CHAPTER 11.1 INTRODUCTION

1.1.1 MEANING OF BANKGenerally, a bank is defined as an institution established by law, which deals with money and credit. Bank is also meant to be an institution whose debits-usually referred to as ‘bank deposit ‘are commonly accepted in final statement of other people’s debts. In other words, it is an institution which transact in money receiving it on deposit from customers, honoring customer’s drawing against such deposits on collecting cheques, for customers and lending or investing surplus deposits until they are required for repayment. Banks are among the most Important financial institutions in the economy and business in thousands of local towns and cities. I the modern time, bank is known as one of the important financial institution dealing with money credit and financial institution.

Some of the banking experts have defined bank in the following types:-According to Professior Hart, “a banker is one who in the ordinary course of his business, receives money which he repay by the honoring cheques of persons from whom or one whose account he receives it”

According to Sayers, “Ordinary banking business consists of changing cash for bank deposits for cash, transferring bank deposits from one person or corporation to another; giving bank deposits in exchange for bills of exchange, government bonds, the secured or unsecured promises of businessmen to repay, .”

According to Crowther, “A bank collects money from those who have it to spare or who are saving it out of there incomes and it lends this money to those who requires it.” The banking systems of different countries vary substantially from one another, but there has been during the present century a universal tendency for each nation to develop a wide network of banks centered upon the chief trading centre and grouped round a quiet different institution referred to as the ‘central bank’. These wide networks of banks have been developed due to multi-functions of bank it has to perform. In the context of Nepal too, we have different sorts of banks performing different functions and helping in different sectors of economy for instance, commercial bank, industrial bank etc.

1.1.2 ORIGIN OF BANK Economists have their own point of view regarding the origin of bank. The Greeks and the Mesopotamians had banks as the Romans had. But these civilizations regarded banking as “unnatural”, but some banks were allowed to operate. Some say that the word bank has derived from the Latin word “bancus” which refers to the bench on which the banker would keep its money and his records. Where as some trace its origin to the French word “banquee” and the “Italian” word “banca”.

Modern banking originated in the medieval Italy. The first bank developed was the “Bank of Venice”. It was established in 1157 A.D. in Italy. Following its establishment, the banks established were “Bank of Barcelona” in 1401 A.D. and the “Bank of Genoa” in 1407 A.D. gradually the “Bank of England” was established in the late seventeenth century and it enjoyed a prestigious position. But the drastic development in the field of modern joint stock commercial banking occurred when the parliament of England passed the banking act 1883 A.D. it was only in the 19th century that the modern joint stock commercial banking system developed in the leading countries of the world.

In Nepal ,however the first bank was established in 1994 B.S. in the name of “Nepal Bank Ltd.” and central bank of Nepal was established in the name of “Nepal Rastra bank” under Nepal Rastra Bank Act 2012 B.S.(1956A.D.). But this act has been repealed and the Nepal Rastra Bank, act 2058B.S. (2002A.D.) is being existed. Nepal Rastra Bank , the central bank of the Kingdom of Nepal , was established in1956 A.D. to discharge the central banking responsibilities including guiding the development of the embryonic domestic financial sector . Since then, there has been a huge growth in both the number and the activities of the domestic financial institutions.

1.1.3 EVOLUTION & DEVELOPMENT OF BANK IN NEPAL If we look back into the history of the development of banking, we notice that money lenders, merchants, goldsmith, landlords were ancient banks of Nepal. In the Nepalese perspective, the first ever recorded borrowings were in 723 A.D. when Gunakama Dev borrowed money to rebuild Kathmandu. However, as an organized bank, the first organization was established in` the name of “Tejarath Adda” in the period of rana reign in 1993 B.S. but “Tejarath Adda” was not the bank in the original sense because it was established only to grant loan to government employees not to general people. Infact, the first organized bank established bank in Nepal was “Nepal Bank Limited” in 1994 B.S. Nepal Bank Limited started to provide the services of commercial bank to the general people and tried to break the monopoly of predominance of “Sahu Mahajan” in financial activities. Nepal’s first commercial bank, the Nepal Bank Limited, was owned by the government by 51 percent of the shares in the bank and controlled its operations to a large extent. Nepal Bank Limited was headquartered in Kathmandu and had branches in other parts of the country. For the purpose of promoting monetary and banking activities of Nepal and also to implement monetary policies of government, it felt the need of central bank and in this process “Nepal Rastra Bank” was set up in 2013 B.S. This bank has been functioning as the government bank and has contributed to the growth of financial sector. After establishment of Nepal Rastra Bank, the banking sector development became possible. In this series, NIDC, “Nepal Industrial Development Corporation”, a state-owned development finance organization headquarter in Kathmandu, was established in 1959 with United States assistance to offer financial and technical assistance to private industry. Although the government invested in the corporation, representatives from the private business sector also sat on the board of directors. The Co-operative Bank, which became the Agriculture

