of the economy. They collect the funds through the public
and create credit as per the rule. It aims at providing loans to industrial and commercial
sectors for the financial welfare of the citizens of Nepal.

1.7 Function of Commercial Bank
To accept deposits of persons and institutions under current account, saving
account and fixed account.
To grant loans against the security of property.
To purchase and sell bills.
To transfer money between places and persons.

8
1.8 Introduction of Kumari Bank Limited (General Profile)
Kumari Bank Limited, came into existence as part of the Nepal Rastra Banks
liberalization of the Nepalese Banking Industry by starting its banking operations from
Chaitra 21, 2057 B.S (April 03, 2001).KBL is credited to be the first private sector bank
in Nepal with the largest capital investment of Rs 500 millions. Kumari Bank Limited is
also the first National Level Bank managed by Nepali Management with highest capital
base. Out of the Bank s authorized capital of NPR 1 billion, 750M have been paid up
and of which 70 % is contributed from promoters and remaining from public.. At
present, the bank is running its operations from its head office situated at Putalisadak.
Kumari Bank Ltd has been providing wide - range of modern banking services through
8 points of representations located in various urban and semi urban part of the country,
5 outside and 3 inside the valley. The bank is pioneer in providing some of the latest /
lucrative banking services like E-Banking and SMS banking services in Nepal. The
bank always focus on building sound technology driven internal system to cater the
changing needs of the customers that enhance high comfort and value. The adoption of
modern Globus Software, developed by Temenos NV, Switzerland and arrangement of
centralized data base system enables customer to make highly secured transactions in
any branch regardless of having account with particular branch. Similarly the bank has
been providing 365 days banking facilities, extended banking hours till 7 PM in the
evening, utility bill payment services, inward and outward remittance services, and
various other banking services.

9
KBL took the initiative of establishing itself when the country was going through major
economic and financial crises. KBL stands in the market with a vision to be a world
class Nepalese Bank and to be a leading financial institution of the country. Its goal is to
create its own niche in the market and get recognition as the preferred organization
among its customers, shareholders, regulatory authorities and all its stakeholders.
Within 6 years of excellence in banking, the bank has been able to get recognition as an
innovative and fast growing institution striving to enhance customer value and
satisfaction by backing transparent business practice, professional management,
corporate governance and total quality management as the organizational mission.
So far KBL have been able to associate their customers with banking products like
internet banking and auto facilities which has helped them to meet their objectives of
adapting modern technologies and coming up with innovative banking products. The
sources of these achievements rely on their organizational values of good teamwork and
high professionalism. The bank has been established with the objectives of providing a
complete one stop banking solution backed by state-of-art and creating and creating
value to valued customers.
The key focus of the bank is always center on serving unfulfilled needs of all classes of
customers located in various parts of the country by offering modern and competitive
banking products and services in their door step. The bank always prioritizes the
priorities of the valued customers.

10
The Banks business philosophy is We Do It

Capital Structure:

Authorized Capital Rs. 1,000,000,000.00
Issued & Paid-Up Capital Rs. 750,000,000.00

Mission / Vision
Mission:

Provide world class service to our customers at a higher satisfaction level.
Practice total quality management and embrace good governance.
Optimize our assets to achieve sound business growth.

Vision:

We are customer oriented. Client is always our first priority.
Employees have direct input and control over work processes.
Employees are treated equitably, with respect and good faith.
We are transparent in our dealings and conduct

11
Values:
Teamwork
Driven
Initiative
Adaptable to changes
Professional
Always striving to improve quality of service.
Cost conscious
High ethical standards
Compliance

1.8.1 KBL Innovations:
1.8.1.2 Internet Banking:
The first ever commercial bank in the country to provide 'Internet Banking service" to
its customers. This service has allowed the bank to streamline the services it offers to
customers. It allows customers the flexibility to take control of banking activities via the
internet. Further it has enabled our core customers to transact
with us from any corner of the world and made their job simpler.

1.8.1.2 Mobile Banking:
We take the pride to be the first bank in the history of Nepal to start a mobile banking
service. The bank has facilitated this service to our customers with the sole objective of
12
being an additional channel with a crucial role of responding to their enquiries and
transactional information via SMS messaging.

1.8.1.3 Auto sweep:
A revolutionary concept for the first time in Nepal with a growth option to the
checking account holder of transferring their excess balance to Time/Call deposit
account.
1.8.2 Products And Services Offered:
1.8.2.1. Personal Banking:
1.8.2.1.1. Deposit:
A. Saving
B. Fixed
C. Liquid
D. Super Saving
i. Advantage plus Saving Account
ii. Saving Plus
1.8.2.1.2 Loan:
A. Vehicle
B. Home
C. Consumer Product Financing
D. Golf Loan
E. Education
F. Travel
13

1.8.2.1.3 Lockers:
1.8.2.1.4 Remittances:
A. Managers Cheque
B. Demand Draft
C. Telex Transfer
D. Travel Cheque
1.8.2.2. Business Banking:
1.8.2.2.1 Deposits:
A. Checking Account
B. Business Account
C. Time Deposits
D. Call Deposits
1.8.2.2.2 Loans:
A. Working Capital Financing
B. Term Loan
C. Short Term Loan
D. Hire Purchase
E. Bill Discounting
F. Loan Syndication

14
1.8.2.2.3 Foreign Trade:
A. Letter Of Credit
B. Forward Contract
C. Bank Guarantee
D. Cash Management
E. Clearing

1.8.2.2.4 Salary Management
1.8.2.2.5 Bulk Cash:
1.8.2.2.6 Remittance:
A. Managers Cheque
B. Demand Draft
C. Telex Transfer
D. Travel Cheque

1.8.2.3. Consumer Banking:
A. Evening Banking:
B. Weekend Banking

1.8.2.4. E- Banking:
A. Internet Banking
B. Mobile Banking
C. Utility Bill Payment
15

1.9 Introduction of Kumari Bank Limited, Branch Office, Biratnagar
Kumari Bank Limited, Branch office at Biratnagar was established on 30
th
November
2003. It is located on the rental building of Morang Merchant Association at Goswara
road, Biratnagar-9. The building is two stored, i.e. ground floor and first floor.
Operating department is situated on the ground floor and loan and marketing
department on the first floor. All together there are twelve staffs for the administration,
two for assistant helper and two guards who are performing there best for the success of
the bank. All the staffs are well qualified. The office of the bank is divided into three
sections i.e. front office, bills department and loan department.
As the bank is technologically which all the transaction are operated systematically. All
the works are computerized which helps to provide quality services to the customers.
The banks is facilitated with anywhere branch system to enable the customer to do their
transaction from any branch. The office of the bank is well decorated and the furniture
and fixtures are pleasing.

1.9.1. Present Business Area of Biratnagar KBL:
There are altogether 8 departments of KBL that cover the different business area of the
Kumari Bank. The concerned department looks after their own area of providing
services and their inter-organization operations of banks:
1. Customer Service Department (CSD): CSD exists for the well-being of
customers which is the main aim of every bank. It looks after the customer
problems and their suggestions. It provides the general services to the customers
like opening of an account, information disbursement, process of doing different
16
transactions, statement display, seeing and account balance, ATM card issue, e-
banking forms, cheque issue for all the account, etc.
2. Remittance Department: It is a term of transferring an amount of money
through banking channel. The responsibility of this department is to look the
remittance services of the bank. Providing the services of remittance, inside or
outside of the country has to be done by this department. Tasks that are
performed in remittance are as such, fax transfer, pay order, draft, swift, and
other services like Western Union Money Transfer, Express Money Transfer,
IME, etc. But the final work is done from the head office.
3. Cash Department: The function of this department is to maintain the proper
reserve of the cash in the bank to save from the illiquidity position of the bank.
Disbursement and collection of the cash is also done by this department.
4. Administration Department: This department looks general service such as
procurement, vehicle maintenance, repair/maintenance of office
machines/renovations, Stock maintenance, etc.
5. Credit Department: The responsibility of this department is to provide loans to
the private and deprived sectors. Before providing loans to borrowers it conducts
various studies and based on the study it decides whether to provide loan or not.
The information about their borrowers is obtained from marketing department.
6. Account Department: The function of this department is to maintain the whole
accounts of the bank on day-to-day basis. Proper maintain of the account of the
individual customers have to made so as to increase efficiency and decrease the
errors.
17
7. Loan Department: This department is solely responsible for providing loans
and advance to the customers. It takes the decision of sanctioning loans,
continue look after the use of loan by the customer so that the customer will be
able to put the loan on the productive sector; and can pay back the loan to the
bank.
8. Foreign Trade: It looks after the foreign trade activities of the bank. It includes
the activities like Letter of Credit, Forward Contract, Bank Guarantee, Cash
Management, Clearing.

1.9.2 The goals and objectives of Kumari Bank Limited
To facilitate the reliable, prompt and high standard of banking services adopting
the latest version banking technologies in compliance with the need and demand
of the market.
To develop life-long relationship with clients and achieve profitability through
customer oriented services and customer satisfaction.
To widespread its branch net work in different part of the countries covering at
least one branch on all developing regions facilitating large number of clients as
far as possible.
To support possible cooperation for the upliftment in the economic development
of the country.
To play an important role in facilitating Indo-Nepal trade this is growing rapidly
with the help of ICICI bank of India.
To provide a whole range of International Banking services to facilitate Nepals
18
trade and tourism.
To participate in the emerging industrial scenario in Nepal.
To provide meaningful support to develop the banking in Nepal by collaborating
with ADB/N and NIDC.

1.9.3 Future plan of Kumari Bank Limited
Kumari Bank aims to position itself as a unique bank with differentiated services
state of art infrastructure, international quality management backed by superior
international banking software. KBL aim to cover all the segments of the economy
with a special focus on the growing technologies, we commit to deliver a wide range
of services in the retail sector including Automated Teller machines, Debit / Card etc in
the upcoming days. KBL also aim to expand their services by providing ample
investment opportunities in foreign currency, Offshore Banking Services, Fund
management of Non Residential Nepalese and issuance of financial papers. Keeping in
view of the increasing demand for KBL services KBL will expand their branch
network at different part of the country.