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

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

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

Industrial Bank: Industrial bank is the kind of bank which provides loans on the basis of mid-term & long-term to establish industries & their expansion such as the purchase of land & development, machinery & equipment etc. It is a bank which is commenced to support the

industrial field of country & its all round development & expansion. This bank is inspired to develop certain areas. Nepal Industrial Development Corporation works as the industrial bank in Nepal.

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

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

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

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

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

are two types of banks under the agricultural banks. They are the land mortgage bank & co-operative bank.

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

Central Bank: Central bank is an important financial institution in every sovereign, independent state in modern times. It is the apex body of banking system. It also acts as a banker to the country. The central bank acts as the banker to the commercial banks government not because the government finds it comfortable economically but because of the close relationship between public finance & monetary affairs. The central bank gives appropriate advice to the government in operating its financial matters. This bank is established to develop banking through strategy on its own to issue the notes, to control the credit, to act as the bank of the banks in each country.

Every country possesses its own central bank. In Nepal, Nepal Rastra Bank is regarded as the central bank of the country. Nepal Rastra Bank was created in 1956 as the central bank of Nepal. The Nepal Rastra Bank is established under the Nepal Rastra Bank Act 201 B.S.(1956 A.D.). But this act has been repealed & Nepal Rastra Bank Act 2058 B.S. (2002 A.D.) is being existed. Its function is to supervise commercial banks and to guide the basic monetary policy of the nation. Its major aims are to regulate the issue of paper money; secure countrywide circulation of Nepalese currency and achieve stability in its exchange rates; mobilize capital for economic development and for trade and industry growth; develop the banking system in the country, there by ensuring the existence of banking facilities; and maintain the economic interests of the general public. Nepal Rastra Bank also is to oversee foreign exchange rates and foreign exchange reserves. Some of the banking experts have defined bank in the following ways:-According to Crowther, “The central bank stands to the member banks in exactly same relation as the member banks themselves to the public”.

According to R.P. Kent, “ Central bank is an institution which is charged with responsibility of managing the expansion & contraction of the volume of money in the interest of the general public welfare”. Central bank is an organization who is authorized to manage the whole economic system in a country, performs banking services for the country and maintains the cash reserves of the commercial banks.

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

Some of the banking experts have defined commercial bank in the following way:-According to Section 2(a) of the Commercial Bank Act 2031 (1974), “Commercial bank is a bank which operates currency exchanges transactions, accepts deposits, provides loan, and performs dealing related to commerce except the banks which have been specified for the co-operative, agricultural, industry of similar other specific objective”. In this report, the topic based on Nepal Investment Bank Limited is discussed. Since, Nepal Investment Bank falls into the category of commercial banks. Therefore, we only here, briefly clarify about commercial banks.

1.1.5 DEFINITION OF BANKWith globalization and have rapid growth in international business, banking activities are continually changing and have grown manifold and banks are now entering into new fields of economic activities. Therefore, it is quite difficult to give a precise definition of bank, acceptable to all and thus, there are several definitions provided by several scholars in their own way. Some of the definitions given by renowned scholars are presented below:

A banker or a bank is a person or company having a place of business where credit are opened by deposits or collection of money or currency or whose money is advanced or loaned.

- Oxford Dictionary

Banks are financial institutions that accept fund in the form of deposits repayable on demand or in short time. - World Bank Development Report

Any Institutions opening deposits, subject to withdraw on demand, making loans of commercial or business nature is a bank. - U.S. Law

A bank is an institution which collects money from those who have it spare or who are saving it out of their income and lends this out to those who require it.

- G. Crowther Ordinary banking business consists of changing cash for bank deposits and bank deposits for cash; transferring bank deposits from one person or corporation to another; giving bank deposits in exchange, government bonds, the secured or unsecured promises of businessmen to replay, etc. - R.S. Sayers

A bank is an organization whose principal operation are concerned with the accumulation of the temporally idle money of the general public for the purpose of advancing to other for expeditor. - Kent, Shakespeare Vaidya

Various Nepalese Acts have defined banks in Nepal. The definitions of bank given by some of the Nepalese Acts are as follows:

Bank means the Nepal Rashtra Bank established under section 3 of this Act. - Sec. 2 (a) of NRB Act 2002 B.S.

Bank is a commercial bank established under this Act. - Sec 2 (b) of commercial Bank Act 2031 B.S.

A bank is a bank which is established under the existing laws.- Sec 2 (a) of Negotiable instrument Act 2034 B.S.

From above definitions, it is clear that a bank is a financial institution established under the laws of a country and performs functions like accepting deposits; lending money; creating credit; facilitating foreign exchange and international trade; providing locker service, information and advices to customers; transferring funds; and acting as the agent of its customers. Therefore, banks are of immense importance in the modern economic world.

Hence, bank can be defined as that financial institution which accepts deposits from public and organizations, advances loans to needy, transfers funds to one place to another and performs many other functions as directed by the central bank and according to the laws of the country. 1.1.6 COMMERCIAL BANKS IN NEPAL Commercial banks are financial institutions that deal with money, trade, finance, and commerce and are guided by profit. Their basic functions are to accept deposits and advance loans. They also perform various other functions like accepting deposits; lending money; creating credit; facilitating foreign exchange and international trade; providing locker service, information and advices to customers; transferring funds; and acting as the agent of its customers.

Commercial banks are also called Joint Stock banks and Credit banks. They make significant contribution to the economic and industrial development of a country and improving the living standard of people. The central bank and the existing laws of the country guide the activities and functions of any commercial bank.Sec. 2 (a) of Commercial Bank Act 2031 B.S. has defined Commercial Bank as:

A bank which operates currency exchanges transactions, accepts deposits, provides loan; performs dealing relating to commerce except the banks which have been specified for the cooperative, agricultural, industry of similar other specific objective.

Today there are many commercial banks in Nepal but the history is not so long. The 1st commercial bank, NEPAL BANK LTD. was established only in 1994 B.S. The development started lately but in the early 2040 B.S., after the formulation & implementation of foreign investment policy to allow foreign investment in commercial banks in the form of joint venture, the last two decades has witnessed the development of commercial banks at a rapid speed and several commercial banks have been established in the private sector, which have greatly contributed in the development and advancement of banking system and economic and industrial condition of the country. In today’s date, there are 30 commercial banks operating in Nepal, including Nepal bank Ltd. and Rashtriya Banijya Bank, the banks with government shares. The commercial banks operating in Nepal are listed below: Commercial Banks in Nepal

Commercial Banks1. Rastriya Banijya Bank

2.Nepal Bank Limited3.Standard Charter Bank4.Nepal Bangladesh Bank5.Himalayan Bank Limited6.Bank of Kathmandu7.Nabil Bank8.Kumari Bank9.Nepal SBI Bank10.Siddartha Bank Limited11.Everest Bank Limited12.Nepal Investment Bank Limited13.Nepal Credit and Commerce Bank Limited14.Lumbini Bank Limited15Laxmi Bank Limited16.Global IME Bank Limited17.Sunrise Bank Limited18.Machhapuchhre Bank Limited19.Agriculture Development Bank Limited20.Citizens Bank international Limited21.prime commercial Bank Limited22.NIC Asia Nepal Limited23.Grand bank limited 24.NMB Bank Limited25.KIST Bank Limited26.Mega Bank Nepal Limited27.Civil Bank Limited