1.9.4 SWOT Analysis of Kumari Bank Limited
SWOT means the strength, weakness, opportunities and threats. We know that to every
organization there is strength, weakness, opportunities and threats. Strength and
weakness are the internal factor to the organization where as opportunities and threats
are the external factor. The strength of one organization might be the weakness of other
organization and similarly for threats and opportunities differ according to their policy.
19
However the SWOT analyses of Kumari bank are as follows:

S- Strength
The strength of Kumari bank are as follows:
1) It has been able to capture a considerable share of business in Nepal.
2) It has a strong culture that makes the employees believe in hard work, building good
relation, proper communication and perfection in their respective department.
3) The employees of Kumari are highly motivated and self-driven. They are highly
competent and trained as well.
4) Kumari is highly customer driven. It has taken a proactive stance towards providing
customers with complete solution.
5) Kumari bank is one of the first bank in Nepal to bring the e-banking facilities for the
first time in Nepal.
6) Kumari have updated Modern Technology with the help of which if has been able to
provide various exclusive services, which are provided by only few other banks in
Nepal. These services include" Any Branch Banking Services" through which all
their branches are inter-connected.
7) Better schemes, strategies and facilities are provided by the bank to the customer that
makes it superior in the eyes of its customer. For e.g. a customer can open an account
in NPR 1000 which thus encourages even to poor people also to open an account.

8) Kumari has been constantly coming up with new services and product lines such as
ATM/ Debit Card facilities, Electricity Bill payment facility and Mobile bill payment
20
facility. The whole idea of focusing on customers with such intensity has given the
bank a formidable place in the market.
9) Quick service to the customer is one of the greatest strength of Kumari for e.g. if the
customer comes for loan or opening account, then the customer gets the facility
within a day after the whole procedure is completed.

W- Weakness:
The weaknesses of Kumari Bank Limited are as follows:
1) High cost of deposit.
2) High interest rate in lending as in comparison with the other bank.
3) It lacks the number of branches that it operates through out the country due to which
it could not reach to the customer.
4) KBL has very few banking experiences since it has only become 6 years till now.
5) KBL also faces lack of experience in staffs because of having more young staffs and
employees.
6) Though facilities of ATM and Debit card have been provided to customers, KBL has
not been able to provide specialized products and services as compare to other banks.
7) It also lacks the services like credit cards and online banking.

8) Due to the lack of specific service and facilities KBL has not been able to attract and
retain clients who have desire for such services and facilities.

21
O-Opportunities
KBL has various opportunities that can help, attract and retain many new clients. Listed
below are the opportunities for KBL:
1) First opportunity for the bank is that it has a large potential to capture new market by
taking advantage of weak competitors.
2) KBL can introduce new schemes targeting not only to general public but specifically
targeting the student segment business bachelor for and deprived sector and even can
introduce a scheme for house wifes by potentially segmenting the markets.
3) There is high opportunity of opening more branches and expand its network so that it
can satisfy the needs of its existing customers as well as potential ones.
4) KBL has also an opportunity to use more advanced technology so that it can satisfy
the needs and desires of its customers more easily. It can provide specialized product
and services to its clients with the help of advanced technologies.
5) Another opportunity for KBL is to add value to its current customers and attract more
customers by online banking, credit cards, insurance skills etc.
6) Urbanization is bringing more opportunities for increments in loan such home loan,
personal loan, educational loan etc. and also provides better facilities such as LC,
remittance, ABBS etc.
7) Since now Nepal has become a member of globalization so it should try to globalize
its banking services to the other country too.
8) New business prospects hydro power projects, tourism, forestry.

22
T-Threat
KBL currently faces the threats of:
1. Firstly, the threat of instable government policies and internal security crisis are
affecting the Nepalese economy negatively, which has the direct influence on the
financial sector.
2. The rules and regulation related to the banking industries are not stable which is also
one of the threats that the banking industry in Nepal is facing a lot.
3. Maoist insurgency has caused political instability in the country, which affects the
banking industry as a whole. Due to the Maoist insurgency only, commercial could
not diversify its activities through opening new branches in various areas of the
country.
4. New emerging commercials banks can also bring threat for existing commercial
banks due to the commendable level of enthusiasm and innovation.
6. Unable to judge and implement the new opportunities ion time by the existing banks
might get converted into threats in case if new emerging or the competing institutions
come with that opportunity.

23
CHAPTER TWO

INTRODUCTION TO THE STUDY ON LETTER OF CREDIT (L.C)

2.1 Introduction
This chapter deals with the specialization topic of the internship report, i.e. Letter of
credit that had been done on the Kumari Bank Limited. The conceptual reviews of the
letter of credit are dealt first, and then dealing are made on the types, parties involved,
procedures of letter of credit. Eventually, the objectives, limitations and mythology of
the study have been described.

2.2. Introduction of letter of credit
Goods can be bought and sold with payment of value in various forms like ready cash,
cash against delivery of goods, cash against documents, cash against acceptance of bills
of exchange, mail or telegraphic transfer, and the like. When however an international
sale transaction is contemplated, the seller does not desire to commit to sell or
manufacture the goods or having done so to give up control over them, unless he is
certain to be paid on fulfilling his terms of the contract. Similarly the buyer wants to
exchange the price only when he has the contracted goods or at least they are out of the
possession and control of the seller.
A conflict of interest thus arises. Difference in currency and applicable laws,
uncertainty of political situation in the countries of the buyer and seller and ignorance
about the other party merely aggravates the conflict. It is here that Letter of Credit
comes to the rescue of the parties and promotes international trade.

24
Letters of Credit are a time-tested instrument of international trade. They have been
used effectively to expand markets for goods and services and to facilitate a variety of
financial transactions, either as a method of payment or as a credit enhancement, within
as well as across the borders of sovereign states.
A Letter of Credit (LC) or a Documentary Letter of Credit (DC) is a conditional written
undertaking issued by a Bank (i.e. the DC Issuing Bank) at the request and in
accordance with the instruction of and for the account of the buyer (i.e. the Applicant)
to pay the Beneficiary at sight or a determinable future date(s) up to a stated sum of
money against presentation of stipulated drafts and/or documents provided that the
terms and conditions of the DC are complied with.
The Letter of Credit arrangement usually satisfies the sellers desire for cash and the
importers desire for credit. This financial instrument serves the interest of both parties
independently. The Letter of Credit offers a unique and universally used method of
achieving a commercially acceptable undertaking by providing for payment to be made
against complying documents that represent the goods and making possible the transfer
of title to those goods. The Letter of Credit is the safest and most convenient means of
paying for exports among all other methods of payments existing.

2.3 Features of Letter Of Credit
i) It is a conditional undertaking subject to compliance with stipulated terms and
conditions.
ii) It is an undertaking by the bank.
iii) It is an undertaking in favor of a party.
25
iv) It is an undertaking to make payment.
v) It is an undertaking given to the third party.

2.4. TYPES OF LETTERS OF CREDIT
Letters of Credit are classified into various types depending upon the nature and the
functions of the credit. Some of them are discussed below:

2.4.1. Revocable Letter of Credit
A Revocable Letter of Credit is the one which can be amended, revoked or cancelled
without the Beneficiarys consent and even without prior notice to the Beneficiary. A
revocable Letter of Credit gives maximum flexibility to the buyer and exposes the seller
to a certain degree of risk.
Since UCP does not support a revocable LC, the Bank will also discourage issuance of
such LCs. However if a customer approaches for a revocable LC with proper
justifications in support of the situation, such LC can be issued upon prior approval of
CEO.

2.4.2. Irrevocable Letter of Credit
An Irrevocable Letter of Credit is converse of Revocable Letter of Credit that can not be
amended, revoked or cancelled without the express consent of all the parties concerned
thereto, particularly that of the beneficiary. This Credit gives a definite undertaking that
Issuing Bank will effect payment provided that the beneficiary complies with the terms
and conditions stipulated in the credit.
26

2.4.3. Sight Letter of Credit
A Letter of Credit under which payment of the drafts and/or documents drawn under the
Letter of Credit is made immediately upon receipt of such drafts and/or documents is
called Sight Letter of Credit.

2.4.4. Time or Usance Letter of Credit
When a credit calls for drawing of drafts at a stated Usance (tenor) period requiring
acceptance and/or payment by the drawee at the end of such tenor or Usance period, its
known as Usance or Time Letter of Credit.

2.4.5. Deferred Payment Letter of Credit
A Deferred Payment Letter of Credit generally calls for the presentation of specified
documents and provides for payment to be made to the beneficiary a stipulated number
of days after presentation of such documents, or after the date of shipment or some
other stipulated date(s). A draft is usually not required under a Deferred Payment LC. In
this type of LC, banks will issue and deliver to the seller-beneficiary a deferred payment
letter of undertaking when compliant documents are tendered.

2.4.6. Confirmed Letter of Credit
A confirmed Letter of Credit is an irrevocable LC in which a second bank confirms the
authenticity of issuing bank with an undertaking to take on payment obligation in
addition to that of issuing bank.
27
A prior consent/approval has to be obtained from TD regarding LC advising bank and
the confirming bank to be used in a confirmed LC.

2.4.7. Unconfirmed Letter of Credit
A Letter of Credit which bears the obligation of the issuing bank only is known as
Unconfirmed Letter of Credit.

2.4.8. Revolving Letter of Credit
If an Applicant and a Beneficiary agree to ship goods on a continuing basis, it may be
more efficient and cost-effective if the Applicant establishes one Documentary Letter of
Credit for all shipments, rather than one Documentary Letter of Credit for each
shipment. A special Documentary Letter of Credit for handling multiple shipments,
renewable over an extended period of time, is a Revolving Letter of Credit.
A Revolving Letter of Credit may operate automatically or by amendment and can be
either cumulative or non-cumulative.
Example: An applicant expects to purchase approximately USD 120,000 in
merchandise from the same supplier during the next year. Each shipment is not to
exceed USD 10,000. Each USD 10,000 shipment covers the purchase of 500 units. The
applicant has the following options:

2.4.8.1. Automatic
The Applicant may arrange for a Letter of Credit for a one-year term in the amount say
USD 10,000 providing that the amount available under the Credit is reinstated for future
28
drawings in an aggregate amount not to exceed USD 120,000. If the Letter of Credit
reinstates the amount automatically upon each shipment, the total amount of the banks
exposure is USD 120,000.
Automatic Revolving LCs should be discouraged to the extent possible by the Bank.
However if a customer approaches for such LCs with proper justifications supporting
the situation, specific approval will be required from Credit prior to issuance of LC.