28.Janta Bank Nepal Limited29.Commerz & Trust Bank Nepal Limited30.Century Commercial Bank limited

31. Sanima Bank Ltd.

A Letter of Credit is:

A bank’s written conditional undertaking made on behalf of the buyer (importer / applicant) To pay a seller (exporter / beneficiary) Up to a given sum of money Immediately or at a determinable future date Provided that documents presented by the exporter meet the terms of the DC and are presented within a specified time and at a specific place. The Letter of Credit protects the buyer because he knows that the seller will not be paid until he has presented documents to the bank evidencing shipment of the merchandise. The seller is protected because he knows that he will be paid once the merchandise has been shipped and the required documents are tendered to the bank. Evolution of Letters of Credit:

In the primitive ages when human civilization and economic development were not advanced and the desires and needs were limited. With advancement in civilization and growth in economic development the desires and needs increased. This resulted in human beings of one locality moving to other localities to fulfill their unmet desires and needs under a process which indicated shift from “self sufficiency” to “inter dependence”. As a result “Barter Economy” came into existence.

Human needs and desires soon became unlimited and produce of a given locality or vicinity could not meet the demands. Movement of people from one place to another reduced due to increase in size of family and development of the culture of settling in families in a location. This forced people to involve in buying and selling i.e. trading of goods and produces from one place to another. By then money had already been introduced as measuring rod for goods and services.

The human desire could not be met by the goods and services produced in one locality to another and people now wanted to use produce from one country to another and from one continent to another and from one end of the globe to another end of the globe. In such a scenario it was impossible for people to move around and buy the product of their choice or demand due to geographical distance as well as the risk in carrying money and then complications faced in carrying back the produces to their habitat. Concurrently technology had also advanced a lot and facilities like transportation, communication, etc. had made trade easier as well as more sophisticated. A person say from Nepal could get in touch with available there or not. Deals were made to buy particular goods for payment of specified amount giving birth to the concept of exporter and importer more commonly known as buyer and seller.

Though by now trading had become easier, settlement of trade transactions posed problems for the parties involved. Goods bought and sold abroad started becoming complicated

transactions for number of reasons like voyage time, import/export control regulations, customs formalities and the very fact that the buyer and seller were separated geographically.

Moreover in much of the cases, the buyer and seller would not have met or seen one another and possibility of not knowing each other’s standing and integrity also loomed large. So the traders felt the need to safeguard and protect the interest of both buyers and sellers and decided to take help of bankers who were widely accepted for its credibility and standings to be involved in financial transactions. The buyer needed to know that he was getting the right goods what he paid for and the seller’s interest was to get promptly paid for his goods. As a result the banks started arranging and extending wide use of credit instruments which satisfied the needs of both buyer and seller. This instrument was called the Documentary Credit or more commonly Letter of Credit handled by international banking network calling for the exporter to present to a bank documents evidencing shipment or dispatch of the required merchandise for which if the documents are in order he will be paid.

History / Origin: Letters of Credit were in operation in England before World War I US banks quickly learned the “know-how” from London bankers. The Federal Reverse Act of 1913 permitted member banks to issue Letters of Credit. In the 1930’s England went off the gold standard, which together with her loss of domination of the world trade, the United States further enhanced the worldwide importance and recognition of US Dollars as a world currency. After World War II, USA became the most important supplier of goods in international trade and the largest buyer of foreign goods. This accelerated the development of Letter of Credit in the USA and American banks today play a leading role in the field of issuance of Letters of Credit. Various customs and practice were developed in USA and foreign countries concerning the interpretations and users surrounding L/C and in order to ensure uniformity of practice and interpretations in international trade, International Chamber of Commerce in Paris, in co-operation with various national chamber of commerce and banks developed the “Uniform Customs and Documentary Credits”. This publication was first published in 1962 and was in effect from July 1, 1963.tually every country and territory in the world has accepted these rules.

Reflecting the numerous changes in international trading and transport techniques occurring since 1962, the rules have been revised and brought up to date several times in the past. The version currently in use is the UCP 500 (w.e.f. January 1, 2004) which is to be replaced by the UCP 600 which is the latest in the line of revisions and is to come into force from July 1, 2007. The new UCP 600 updates and consolidates the UCP 500.

Need of LC:

The goods manufactured in one country can be sold to the market of another country either for consumption or for resale purpose. This purchase-sale relationship between two or more countries is the basic feature of foreign trade.

The need for a LC generally arises whenever any two parties (importer/exporter) get into a contract to buy & sell something. In any international trading activity, as the parties to it reside two different places, often in two different countries, the issue of confidence or credit worthiness of both the parties arises. A party might be big or prestigious even then other party always will have to think from worst case scenario, i.e. the other party might default & might renege in its obligation. It is to tide over such things that the instrument of LC is invoked.

Importance of LC:

a) To the Buyer:

Provides a specific transaction with independent credit banking and a clear promise of payment. Assures the buyer that documents required by the Letter of Credit must be presented in compliance with the terms and conditions of the Letter of Credit and UCP rules. Assures the buyer that documents presented will be examined by banking personnel knowledgeable in Letter of Credit operations.

Assures the buyer that his bank will refuse payment to the seller unless terms and conditions given by him to his bank as stipulated in the credit are met. Extended terms of payments which in any other form of payment means would not be available. Refinance of goods until they are marketed.

b) To the seller:

No need to rely on the willingness and capability of the buyer to make payment since payment is assured by the bank which issues the Letter of Credit. Less apprehensive that payment for goods might be delayed or jeopardized by political acts or other problems in the buyer’s country.

Enable to obtain loan from banks to prepare goods for shipment prior to making a shipment or just after making shipment.

c) To the Banks:

Goods source of revenue.Goods source of foreign exchange earningsLow risk means of financing (e.g. Trust Receipt, Pre/post shipment loan)Low uncertainty of realization of payment in case of credit-complaint documentsPayment is assured on the basis of documents along and not based on the goods or service to which they may refer.

Parties Involved in LC:

Applicant: Buyer / ImporterBeneficiary: Supplier / Seller / ExporterIssuing Bank: Applicant’s BankAdvising Bank: Issuing Bank’s agent in Beneficiary’s place / countryConfirming Bank: Bank which assumes the risk of Issuing BankReimbursing Bank: Bank authorized by the Issuing Bank to reimburse the bank making paymentNominated Bank: Bank nominated by the Issuing Bank to honor drawings

1.1.9 LETTER OF CREDIT (L/C) – MEANINGPayments for purchase of goods & services can be made through various modes of payments such as cash payment, cash against delivery of goods, cash against documents, cash against acceptance of bills of exchange, telegraphic transfer, cheques, drafts, hundis, and so on. But there are risks involved in them and furthermore, the transacting parties may be conspicuous of the other party that they might not act in good faith. This becomes even bigger & serious problem when it comes to international trade. The use of L/C as mode of payment reduces this problem & dilemma. It is the most safe and convenient means of payment among all other methods of payment existing.

The documentary Credit, Letter of Credit, Documentary Letter of Credit, Commercial Letter of Credit, Banker’s Commercial Credit, or simply L/C is a conditional & Written instrument or an undertaking by a bank to honor draft (bill of exchange) and effect payment at sight or at a future date to the seller in accordance with the instructions of the buyer, up to a prescribed amount within a prescribed time period against prescribed documents, provided that they are correct and in order, i.e. they conform to the condition of the credit letter. It is an arrangement whereby a banker acting at the request of the customer, undertakes to pay a third party, by a given date, according to the agreed stipulations and against presentation of documents, the counter value of the goods and services rendered otherwise. It is a mechanism by which a buyer enables a seller to get the value of the bill of this supplies effected as per agreed terms and on his tendering the stipulated documents of the relative consignment to a banker on or before a given date.