2.4.8.2 By Amendment
This procedure operates the same as above except that availability is reinstated only
upon specific authorization and amendment to the Letter of Credit. If the credit revolves
by amendment, the exposure is USD 10,000 upon issuance because the bank must
approve each amendment.
Given the above example, the applicant expects to purchase 500 units at a cost of USD
10,000 per month, for a one-year period (a total of 6,000 units for USD 120,000). The
transaction could be structured as follows:

2.4.8.3 Cumulative
The applicant may request an LC to permit the quantity and value of the goods not
shipped within any month to be carried forward and added to the quantity and value for
the following month. For example, if the beneficiary shipped only 400 units for USD
8,000 in January, when the credit revolved in February the beneficiary could ship 600
units for USD 12,000 (i.e. the February shipment of 500 units plus the 100 units not
29
shipped in January). The banks exposure is USD 120,000 because all shipments could
be deferred to the last month of the credit.
Cumulative Revolving LCs should be discouraged to the extent possible by the Bank.
However if a customer approaches for such LCs with proper justifications, specific
approval will be required from Credit prior to issuance of LC.

2.4.8.4 Non-Cumulative
An LC is a Non-Cumulative Revolving LC if it clearly specifies its non-cumulative
or if no indication as regards the type of revolving is specified in it. As such amounts
not utilized in any period may not be carried forward to succeeding periods.

2.4.9. Advance Payment Letter of Credit
This type of Letter of Credit contains a clause which permits the Beneficiary to receive
certain funds in advance of presenting commercial documents evidencing the shipment
of goods. When a Beneficiary must create special order merchandise for which there
may be no other buyer, a Beneficiary may instruct an Applicant to request that the
Issuing Bank issue an Advance Payment Letter of Credit.

2.4.10. Red Clause Letter of Credit
A Red Clause Letter of Credit is a Credit with a special condition incorporated into it
that enables the beneficiary to obtain pre-finance from a bank (as nominated by the
issuing bank) as an advance before presentation of documents.
30
The Red Clause in the credit enables the seller to draw up to 100% of the credit amount
as a pre-shipment finance to produce/manufacture or arrange merchandise as desired by
the buyer prior to shipments. The documents are tendered to the bank after shipment is
made. This clause is called Red Clause because historically, the term was usually
printed or typed in red ink.

2.4.11. Green Clause Letter of Credit
An LC which permits advance to the Beneficiary for the purpose of goods storage
facilities at the port in addition to the pre-shipment payment to the beneficiary before
presentation of the documents.

2.4.12. Transferable Letter of Credit
A Transferable Letter of Credit is an LC under which the beneficiary (first beneficiary)
has the right to give instructions to the bank which is authorized by the issuing bank to
effect payment, accept drafts or negotiate documents to make the credit available in
whole or in part to one or more second beneficiaries.

2.4.13. Back-to-Back Letter of Credit
On occasions a Beneficiary of a non-transferable LC seeks to use it as a basis for
requiring a bank to issue a second, parallel irrevocable LC in favor of the manufacturer
or supplier of those goods needed for shipment under first LC. In this case, the
Beneficiary of the first LC (generally a broker or a middleman) will become Applicant
of the second LC utilizing the first as a source of payment to the issuer of the second
31
LC. So an LC issued with the backing or strength of another LC is called Back-to-Back
Letter of Credit. The LC playing the source of payment to Back-to-Back LC is said to
be Master LC.
As per prevalent NRB regulations, Back-to-Back LCs can be issued for the import of
fabrics to be used as raw materials by Nepalese readymade garment industries provided
that such industry has received an irrevocable LC in its favor from an overseas buyer
for the purpose of importing readymade garments produced by such industry. Further
payment of raw material fabrics under a Back-to-Back LC can be made up to maximum
of 50% of FOB value of the readymade garments to be exported by such industry.

Fig. 2.1
Back To Back Letter Of Credit

Advising Bank in sellers
country/opening bank for
countervailing
Countervailing
credit
Opening Bank in
Buyers Country
Original buyer
Actual supplier
Intermediary
Commission agent
Sub-Contract Contract
32
2.4.14. Straight Letter of Credit
In case of a Straight LC, the undertaking of the Issuing Bank extends directly to the
named Beneficiary only. If a bank or other intermediary gives value to the Beneficiary
and forwards documents to the Issuing Bank, it does so at its own risk and acquires no
rights of its own against the Issuing Bank.
Nepalese banks are not allowed to issue Straight LCs abroad as per NRB directives.
All banks are required to route their abroad LCs abroad through their respective
correspondent banks only.

2.4.15. Stand-by Letter of Credit

The standby Credit is a Letter of Credit or similar arrangement, which represents an
obligation on the part of the Issuing Bank to the Beneficiary to:

i. Repay money borrowed by the Applicant, or advanced to or for the account of the
applicant;
ii. Make payment on account of any indebtedness undertaken by the Applicant; or
iii. Make payment on account of any default by the Applicant in the performance of an
obligation.

The Standby Letter of Credit is a guarantee declaration in the broadest sense. It is used
mainly in USA because American Banks are prevented by law from providing
guarantee to secure advances made to US nationals or companies resident abroad.

33
2.5. RULES AND REGULATIONS TO BE FOLLOWED WHILE HANDLING
LETTERS OF CREDIT
2.5.1. Uniform Customs and Practice for Documentary Credits (UCPDC)
In the course of time, a number of practices, expressions and terms have evolved
between banks dealing with Letters of Credit. To ensure uniformity of interpretation in
international trade, the International Chamber of Commerce (ICC), Paris, France have
worked out the Uniform Customs and Practice for Documentary Credits. These have
been revised and brought up to date several times in the past. They are now applied by
the Banks in nearly all countries. The version currently in use is the UCP500 (w.e.f.
January 1, 2004) which is to be replaced by the UCP600 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.
2.5.2. Directives/Circulars issued by Nepal Rastra Bank, Foreign Exchange
Management Department
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.

2.5.3. Laws, Acts and Specific Provisions Made by Government Ministries,
Departments, etc.
Some Government Ministries and Departments have imposed restrictions on import of
several items like health hazardous items (narcotic drugs, liquors containing more than
34
60% alcohol), arms and explosive items (other than licensed by the Government of
Nepal), Communication equipments (voice carriers), wireless, walkie-talkie and
equipment of similar features (other than licensed by the Government of Nepal), etc.
Similarly some items require prior approval, for example approval from Internal
Revenue Department is required for import of alcohol. Likewise prior approval is
required from Ministry of Commerce in respect of quantity for the import of Poppy
Seed whereas approval of Ministry of Population and Environment is a must for
old/used cloths, metal and plastic scraps and second hand equipments for non-industrial
imports.
Moreover approval from the Ministry of Finance, Department of Commerce is required
to change customs entry point in a Letter of Credit whereas Nepal Ready Garment
Association, Nepal Wool and Carpet Development Board, Ministry of Health,
Department of Drug Administration have also got some provisions for imports through
Letters of Credit.
Sometimes regulations are also promulgated by the Government through Nepal
Gazettes. At the same time some Acts (eg, Industrial Enterprise Act, Company Act, etc)
also need to be referred to for correct interpretations of terms included in
such regulations or directives.

2.5.5. Uniform Rules for Bank-to-Bank Reimbursements Under Documentary
Credits (URR)
The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits
(URR) are the rules that govern all the Reimbursements Authorizations that are issued
35
under Letters of Credit. The version currently in use is the URR, ICC Publication No.
525. They are binding on all parties thereto, unless otherwise expressly stated in the
Reimbursement Authorizations.

2.5.6. International Standard Banking Practice (ISBP)
International Standard Banking Practice (ISBP) is a set of guidelines documented to
draw down international standard banking practices for the examination of documents
presented under Letters of Credit. The practices set out in this publication are consistent
with the UCP. This document does not amend UCP; rather it explains how the practices
articulated in the UCP are to be applied by documentary practitioners. So all LC staffs
need to be familiar with the practices articulated in the ISBP for correct interpretation of
the articles drawn down in the UCP.

2.5.7. ICC Uniform Rules for Collection (URC)
With a view to maintaining uniformity in transactions relating to collections, ICC
have developed a set of rules that is called Uniform Rules for Collection (URC). The
version currently in force is the URC, 1995 Revision, ICC Publication No. 522. LC
staffs are required to be familiar with several provisions articulated in this publication
of ICC.

2.5.8. INCOTERMS
By the 1920s, commercial traders had developed a set of trade terms to describe their
rights and liabilities with regard to the sale and transport of goods. These trade terms
36
consisted of short abbreviations for lengthy contract provisions. Unfortunately, there
was no uniform interpretation of them in all countries, and therefore misunderstandings
often arose in cross-border transactions.
To improve this aspect of international trade and to make it as clear as possible, the ICC
developed INCOTERMS (International Commercial Terms), which is a set of uniform
rules for the interpretation of international commercial terms that exactly define the
costs, risks and obligations of both buyers and sellers in international transactions.
First published in 1936, these rules have been periodically revised to account for
changing modes of transport and documents delivery. The current version is Incoterms
2000 and has been preceded by six versions.
INCOTERMS can be quite useful, but their use has limitations. If you use them
incorrectly, your contract may be ambiguous, if not impossible to perform. So it is
important for LC staffs to understand the scope and purpose of INCOTERMS when
and why you might use them before you rely on them to define such important terms
as mode of delivery, customs clearance, transfer of risks, and passage of title during the
course of transit.

2.5.9. Other Internal and External Policies and Laws as they may come into picture
during the course of Letters of Credit Transactions
So it is the responsibility of all the staff working in LC department to ensure that they
are fairly aware of the changes in the abovementioned rules and regulations as well as
enactment or promulgation of any new laws that may have direct impact over Letters of
Credit transactions and that they are duly complied with at all times.
37
2.6. Parties involved in L.C
i. Applicant
A party who applies to the bank to open L.C for the benefit of the exporter. Applicant is
an importer, whether it can be an individual, a company, association or institution.

ii.Beneficiary
Beneficiary is a seller or exporter of merchandize for whom the letter of credit is issued.
He requests the importer to benefit him from letter of credit facility that means to give
him a bank guarantee by opening letter of credit.

iii.Issuing Bank
It is the importers bank that opens letter of credit in the request of the importer or
applicant.

iv.Advising Bank
The responsibility of Advising Bank is to authenticate the L.C and any amendments
thereto and advice the same to the beneficiary within reasonable timeframe. Advising
bank does not have other liability other than establishing authenticity to the beneficiary.
However, if the authenticity could not be established, they are responsible to intimate
this duty to the beneficiary. Advising bank may be the negotiating bank also.

38
v. Confirming Bank
The confirming bank will have the same liability as that of the issuing bank towards the
negotiating bank or the beneficiary if the issuing bank fails to discharge their obligation
towards them. However, confirming bank is not liable against the unconfirmed
amendments. The confirming bank holds the right to claim the issuing bank for any
values as per the L.C terms and any unrecovered charges.

vi.Negotiating Bank
If the beneficiary presents the documents to a bank for negotiation, the bank
authorized to negotiate in the credit negotiates the documents fulfilling all the terms, the
bank got right to claim the payment from the issuing bank.

vii.Reimbursement Bank
The reimbursement bank act on the instructions from the issuing bank. Once authorized
to reimburse, they can honor the claims received from the claiming bank. Once the
claim is honored, they will have a good claim on the issuing banks instructions in this
regard. In such case, the issuing bank will be responsible to pay the claiming bank the
claimed amount as per the L.C terms along with the interest, for the delayed period, if
any.

2.7. Benefits of Letter of Credit
To the Beneficiaries:
They will have a relief of payment collection, as the payment will be available
39
with their bank.
They will get the financial assistance.
Exchange risk is covered.
They will get the immediate payment.
They have a guarantee of Payment after they ship out the goods as per the terms
agreed with the buyers as per the L.C and present the documents to the bank.

To the Applicant:
They do not have to make the immediate payment.
Exchange risk is coved.
They are assured that their goods are delivered at the fight time.
They can get the delivery of the goods after they make payment to their bank.
They can first check the documents to ensure that the goods are exactly of the
same specifications as per their agreements or not and then only pay the amount.
They do not have to pay the amount of the goods directly to the exporter they
can just pay to the bank and the bank would pay to the beneficiary.

2.8. Procedure in Letter of Credit transaction
The movement of documents, money and goods between beneficiary and importer are
shown in the figure 2.2. This makes clear to understand about the process involved in
the L.C

40

The different steps involved in the letter of credit are enumerated as under:
1. Contract between the buyer and seller
2. Applying for the letter of credit with the bank
3. Advising the documents to the beneficiary
4. Scrutiny of the documents
5. Payment of the goods

Step 1: Contract between the buyer and the seller
When the transaction takes place between two countries, then the trade is said to be
foreign trade. The buyer of a country orders merchandise from another country. The
41
seller accepts the order. But the seller wants to obtain the guarantee for dispatching the
goods. Therefore, the parties undergo contract directly or through some mediator. The
contracts terms and condition should be within the legal framework or guidelines of
central bank of the concerned country.

Step 2: Applying for opening letter of credit with the bank
After the contract between the buyer and seller, the buyer approaches the bank for the
issue of letter of credit to importer merchandise to the benefit of the seller. The
applicant must make an application before a letter of credit is actually issued. The buyer
fills up the form and submits the application form along with other documents. The
bank check all the documents and ensure whether it comply with the terms and
conditions. After checking all the documents and ensuring the creditworthiness of the
applicant, the bank accepts the application. After the acceptance of the application, a
contractual relation between the application and the bank issuing the credit is
established. The agreement creates clear obligation undertaken by the applicant towards
the bank. It also contains the details for the payment made under the credit.

These processes for applying letter of credit are discussed below. These processes are
also summarized in the figure no.2.3.

42

Figure No.2.3. The process involved for applying the letter of credit

Application form:
KBL has its own prescribed form of application that should be duly filled by the party.
The important items that should be mentioned on the application form of letter of credit
are:
1. L.C number, date of issue and L.C amount.
A buyer approached the bank
The buyer fills up the application form
Submit the application form along with the
other documents
Application Checking
Creditworthiness of the applicant are assessed
Acceptance of the application
A buyer approached the bank A buyer approached the bank
43
2. Details of the applicant firm name and address
3. Name and address of the beneficiary
4. Name and address of advising, confirming, negotiating and reimbursing banks,
if any
5. Details of item, quality, price and total amount of the items to be imported
6. Latest shipment date and latest negotiation date
7. Declaration custom point
8. Payment procedure sight or usance or deferred
9. Means of transport
10. L.C should contain price of the items, insurance, price term, packing and weight
list, certificate of origin, etc
11. Margin, security deposit and commission.

Applicant forms not only give the bank legal protection through the agreement
which is printed on the bank but also give customer guidance on the points which
usually need to be included in a credit.

Submitting the other documents
Along with the application form, the customer shoukd also provide the following
documents:
1. Pro-forma invoice or contract paper:
A pro forma invoice is provided by the seller prior to the shipment of
merchandise, informing the buyer of the kinds and quantities of goods to sent,
44
their value, and important specifications including weight and size. Pro-forma
invoice is a form of quotation by the seller to potential buyer.
It contains:
Name of the buyer and seller
Name , brand and model of the merchandise
Unit price
Quantity
Harmonic code number
International Commercial term, the terms of sales like freight charge,
insurance, etc
Country of origin certificate ( of goods)
The buyer requires a pro-forma invoice for his record purpose since this forms
the basis of the Trade Association.
2. Income tax registration certificate
3. Firms or companys registration certificate
4. Citizenship certificate of authorized person
5. B.B.N. Form No. 3 ( in case of convertible foreign exchange L.C)

Checking the content of documents
Receiving documents is not sufficient. The content of documents should also be
thoroughly checked. Here are furnished contents of documents to be reviewed while
checking L.C application.

45
1. Is the application in the approves format?
2. Are all the mandatory terms filled up?
3. Are all the additions and alterations duly authorized?
4. Does the signature verify?
5. Are the documents to be called marked clearly?
6. Is the firm duly registered under the concerned government agency?
7. Is the registration certificate renewed from time to time?
8. Does the application need license?
9. Does the pro forma invoice indicate suppliers name, country of origin,
description of goods, quantity, unit price and harmonic code no. ?
10. Is the board resolution precise in respect of authority?
11. Is the board resolution duly attested?

Checklist for import from India against convertible foreign exchange
1. Is the applicant an industrial unit?
2. Does merchandise correspond with eligible listed items?
3. Does it match with harmonic code no. of the listed items?
4. Does the pro forma invoice indicate that beneficiary is registered as
manufacturing company in India?

Checklist for import from India against convertible foreign exchange by Readymade
Garments Industries.
1. Have you received recommendation from Garment Association of Nepal
46
(GAN)?
2. Does pro forma invoice indicate import-export (i.e. IE code) of export?

Letter of credit, Usance L.C
1. Is the applicant an industrial unit?
2. Is it raw material or machineries?

Terms and conditions of letter of credit
Letter of credit is a conditional undertaking of payment being subject to compliance of
the terms and conditions of the credit. Primarily, the agreement between buyer and
seller is the terms and conditions of L.C. In order to place appropriate terms and
conditions, the buyer should refer the agreement and instruct the bank accordingly. An
L.C operative instructions should incorporate widely acceptable terms that are defined
by various International Chamber of Commerce (ICCI) rules. Besides, L.C opening
bank may also incorporate terms and conditions representing central banks directives
as well as its own policy.
Some of the essential terms and conditions of L.C are presented here under

a. Delivery terms/ credit terms
Representing and expressing entire sales contract Delivery of Credit Terms stand in
abbreviated form. For example, CIF, CFR (C & F), C & I, FOB, EX-WORKS etc. these
are the terms that represent specific obligation of buyer and seller while moving goods
47
from one place to another. These terms are defined under INCOTERMS 1990 and
subsequent revision of 2000.

b. Credit available with
Letter of credit should categorically mention the terms that suggest availability of the
credit in the beneficiarys country. Normally, freely negotiable credit is available with
any bank in the beneficiarys country. UCPDC article no. 42 (a) states that place for
presentation of document should be mentioned in all credits.

c. Available by
In accordance to UCPDC article no. 10 and L.C should indicate whether it is available
by sight payment or by negotiation. This term is very important as it shows type of
trade, defines payment method and can provide credit to seller. Without such indication,
neither L.C is issued nor accepted.

d. Partial shipment
L.C should mention whether partial shipment is allowed or not. In the absence of such
indication it is deemed to be shipment is allowed. Partial shipment clause is based on
beneficiarys ability to supply goods. Applicant may have to borne additional cost of
partial shipment.

48
e. Transshipment
Transshipment implies transfer of consignment from a means of transportation to
another during the course of transportation. Transportation is the need of geographical
variety. However, breakable, perishable and liquid consignments are normally not
allowed for transportation.

f. Latest shipment date/ earlier shipment date
Applicant can protect himself against possible loss business by the user of L.C Seasonal
goods are tome sensitive. Goods arrived after the appropriate season may become
wastage. Restriction I shipment date allows the beneficiary to work in time-bound
effort. Restriction may either be in earlier date or latest date of shipment. Defaulting
beneficiary cannot pass on the payment obligation to the applicant.

g. L.C Expiry date/ last negotiation date
L.C transaction is the buyers agreement to make payment to seller through his bank
provided that the seller surrenders the documents of title of goods. The documents that
are called for the presentation should be handed over to the applicant through the
issuing bank before the arrival of consignment at port. Consignment lying at port
waiting for clearance is an additional cost burden. Buyer, therefore, protects its position
by fixing a expiry date or negotiation date. Expiry date is the time limit for seller within
documents should be surrendered.

49
h. Document presentation period
Document presentation period always corresponds with the L.C described that
document to be presented within days but within the validity of credit. The period
for presentation of documents is allowed looking into gap between shipment date and
L.C expiry date. This is the clause representing surrender of documents which ensures
receiving of documents by the applicant in time.

i. Allowance in credit amount, quality, unit price
Unless otherwise indicated in L.C, allowance in amount, quality and unit price upto
10% is permitted. However, it is suggested to indicate allowance of tolerance in the L.C
itself.

2.9. Opening of Letter of Credit
From the banks point of view, L.C opening is a function of creating liability on behalf
of the client because the clients default, in whatsoever manner, may not excuse the
bank from its binding obligation of payment. While opening L.C bank must ensure
creditability of the customer. Bank examines whether the importer is enjoying the credit
facilities with other banks, if found, it ascertain the reasons for his approaching to the
bank for opening letter of credit and also takes further steps to make reference to his
existence bankers with whom he is enjoying credit facilities. It is suggested that proper
assessment, in terms of states, profitability, net means, track record etc. has to be carried
out.
50
Especially, L.C is the transaction of foreign exchange defection possibility is high.
Therefore, various directives are associated in this transaction. The directives related to
opening of L.C are the most important because it opens door for possible deflection.
Therefore, the L.C opening bank should comply all the directives. In case of doubt,
circulars issued by NRB may be referred.
L.C opening and amendment request must be scrutinized on the basis is:
a. Banks internal policy
b. Regulatory aspects (NRB Directives)
c. International practices (i.e. application of various guiding rules)
When the issuing bank is satisfied, then the applicant is approves for the letter of credit.
After the acceptance of application, a contractual relation between the customer and the
bank issuing the credit is established. The agreement create clear obligation undertaken
by the customer towards the bank. It also contains details for the payment made under
the credit.
Credit is issued on the bank standard format in four copies. First copy for beneficiary,
second for the advising bank, third copy for the office record and fourth for the
customer.