L/C is a letter or an advice issued by a bank on behalf & as per the instructions of the buyer of the goods, the importer, authorizing the seller or its agent, the exporter, to draw a stated amount of money from the issuing bank, its branches, or other associated banks or agencies against presentation of necessary & valid documents specified in it. Payment under L/C is strictly based on documents. It specifies the documents required to be presented by the exporter to receive payment. The issuing bank an L/C has nothing to do with the consignment. If the bank finds the documents presented by the seller complying with the terms & conditions of the L/C, it will remit the contract amount to the seller and reimburses the same amount from the buyer.

It is the responsibility of the issuing bank to ensure, on behalf of its client, the buyer, that all conditions have been met before the L/C funds are released. L/C guarantees payment to the seller on the condition that he presents the specified documents valid & correctly evidencing shipment of contracted goods, and does so independently of the underlying contract of sale or the financial condition of the buyer at the time of presentation. All the financial risk involved in the transaction is passed on the issuing bank, and this assurance for the seller makes L/C so popular. On the other side, the buyer on his part is assured of receiving the correct documents & payments being made only after their receipt. It is a guarantee to the exporter from the bank that he will receive his payments if the terms and conditions of the L/C are complied with and simultaneously assures the importer that he will receive the documents complying with the contract that means that the goods received are in accordance with the proforma invoice or sales contract. This has made it the most acceptable mode for arranging payments for exports as it offers the greatest protection to the parties concerned, so it is widely accepted by both exporters and the importers as a basis of settlement for payment. In conclusion, we can point out the following characteristics of a letter of credit:• It is an undertaking of bank.• It is an undertaking on behalf of the buyer.• It is an undertaking given to the seller.• It is a conditional undertaking subject to compliance with certain conditions i.e. the presentation of stipulated documents.

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

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

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

Unconfirmed Irrevocable letter of credit An irrevocable L/C in which the advising bank does not add its confirmation to the credit is known as an Unconfirmed Irrevocable L/C. It is the converse of Confirmed Irrevocable L/C. In this credit, there is the undertaking to pay from only on bank and that is the issuing Bank.

Restricted Negotiable Letter of CreditThe L/C in which the authorization from the is suing bank to pay the beneficiary is restricted to a specific nominated bank is known as a restricted negotiable L/C.

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

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

Back to Back L/C A Back-to-Back L/C or a Countervailing Credit is a L/C opened with the backing or against the security of another credit i.e. the original L/C, called Overriding Credit or Principal Credit. A beneficiary opens this type of L/C when he is not the actual supplier of the consignment. This beneficiary opens another L/C as an applicant and in favor of another beneficiary, the supplier

of the consignment to him, and backing the Principle Credit. Thus, it is opened by an intermediary in favor of actual supplier and for the actual buyer. This type of L/C is similar to a Transferable L/C because both of them serve the same purpose.

Revolving L/C When a L/C is specifically designated ‘Revolving L/C’, it is a Revolving L/C and when the L/C amount is drawn, the L/C is reinstated or revived without the need to amend the original L/C i.e. the amount becomes available again without issuing another L/C and usually under the same terms and conditions. The amount of the credit can revolve in relation to time or value. This type of credit is usually issued when the buyer has regular transactions with the seller or when the buyer and seller have agreed to buy and sell fixed goods over a period of time or when the relationship of the buyer and seller is that of supplier and agent. This type of credit saves time and money for the buyer, the applicant, as he does not have to open new L/C repeatedly. It is beneficial when there is short supply of goods or the supplier is a monopolist.

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

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

Sight L/C In a sight L/C, payment to the beneficiary is made at the first sight of presentation of the documents at the counter of issuing bank. However, the issuing bank must verify and satisfy itself with the documents received as whether they comply with the credit terms

and whether all the quoted documents are received or not. Reimbursement can be claimed by the negotiating bank directly from the reimbursing bank after examination of documents by the issuing bank.

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

Stand by L/C It is a special kind of standby or backup L/C. It is rarely used and is generally not seen in practice in Nepal. This form of L/C is issued in specific situations such as when the law restricts banks from issuing guarantees. In such conditions, it is used as a substitute for performance guarantee or other financial guarantees or for securing loans.