Step 3: Advising the document to the beneficiary
L.C is advised to the beneficiary through the correspondence bank where the
beneficiary is established. The correspondent bank informs the beneficiary or the
agency bank about the issuance of letter of credit. The media for the transit of L.C
document can be any one of the following form:
51
i. Courier
ii. Telex
iii. SWIFT

Generally KBL use either courier or SWIFT medium to transmit the document of L.C to
the correspondent bank.

Step 4: Dispatching the goods and the documents
Beneficiary, within the terms and conditions of letter of credit, dispatch the items and
handover all the documents to the correspondent bank. The documents that must be
prepared by the beneficiary are as:

i. Invoice bills:
The main use of invoice bills is to check whether the proper merchandise is shipped at
an agreed price. Further, the form and the contents of the invoice enable the actual
goods to be checked against the underlying commercial contract.

ii. Bill of lading:
A bill of lading is a formal receipt given by the ship owners or their authorized agents
stating that the goods mentioned therein, quality, description etc., are shipped to a
specified date and vessel and are delivered to the person mentioned therein or to his
order after payment of all dues of the shipping company.
There are three main functions of bill of exchange:
52
a. It is evidence of contract of affreightment.
b. It is a receipt for the goods.
c. It is a document of title of goods.

iii.Packing and weight list:
It is document certifying the weight of the goods. It is given by the exporter, which may
at times be countersigned by an independence agency. Generally, it gives the weight of
each article or bunch of articles. This certificate is generally required in case of bulk
goods like iron ore, food items, etc.

iv.Certificate of origin:
This certifies the country where the goods have been produced or growth of goods, is
generally issued by a Chamber of commerce. In some countries the customs law
requires to be produced before clearance of goods and assessment of duty. The
implications of such a specifications in the law may be economic or political. Country
of origin of goods to be stated in the certificate of origin.

v.Insurance document:
This document specifies the transit insurance is to be covered by the beneficiary.

iv. Certificate of analysis and quality
This report indicates the inner composition, quality, technical composition and intricate
nature of the goods broadly described in the invoice. In certain types of goods like
53
chemical, food articles, clothes etc., this certificate is generally called for so that the
good exported conform to the desired quality /standard/analysis.

v. Bill of exchange:
A bill of exchange is also referred to as draft of hundi. Nil of exchange performs the
following five basic functions:
a. Means of collecting payment.
b. Means for demanding payment.
c. Means for extending credit.
d. It is promise of payment.
e. It is receipt for payment.
Bill of exchange can be Sight Bill of Exchange or Usance Bill of Exchange.
Terms and conditions necessary for preparing documents by the beneficiary are:
a. Documents bearing the data before the L.C are not allowed.
b. All charges inside and outside Nepal are on the account of beneficiary/applicant
depends upon the agreement or the contract.
c. Negotiating bank should mail all documents to KBL through courier upon
negotiation.
d. KBLs L.C number and date to be mentioned in all documents required under
this L.C

54
Step 5: Scrutiny of Documents
The correspondent bank advises the document from the beneficiary. Then the
correspondent bank scrutinizes the documents. After scrutinizing the documents,
correspondent bank endorses Bills of Exchange in the name of Issuing bank and
forward all the documents including payment instruction to the issuing bank. The same
document is thoroughly scrutinized by the issuing bank to ascertain whether or not it is
compliance with credit. In case of any discrepancies, correspondent bank and customer
are informed immediately within 7days following the day of receipt of the documents
pointing out the discrepancies. If the information is not given to the negotiating bank it
will be assumed that the issuing bank has accepted the document.
Scrutiny of document presented under Letter of Credit is a crucial and sensitive function
of bank in entire credit operations, particularly for the issuing bank and the confirming
bank. Decision to make payment or not against the documents presented will depend
solely on the result of this scrutiny. Hence, the person scrutinizing the documents must
be vigilant and give his undivided attention to the matter. He should have complete and
comprehensive information and knowledge of the conditions of the relative credit,
provisions of UCPDC and their implications.
Before scrutiny of individuals documents presented, an overall scrutiny of documents
with reference to the general conditions of the credit and the basis necessities of
documents should be verified. A person responsible should check whether:
- All the documents are submitted in the requisite of copied or not.
- Documents are issued by the persons specified or required to issue or not.
- Documents, where necessary and stipulated, are dated or not. If they are dated,
55
the dates should be consistent with the terms of L.C or otherwise.
- Documents, where necessary and stipulated, are manually signed.
- Material alterations or additions on documents are properly authenticated.
- The requisite and stipulated documents are originals or marked as originals and
appear to be signed.
- All documents, on the face appear to be in compliance with the terms and
conditions of the credit.
- Shipment is effected within the time stipulation or not. It is an installment credit
whether the requisite quality is shipped within the stipulated schedule.
- Any partial shipment is effected. If so whether it was permissible under L.C.
- Documents are presented at the place of expiry stipulated
- Documents are presented within the expiry date (validity) of the credit or not. If
documents are presented to the nominated bank on an extended validity dare in
terms of provisions of Art. 44 (a) of UCPDC, the nominated bank should
confirm to that effect as per provision of Art. 44 (c).
- Documents are presented within the time stipulations indicated in the L.C or the
provisions of UCPDC Art. 42 and 43.

Apart from the general scrutiny of the documents, individual documents like Bills of
Exchange, Invoice and Bill of Lading must also be checked carefully.

56
Bill of Exchange/ Draft
- It should bear a date
- It should be drawn by beneficiary or any other person authorized in this regard.
- It should be signed by the drawer.
- It should be drawn by the applicant or any other specified drawee.
- It should be drawn for the specific amount and should be consistent with the
terms of the drawing permitted in the credit.
- It should be drawn payable to a specified payee and proper endorsed.
- It should be payable at tenor specified in the credit.
- Where stipulated, it must indicate that it is drawn under the credit of the bank
concerned.
- It should, unless otherwise specified, be drawn in the same currency as invoice
or L.C.
Invoice:
- The beneficiary makes it out to other authorized person as stipulated in the L.C.
- It should unless otherwise specified be made out in the name of the applicant.
- It need not be signed.
- Description of goods specified must correspond with the description in the L.C.
- Quantity of goods, unit prices, delivery terms etc. must correspondent with the
L.C terms and be consistent with other relative documents.
- It should be drawn in the same currency as L.C unless otherwise specified.
- It should not include any charges, which are not permitted by L.C as per
stipulations of L.C; the gross value of invoice should not exceed the credit
57
amount.
- It should show deduction towards advance payment made, agency commission
payable etc. as applicable.
- Arithmetic calculation should be accurate.
- Final amount of invoice or the percentage of drawings should preferably
correspond with the draft amount.
- If partial shipments are effected, amount of drawings should preferably
correspond to proportionate quantities shipped (where only quantity is
mentioned without unit prices etc.)
- Invoice being a document of contents, the details stated therein must
correspond or be consistent with details appearing on all other documents.
- It must certify to facts like origin of goods etc. as stipulated in the L.C
- If invoice is issued for an amount in excess of the amount permitted by credit
(where not specifically prohibited by terms of L.C (when not specifically
prohibited by terms of L.C) as per Act. 37 (b) of UCPDC the drawings should
not exceed amount of credit.
Bill of Lading
- Be issued by name carrier of his agent.
- Bear a distinct number.
- Indicate the place of issuance.
- Indicate the date of issuance.
- Be signed by named carrier or his agent.
- Indicate the name of consignor.
58
- Indicate the name of consignee.
- Indicate brief description of goods being carried.
- Indicate port of Lading or taking in charge (in case of Marine Bill of Lading, it
must show or indicate a definite port of loading and in other cases it can be
shown as an intended port).
- Be presented in full set of original (full set comprises two or more originals
issued to consignor of goods, all of which are marked as ORIGINALS and
signed. The number of copies of originals issued is indicated on the Bill of
Lading itself)
- Meet all other stipulations of the credit.
- Must indicate whether Freight Prepaid or Freight Payable

Step 6: Payment of the goods
The correspondent bank makes the payment as per terms and conditions of to the
beneficiary. Since, Nepal is a landlocked country whose only access to the sea is via
India, relations with India are critical to business prospects. Thus, goods in Nepal arrive
through the Calcutta port. Then after the payment of the goods by the applicant to the
issuing bank, the bank transfers the ownership of the goods to the applicant. Applicant,
then, authorizes any clearing agents at Calcutta to clear goods and forward it to custom
office. Then applicant releases goods from custom office through two copies of BBN
No. 4 that is issued and duly signed and stamped by the bank.
59
In the case of trading firms at the retirement of documents from the Indian port, 10%
security will be obtained which will be issued in the form of cheque to customs office at
the time of issuing BBN Form No. 4 for the clearance of goods from the custom.
In the case of industries, only 2% security will be obtained at the time of document
retirement from the port. This 2% security can be issued in the form of cheque to
custom office along with BBN Form No. 4 if cheque is not issued to customs and after
the return of attached of one BBN Form No. 4 received along with Pragyapan Patra
and the receipt of 2% security will be refunded to the party.

Issuing bank, on the other hand, makes the payment to the corresponding bank as per
payment instruction provided immediately after the applicant releases goods by making
payment to the issuing bank.

2.10. Letter of credit and incoterms:
International chamber of commerce has developed trade terms in a set with
responsibilities of buyer and seller. The official publication of those trade terms is
known as INCOTERM. The purpose of incoterms has been clarified as a means of
international rules for the interpretation of most commonly used trade terms in foreign
trade thereby avoiding or at least reducing the uncertainties of different interpretation of
such terms in different countries. The latest revision (incoterms 2000) groups the trade
terms in four categories denoted by the first letter.

60
Table no. 2.1
Group Incoterms Interpretation
C CFR Cost of Freight - Named port of destination
- Seller delivers when the goods pass the ships
rail the port of shipment
Seller has to bear cost and risk up to the delivery
but all the risk, loss or damages and any
additional cost liable after the deliver are
transferred to buyer

CIF Cost, Insurance and
Freight
- Named port of destination
rail in the port of shipment
- Seller has to bear cost and risk up to the
delivery but all the risk, loss or damages and
any additional cost liable after the deliver are
transferred to buyer
- Seller is required to procure insurance at his
cost to cover buyers risk of loss or damages
to the goods during the carriage
- Seller is required to clear the goods for export

CPT Carriage Paid to

- Named place of destination
- Seller delivers the goods t6o the carrier
nominated by him and pays the cost of
carriage necessary to bring the goods to the
named destination
- Buyer bears all risk and any other cost
occurring after delivery of goods
CIP Carriage and
Insurance paid to

- Named place of destination
- Seller delivers the goods to the carrier
nominated by him and pays the cost of
carriage necessary to bring the goods to the
named destination
- Buyer bears all risk and any other cost
occurring after delivery of goods
- Seller is required to procure insurance at his
cost5 to cover buyers risk of loss or damages
to the foods during the carriage
- seller is required to clear the foods for export
D DAF Delivered at Frontier

- named place
- Seller delivers when the goods are placed t
the disposal of the buyer on the arriving
means o transport not unloaded, cleared for
export, but not cleared for import at the
named point or place at the frontier, but
before the custom point of the adjoining
country.

61
DES Delivered Ex- ship

- named port of destination
- seller delivers when the goods are placed at
the disposal of buyer on board the ship not
cleared for import at the named port
destination
- seller has to bear all cost and risk involved to
bring the goods to the named port of
destination before discharging

DEQ Delivered Ex-quay

- named port of destination
- seller delivers when the goods are placed at
the disposal of buyer not cleared for import
on the quay at the named place of destination
- seller has to bear all cost and risk involved to
bring the goods to the named port of
destination and discharging the goods on the
quay
- buyer is required to clear all import
formalities (a change from previous
incoterms)

DDU Delivered Duty
Unpaid

- named place of destination
- seller delivers foods to the buyer, not cleared
for import, and not unloaded from any
arriving means of transport at the named
place of destination
- Seller has to bear all costs and risk involved
to bring the goods thereto other than, where
applicable, any duty for import in the country
of destination. Such duty has to be bear by
buyer

DDP delivered duty paid - named place of destination
- seller delivers goods to the buyer, cleared for
import, and not unloaded from any arriving
means of transport at the named place of
destination
- seller has to bear all costs and risk involved
to bring the goods thereto including, where
applicable, any duty for import in the country
of destination
E

EXW Ex-works - named place
- Seller delivers the goods, cleared for export
to the carrier nominated by the buyer at the
named place. If delivery occurs at the sellers
premises, the seller is responsible for loading
and if not, seller is not responsible for
unloading.
- Delivery can be to named person, where
sellers obligation finishes
62
F

FCA Free Carrier - Named places
- Seller delivers the foods, cleared for export,
to the carrier nominated by the buyer at the
named place. If delivery occurs at the sellers
premises, the seller is not responsible for
unloading.
- Delivery can be to a named person, where
sellers obligation finishes.

FAS Free Alongside Ship - Named port of shipment
- Seller delivers when the goods are placed
alongside the vessel at the named port of
shipment
- Buyer has to bear all r4isk and cost from that
moment
- Goods are to be cleared by seller for export (
a change from previous incoterms)

FOB Free on Board - Named port of shipment
rail at the named port of shipment
- Buyer has to bear all risk and cost from that
point
- Applicable for inland waterway and sea
transport

2.11. Liability of the issuing bank
Article 9 of UCP 500 clearly details the liability of issuing banks. It states that an
irrevocable credit constitutes a definite undertaking of the issuing bank, provided that
the stipulated documents are presented to the nominated bank or the issuing bank and
that the terms and conditions of the credit are complied with:
1. If the credit provides for sight payment , to pay at sight.
2. If the credit provides for deferred payment, to pay on the maturity date(s)
determinable in accordance with the stipulations of the credit.
3. If the credit provides for acceptance:
a. By the issuing bank--- to accept draft(s) drawn by the beneficiary on the
63
issuing bank and pay them at maturity, or
b. By another drawee bank to accept and pay to maturity draft(s) drawn by
the beneficiary on the issuing bank in the event the drawee bank
stipulated in the credit does not accept draft(s) drawn on it, or to pay
such draft accepted but not paid by such drawee at maturity.
4. If the credit provides for negotiation to pay without recourse to drawers and/ or
bonafide holders, draft(s) drawn by the beneficiary and/or documents presented under
the credit. A credit should not be issued available by draft(s) on the applicant. If the
credit nevertheless calls for draft(s) on the applicant, banks will considers such draft(s)
as an additional documents.

2.12. L.C. Operating: Financing
The buyer has to pay when the goods are delivered and many need financing to do so.
Similarly, there are times when the sellers many need to be financed, too, in order to
purchase the goods that are to be shipped.

Financing the buyer on a sight letter of credit
A usance bill is an indication that the seller has agreed to give the buyer some credit.
Documents are released and the buyer takes delivery of the goods upon accepting the
draft. The buyer then sells the goods and repays the bank. It must be noted that the bank
is obliged to make payment even though the buyer may default.

64
Financing the seller on a sight letter of credit
In a sight letter of credit, the seller usually draws a sight either on the buyer or the
issuing bank, or whoever is named in the credit. Along with the draft, he submits all the
documents called for in the credit and request his bank to negotiate the document and
pay him immediately. If the documents are in conformity with the credit, the bank may
agree to make immediately payment to the seller. In due course it will obtain payment
from the issuing bank after negotiating the document.

Financing the seller on a usance letter of credit
In regard to usance letter of credit, the seller can either wait to be paid in maturity or
request his bank to negotiate the draft and purchase it. In this case, the negotiating bank
will be reimbursed upon the maturity of the draft.
Lets us review the more common methods of financing:

1. Packing loans
Packing loans are loans advanced to sellers to purchase goods and pay for services
required in order to fulfill orders. In many countries packing loans are available to
concessional rates in order to encourage exports.

2. Overdraft
An overdraft is an account maintained by an account that fluctuates and is usually in
credit with the bank being the lender.
65
Overdraft facilities are given to customers for working capital purposes; to purchase
goods, to pay wages, etc, and the proceeds of sales are usually deposited in these
accounts.
Importers are not normally given overdrafts unless it is for a short period. Instead, credit
is normally given to them by trust receipts and bankers acceptances.
On the other hand, sellers are given overdraft to enable them to purchase raw materials
and meet the cost of manufactures.

3. Term loan
Term loan are normally given by the banks for financing large transactions, like the
purchase of fixed assets by a company. These are repayable over a number of years.
Term loan are not normally given for the purchase of items that are traded or bought for
resale, i.e. for working capital requirements.

4. Trust receipt (TR) loan
Trust receipts are normally used to finance imports. A trust receipt is a document
executed by a customer to a bank when the bank releases the documents of the title to
him. This enables his to sell the goods and repay the bank through the proceeds of the
sale.
A trust receipt thus:
Acknowledges receipt of the documents.
Holds the goods as trustees to the bank.
Agrees to pay the proceeds of the sale.
66
Agrees to insure and warehouse the goods. Authorizes the bank to recover
proceeds of sale from third parties.
Undertakes to keep the transaction separate.

It must be noted that when a trust receipt is executed, the properly or title to the goods
will rest with the bank. The bank permits the buyer to take delivery in order to sell the
goods and repay the bank on receipt of dues.
Buyers normally executes trust receipts on imports under sight credits. In the case of a
sight credit payment has to be made on presentation or sighting of the documents. The
client, not wishing to tie his own funds, the importer could execute a trust deed to have
the goods released.
Trust receipts are normally not executed for usance credits as in such cases the buyer is
already given credit by the seller. There is, therefore, no need to execute a trust deed.
On receiving the trust receipt properly executed, the bank releases the document of title
to the buyer. The buyer then takes delivery of the goods from the shipping company by
presenting the bill of lading.
After selling the goods, the buyer uses the proceeds to settle the amount due to the bank.
Generally, KBL provides 85% to 90% of the total value as trust receipt loan charging
9% to 11.5% for the industry, 9% to 11.75% for the trading firms and 8.50% to 9% for
the corporate or multinationals. These rates are for the maximum of 120 days. Incase
any TR loan is not adjusted within the stipulated time, 1% higher rate of interest will be
charged from the period of delay.

67
2.13 Nepal Rastra Bank Reporting
i) Upon issuance/ amendment of L.C, copy of each BBN Form No. 3 should be
sent to NRB, Custom Office and bank should retain one copy for office record.
ii) Report in corporating details of L.C issued should electronically be reported to
NRB on daily basis.
iii) At the time of retirement of documents BBN Form No. 4 should be prepared in
quadruplicate for distribution as follows.
First two copies to importer for submission to custom office for clearance of goods of
which one copy will be returned to the bank by the custom duly certified, after
clearance of the goods.
The copy is to be sent to NRB.
Fourth copy is to be retained by the bank.

iv) In case of non return of certified copies of BBN Form No. 4 within four months
from the data of retirement of the documents and non payment of cheques within
stipulated time period, should be intimidated to NRB within seven days after the
expiry of such period.
v) While filling the forms to NRB, the same should given serial number and
separate dispatched number.
vi) Details of L.C opened on 50% cash margin or above should be reported to NRB
within seven days from the end of the month.
vii) In terms of export credits if amount realized is less then document value by USD
500 or above then the details of export should be reported to NRB.
68

2.14. Problems to be faced in Opening L/C
Procedures of opening L/C is very complicated process. So to fulfill this process the
involved parties have to face many problems. The problem that has to be faced by
opening banks and customer are as follows:
1. NRBs some of the rules and regulations do not have authority to use even their own
foreign currency as they wish. They have to follow the limits prescribed by NRB
while opening L/C for any client.
2. Employees of commercial banks involved in L/C transaction have to be responsible
if anything goes wrong in the transaction. But employees of commence department
and taxation department from where people get import license and income tax
clearance certificate respectively to open L/C , do not have to be responsible.
3. Sometimes the client of the bank may turn out to be fraud. In such cases bank has to
face lots of problems. If all the documents arrive but the client do not come to take
the documents, in that case, the bank has to pay money to the exporter although the
foods will be under the bank control. If the goods which it has by any means.
4. If the client of the bank is found to be missing foreign currency then the reputation
of the bank will go down and it has to be responsible for it.

69
2.15. General Remarks
1. L/C is a separate transaction from sale of goods. Compliance of letter of credit
terms and condition is the basis for payment by the bank and not the compliance of
terms of the sale of good contract.
2. L/C is only an offshoot of original contract for sale of goods.
3. The Issuing Bank has following options to secure its interest in letter of credit
transactions:
a. Asking the opener to provide 100% cash margin before the issue of letter
of credit.
b. Asking the opener to provide some percentage of cash as a margin and
rest by collateral.
c. Merchandise covered by bills of lading.
d. Performance undertaking from a reliable party or bank on behalf of the
opener.
4 Negotiating bank has following options to secure its interest against the payment
in exchange of documents:
a. Ask for collateral covering the amount paid for bills.
b. Ask for a promissory note to be signed by the beneficiary and an
undertaking to payback with interest in incase issuing bank or the party
rejects the documents.
c. Ask for a performance undertaking from a reliable party or bank on behalf
of the beneficiary.
70
5. Payment under a Letter of credit is independent of performance of contract.
Payment is due from the bank the moment the exporter complies with the terms of LC.
Bank is not legally responsible for quality and quality and quantity of goods. LC is a
contract for transaction of documents and not of goods. Any breach of contract between
the parties must be taken up separately and bank must not be dragged in to the dispute.
6. Letter of Credit involves multi-layer contract. Contract at each layer is
independent of contract at other layer. Seller cannot take advantage of contract between
the buyer and the opening bank or of contract between opening bank and negotiating
bank. Similarly buyer cannot take advantage of the contract between opening bank and
the negotiating bank or of the contract between negotiating bank and the supplier.
a. Contract between the opener and opening bank.
b. Contract between the opening bank and advising/negotiating/confirming
bank.
c. . Contract between negotiating bank and beneficiary.
7. Letter of credit must be as precisely word as possible. It should avoid
unnecessary details.

2.16. Objectives of the study
The main objective of the study is to gain some knowledge regarding letter of credit.
Thus, the specific objectives of the study are as follows:
i) To learn the basic knowledge regarding the procedures, rules and regulations of
L.C
ii) To have the practical knowledge about the opening of the L.C and how the
71
dealings take place.
iii) To analyze the effect of dealing with L.C on the banking system and the
economy as a whole.
iv) To know how much commission is earned by the bank.
v) To analyze which type of L.C brings more profit to the respective bank on the
basis of subjective judgment.
vi) To know which type of L.C is issued more frequently in the bank.
vii) To evaluate the trends in the number of L.C issued.

Apart from the specific objectives of the study, there are some general objectives of this
study, which are as follows:
i) To understand the actual working environment of an organization.
ii) To gain the knowledge of the financial system of KBL, as it is the part of the
specialization course of the internee.
iii) To know the effectiveness of the customer services that are provided by the KBL.
iv) To identify the market competition faced by the KBL from the other commercial
banks in the same region.
v) To develop the interpersonal communication skills while interacting with the people
in an organization.
vi) To gain the meaningful insight on how the banks plays an important role in the
functioning of the economy.

72
2.17. Rationale of the study
The study of Kumari Bank Limited is done as being part of BBA course. The study was
helpful to have a practical knowledge on banking. The study was helpful in making
addition to the existing knowledge in the field of business education. It will also be
helpful in the future profession as knowledge on banking is gained from the internship
programmed.

2.18. Limitations of the Study
This study has been suffered from the following limitations.
i) The sufficient information about the history of KBL is not available.
ii) The findings in the study cannot be regarded as conclusive. The findings are
based on the observation and some facts and figures. Other basis of the study are
from the interaction with the banks staffs.
iii) The scope of the proposed area of study is limited to KBL, Biratnagar. This
study focuses on the process of opening and creating the letter of credit.
iv) Due to the banks regulations, sufficient financial data was not available. The
study is thus limited to whatever data were available to the internee.

2.19. Scheme of the study
The present study is composed of four different chapters. The first chapter outlines the
introduction of the organization, that is of KBL, its objectives, services provided to its
customers. The second chapter focused on revive of subject matter,i.e., of Letter of
Credit that introduces the rules, procedures of Letter of Credit and, parties involved in
73
Letter of Credit. In this chapter, objectives have been spell out, the need and
methodology of the study had been highlighted. Data presentation and analysis are
presented in third chapter. In this, data presented, analyzed and interpreted and major
findings have been drawn.
The last chapter of the study irradiates conclusion and recommendations.

2.20. Methodology
The several methods of collecting the data are known as methodology. Most of the
datas had been collected through informal questionnaires from the concerned bank
officials, as their management committee did not allow some of the statements. This
study is concerned with the liquidity analysis of NBL. Other sources of data had been
publications of NBL and some publications of Nepal Rastra Bank. Basically, the
methodology has been divided into 2 parties namely; they are primary data and
secondary data.
2.20.1 Research
This fieldwork is based on letter of credit of Nepal Bank Limited. This fieldwork wants
to show only about transaction of letter of credit of NBL. So that, this fieldwork has not
going to show any new research factor for this topic. This research only based on
traditional way of L/C.
2.20.2 Sampling
Developing of commercial bank Nepal has many commercial banks are activated their
operation under this field. Till this year many commercial banks have been established,
some names of commercial banks are as follows:-
74
1. Nepal Bank limited (1994 B.S.)
2. Rastriya Banijya Bank (2022B.S.)
3. Nabil Bank Limited (2041 B.S.)
4. Nepal Investment Bank (2042B.S)
5. Standard Chartered Bank (2043B.S)
6. Himalayan Bank Limited (2049B.S)
7. Nepal SBI Bank Limited (2050 B.S.)
8. Nepal Bangladesh Bank (2050B.S.)
9. Everest Bank Limited (2051 B.S.)
10. Bank of Katmandu (2051B.S.)
11. Nepal Credit And Commerce Bank (2053B.s)
12. Nepal Industrial And Commercial; Bank (2055B.S)
13. Lumbini Bank (2055B.S)
14. Machhapuchhre Bank (2057B.S)
15. Kumari Bank (2057B.S)
16. Laxmi Bank Limited etc
17. Siddhartha Bank (20549B.S)

2.20.3 Type and Source of Data
2.20.3.1 Primary Data Collection Method
The data, which is generally collected by the investigator or researcher by
himself/herself, is known as primary data. So observation, survey and questionnaires
refer to primary data. Primary data take much time to collect and fit exactly as per
75
requirement for the research. The essential information for the study was collected
through different method of primary source like:
a. Through observation
b. Through questionnaire
c. Through direct interviews
d. Through telephone
2.20.3.2 Secondary Data Collection Method
The data, which is already collected and used by someone, is known as secondary data.
Secondary data are the data that have been gathered not for the immediate study but for
some other purpose. Secondary data can be obtained from either private or public
sources. It is collected indirectly. The advantages of secondary data are that they are
low in cost and do not require much time to collect. However, it has disadvantages such
as the data may not fit exactly as per requirement for the research problem as defined in
the study. The secondary data would be used to study in this field work are:
a. Different publication of KBL.
b. Different publication of NRB, Research and publication department, banking
operation department.
c. Different publication from Ministry of Finance.
d. Other publication i.e. Newspaper and magazines.

76
2.20.4 Tools used in this Study
For complete this fieldwork I have used many useful tools for this fieldwork. Some
tools are used in this study are as follows:
Table illustration
Figure illustration
Mathematical illustration
Mean
Standard Deviation
Coefficient of Variance
Straight line Method
Trend line Method

2.20.5. Design of the study
This study have been conducted with a view to understand the various terms and
conditions of L.C and also to provide various information on L.C such as number of
L.C issued, total imports done through L.C, total commission earned by the bank by
providing the facilities of L.C. Hence, to collect the data and fulfill the proposed
objectives and designs for the study have been designated and descriptive study.

2.20.6. Data processing procedure
The collected data are presented and refined for the purpose of the study. The raw data
are processed by construction of tables for proper analysis and interpretation of data.

77
2.20.7. Analysis method
This study seeks to explore the letter of credit with particular reference to KBL. To
fulfill the objectives, descriptive analysis techniques was followed.

78
Chapter Three
Presentation and Analysis of Data
3.1 Collected Data from L/C Business
The following data were collected from its L/C in business five years 2059/2060,
2060/61, 2061/62, 2062/63, 2063/64. .
Table 3.1
No of L/C & total amount collected for the period 2059/60 to 2063/64
S.N Fiscal Year No of L/C
open
Amt of L/C % amt of L/C
1 2059/2060 100 350,075,000 7.1
2 2060/61 280 916,560,000 18.6
3 2061/62 310 992,940,000 20.1
4 2062/63 400 1,145,700,000 23.2
5 2063/64 510 1,527,600,000 31
Total 1600 4,932,875,000 100
NOTE: Fiscal year starts from Shrawan 1
st
and end 31
st
Ashad

In fiscal year 2059/2060, 2060/61, 2061/62, 2062/63, 2063/64 the total number of L/C
open was 1600 and amount collected from L/C was Rs 4,932,875,000.
The maximum number of L/C were open in fiscal year 2063/2064 i.e. 510 and
minimum number of L/C were open in fiscal year 2059/60 i.e. 100.
79
The average number of L/C open in these days is Rs 320.
Note:
Total number of L/C opened in five years
Average number of L/C opened =
Total number of years

1600
=
5

= 320

Total amount of L/C collected in five fiscal year was 4,932,875,000 which are shown in
Table no 2.1. The maximum amount is collected fiscal year 2063/64 which is Rs.1,
527,600,000 and minimum amount is collected in fiscal year 2059/60 which is Rs.
350,075,000.
Note: average amount is collected in five year

Total amount collected in five years
Average amount collected in five year =
Total number of years

4,932,875,000
=
5

= 986,575,000

80
The average amount collected from L/C is Rs.986,575,000 per year during five year.
The above table/table no. 2.1 can be representing and analyzed by the following
diagram.
No of L/C opened in last years 2059/2060 to 2063/2064 Kumari Bank Limited.
Note:

Total amount collected in five years
Average amount collected from per L/C =
Total number of L/C opened in five years

4,932,875,000
=
1600

= 3,083,046.88

Similarly, Rs 986,575,000 is collected from per L/C during the last years. It is
remarkable that Bank has given effective service in L/C transaction.

81
Figure 3.1.

Fiscal year

According to the diagram the simple bar diagram indicates the no. of L/C opened in
different fiscal year 2059/2060 to 2063/2064.
The diagram shows the maximum no of L/C opened in the year 2063/2064 i.e.510 and
the minimum no. of L/C opened in the year 2059/2060 i.e. 100. It shows the L/C
transaction of Kumari Bank Limited Office dawn last year and the favorable year is
2063/2064.
Amount of L/C opened in the last year 2059/2060 to 2063/2064, KBL Office Present
by this pie chart diagram in difference five years in percentage.

82

Figure 3.2.

The diagram indicates that highest amount collected for the year 2063/2064 is
Rs.1,527,600,000 and the lowest amount indicates for the 2059/2060 which in
percentage is only 7% from the opening L/C. It is huge differences the highest and
lowest amount collected.
Thus, according to this diagram L/C business of KBL Office better year is 2063/2064 in
which amount collected is Rs.1,527,600,000. But the year 2059/2060 is not good for
L/C business of this Bank in which only Rs350,075,000 amount is collected. The data
shows that it is not equal in every year for collecting amount. The data may fluctuate
due to fluctuation of the economy and industrial sector is also affected. The changes in
the foreign exchange rates and American dollar also affects the collection.

83
3.2. Mathematical Analysis
The calculation of standard deviation of coefficient of variance of total L/C transaction
of KBL can be done in this way:
TABLE NO. 3.2.
(In Millions)
Year X(Amount of L/C) X - Mean (X-Mean)
2

2059/2060 350 -636 404496
2060/2061 916 -70 4900
2061/2062 992 6 36
2062/2063 1145 159 25281
2063/2064 1527 541 292681
Total X =4930 (X Mean)
2
=727394

Here,
X = 4930
N = 5
Where, X = Amount of L/C
N = no of years

Therefore, Mean = X
N
= 4930
5
84
= 1171.6

Solution:
S.D = (X Mean)
2

N
= 727394
5
= 145479
Therefore S.D = 381.42

Coefficient of Variance (C.V) = S.D X 100
Mean
= 381.42 X 100
986
= 99.54

Using the straight line Method,
As we know,
Let the straight line trend be
Y = a + bx.. (i)

85
Table no. 3.3.

3.3. Trends analysis by least square method (In Millions)
S.N Y Total Y X X
2
XY Trend
value
1 2059/2060
350
-2 4 -700 469.4
2 2060/2061
916
-1 1 -916 727.7
3 2061/2062
992
0 0 0 986
4 2062/2063
1145
1 1 1145 1244.3
5 2063/2064
1527
2 4 3054 1502.6
Y = 4930 X = 0 X
2
= 10 XY=2583
Solution:
Since X = 0
So, a = Y
N
= 4930
5
= 986
Similarly, b = XY
X
2

= 2583
10
= 258.3
Trend line,
Since, X = -2, Y = a + bx
= 986 + 258.3(-2)
= 469.4
X = -1, Y = a + bx
= 986 + 258.3(-1)
86
= 727.7
X = 0, Y = a + bx
= 986 + 258.3(0)
= 986
X = 1, Y = a + bx
= 986 + 258.3 (1)
= 1244.3
X = 2 Y = a + bx
= 986 + 258.3(2)
= 1502.6

Trend line
Figure 3.3

87

3.3. Commission earned from L/C

By providing the facility of L/C or acting as a guarantor, the bank charges commission.
KBL has been earning commission by providing the facility of opening letter of credits
to its customers. The total commission earned by KBL through opening letter of credit
for the past five years are tabulated in the table no. 2.2. The table also shows the
percentage changes in total commission during those five years.

Table No. 3.4.
Percentage Change in Total Commission earned
By opening L/C

Rs. In million
Year Total Commission Percentage
Change
2059/60 35 -
2060/61 91 160
2061/62 99 8.19
2062/63 114 15.15
2063/64 152 33.33

From the table no. 2.2, it can be observed that total commission from opening L/C is
being increasing yearly. However, percentage-increasing rate of total commission is
being increasing only after the fiscal year 2060/61. It is seen that the percentage change
in the commission has change by a huge percent in the fiscal year 2059/60 i.e 160% ,
but there after the commission has been increasing in the increasing order.. In the fiscal
year 2063/64 the percentage increase is 33.33%, which was 15.15% in the previous
year. This increase in percentage may be due to the fact that in the fiscal year 2063/64,
the overall economic scene of the country in the year remained encouraging.

88
The increasing and decreasing rate of the total commission from L/C may also be due to
the intense competition during the year. Numbers of commercial banks are opened each
year. Thus this creates competition among the commercial banks.

89
Chapter Four
Summary, conclusion & Recommendation
4.1 Summary
Banks are the most important institutions for accelerating economic growth in the
country. It is quite true that a strong financial institution is quite need in the
development like our country. Nepal because all the economic condition is based on the
financial institution and the development of the country depends upon the activity
participation of the bank in the different activity in the country. The KBL one of the
commercial Bank in the country is providing the related function since in 2057 B.S. The
bank has successfully collected a large amount of stardom saving through the next work
of 8 branches in the country.
In the beginning, KBL has an authorized capital of Rs. one thousand million and paid
up capital Rs. Seven hundred fifty million.
This study deals with the causes and effort of decrease and increase in the export of
L/C. The average no. of L/C opened for last five years for 2059/060 to 2063/064 is
around 320, which is no so satisfactory. The total amount of L/C collected in year
2063/2064 is 986,575,000 and L/C collected has been increase by 7.8% compare to
previous year 2062/2063 collection of 23.2%.
It can be observed that total commission from opening L/C is being increasing yearly.
However, percentage-increasing rate of total commission is being increasing only after
the fiscal year 2060/61. It is seen that the percentage change in the commission has
change by a huge percent in the fiscal year 2059/60 i.e. 160%, but there after the
90
commission has been increasing in the increasing order. In the fiscal year 2063/64 the
percentage increase is 33.33%, which was 15.15% in the previous year. This increase in
percentage may be due to the fact that in the fiscal year 2063/64, the overall economic
scene of the country in the year remained encouraging.
This study limited only the L/Cs transaction of KBL, banking office. It doesnt deal
with financial position and lending by other bank. It is design to show the L/C position
of KBL. This study is concern of six economic years 2059, 2060, 2061, 2062, 2063,
2064. This data are collected from KBL.
Thus it can be send that KBL has to play more active role to attract more customers to
open L/C. So, it should improve and give more facilities, with any party one to open it.

4.2. Conclusion
The economic history of many countries revels that growth of financial infrastructure is
the prerequisite for the economic development of a country. Thus, it is important that
there must be systematic and excellent banking procedures to direct the economy to
move on a profitable direction. Due to this fact, Nepalese commercial banks have
started to recognize the importance of sophisticated or high technology for improving
the customer service, productivity, and operational efficiency of bank. KBL, which was
established as a commercial bank in Nepal. Is well known of the importance of the
systematic banking procedure. KBL believes that the high quality customer service is a
perquisite for the progress of the bank on sustained basis. KBL for better customer
service aims to identify customer oriented services through the adoption of the policy of
healthy competition and proactive results and to fulfill the needs of its valued clients.
91
The bank is fully computerized which helps to provide speedy and quality services to its
customers. The main theme or motto i.e., The Name You Can Bank Upon itself clears
that the main objectives of KBL is providing an excellent services to the customers.
KBL aims at providing banking services to the different sectors of industry, projects and
services, thus, helping in the developing of the trade and commerce. It has been
providing credit to agricultural sector, manufacture and construction sector, trading,
services and other. It is also promoting the international trade by opening letter of
credit, through foreign exchange facility and SWIFT facility. These functions of KBL
surely help in the development of import and export business.
KBL pools together the savings of the community and arrange for their productive use.
It supplies the financial needs of modern business by various means. It accepts deposits
from the public on the condition that they are repayable on demand or in short notice. It
provides loans at minimum rates than any other banks do and also renders services like
collection of bills and cheques, safe keeping of the valuables, financial advising, etc. to
its customers.
KBL branch office, Biratnagar has only limited number of employees, i.e. 11
employees. And this made the internee notice that the management seems to be
operating systematically. Each department is headed by a department incharge
, who keeps all the activities of the department under control. Thus, the branch manager
is not headed with lots of problems and works. All the staffs of the bank are well
qualified for their job. Furthermore, the bank has been providing training to its staffs to
improve their skills and efficiency. The internee observed that all the staffs of the bank
were very cooperative and friendly with its customers. The bank holds monthly staff
92
meeting that has helped in improving the customer services thereby increasing the
efficiency of the staffs. I t was also observed that bank was at its best able to retain
existing customers and attract the new ones.
Although the bank has several plus sides, it is not free of the negative aspects, which are
summed up in the following:

- There is no separate marketing department in the Biratnagar branch.
- There is no credit card system.
- No a facility of the ATM.
- Staff welfare is not providing up to the satisfaction level of the staffs.

Apart from these limitations, KBL is regarded as the best among the banks, which can
provide the most attractive facilities to its customers. Thus, we can conclude that KBL
with its professional and excellent management an with its innovation and dynamic
teams will contribute more in the development of banking industry as well as the
development of the country in the near future, fulfilling its mission and objectives.

4.3. Recommendation
The bank can be succeeding to earn more profit if it succeeds to issue more loan and
advances. So bank should make attempt to utilize funds in different areas possible for
investing funds.
Bank should provide more attention to the priority and industrial scheme to contribute
to the national economic development.
93
It should attract more customers by providing different service and facilities to collect
more negotiation.
There should be sound co-ordination between NRB and other commercial banks. So as
to deliver credit and other supporting service smoothly.
It is more necessary to supervise and control the banking transactions.
Employees are not so trained. They do not have good attitude toward the costumers.
Employee should be selected not by force. Staff should be selected according to their
qualification and ability. And also training should be provided to them.
Employees should be placed in right places according to their capacity and willing
towards work.
The bank should give more emphasize in computer system so that they can provide
better service to the costumers in short period.
Keeping in mind, the down falling economy, special emendations should be made in
L/C policies & regulations helping industries and firms increase export.

Dhiraj's Final Report

Diunggah oleh

Informasi Dokumen

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Dhiraj's Final Report

Diunggah oleh

Hak Cipta:

Format Tersedia

1

An internship report on Letter Of Credit

Anda mungkin juga menyukai

Dhiraj&#39;s Final Report

Diunggah oleh

Informasi Dokumen

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Dhiraj&#39;s Final Report

Diunggah oleh

Hak Cipta:

Format Tersedia

1

An internship report on Letter Of Credit

Anda mungkin juga menyukai

Dhiraj's Final Report

Dhiraj's Final Report