Not all these types of L/C are in practice in Nepal. The L/C that Machhapuchchhre Bank issues, uses or accepts in general is the Sight L/C, Usance L/C, Revolving L/C, transferring L/C and Back-to-Back L/C.oviding guarantee to secure advances made to us nationals or companies’ resident abroad.

Documents under Letter of Credit

• Commercial Documents:

a) Proforma Invoice:

Proforma invoice is basically a form of quotation by seller to a potential buyer. It’s a short of invitation to the buyer from seller to place a firm order on him. The Proforma invoice normally shows the terms of trade & prices in addition to the description of goods so that ones the buyer has accepted the order, there is a firm contract to be performed as per the terms & conditions mentioned on it.

b) Commercial Invoice:

Contains a detailed description of goods consigned, selling price per unit, and total amount, quantity shipped, LC and contract numbers, payment and delivery terms, country of origin, etc issued on the letterhead of the exporter. c) Packing List:

May be combined with Weight List. Gives full details of goods, viz. number of cases, bales, pieces or packages, net and gross weights, shipping marks, numbers, etc.

d) Weight List:

Lists the weights of individuals’ packages and/or gross and net weight. Detail of weight of goods. • Official Documents

a) Export / Import License

Proof that appropriate government authority has approved the transaction under import or export.

b) Certificate of Origin

Proof of origin of goods. Third Party Pre-shipment Inspection Certificate confirms goods confirm to the certain standards and indicates value can be requested by the Importer (as commercial document).

c) Quality certificate

A proof that shows goods satisfy the conditions relating to quality control and are certified as export worthy.

d) Certificate of Analysis

Related to those goods whose chemical analysis is required.Health/ Veterinary/ Phyto-sanitary Certificate Called usually for export of foodstuffs, marine products, animal meat, livestock, fruits and vegetables, herbs, etc. A proof that the merchandise is free from any harmful insects, disease and fit for human consumption.

• Transport Documents

a) Bill of Landing

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

b) Airway Bill or Air Consignment Note

Issued by Air carriers? Transporters. A receipt for goods. An evidence of having entered into contract of carriage does not represent title to the goods and therefore not negotiable instrument. Rail or road Consignment Note.

c) A receipt for goods

An evidence of having entered into contract of carriage. Road Consignment Note also known as truck Receipt or Lorry Receipt.

d) Post Parcel Receipt

Issued by Post OfficesEvidence of receipt as well as dispatch of goods packed in parcelsDoes not represent title to the goodsUsed for articles of small size but proportionately of a larger value

• Insurance Documents

Insurance PolicyA contract outlining what risks are insured, what insurance premiums are to be paid by the policyholderDefines the rights of both insured and insurerCan be assigned merely by endorsement and delivery Marine or SimilarCovers transit periodDone usually for warehouse to warehouse basis

• Financial Documents

Financial documents are those documents, which performs the function of obtaining finance, collection of payment etc. The most common financial documents used is a “Bill of Exchange”. A Bill of Exchange (or B/E shortly) is also referred to as “Draft” or “Hundi”. In many countries, a bill of exchange is recognized as legal documents.

Bill of Exchange has three basic parties namely Drawer, Drawee & Payee.

1. The person who draws the bill is called the Drawer.2. The person whom the bill is addressed (on whom the bill is drawn) is called the drawee.3. The person whom the payment is to be made is called the Payee.

• LC Negotiation:

UCP 600 which is to come into force from July 1, 2007 defines negotiation as follows:

“Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/ or documents under a complying presentation, by either advance in or agreeing to advance funds to beneficiary”.

The process of negotiation starts right after the presentation of shipping documents (invoice, transport documents, certificate of origin, insurance documents etc.) together with financial documents (bill of exchange or draft) by the beneficiary at the counter of a bank nominated for negotiation in the Letter of Credit or a bank of seller’s choice. After examination of documents and ensuring their compliance with the Letter of Credit, the nominated bank agrees to purchase the draft or bill exchange drawn under the Letter of Credit and gives the value of the draft/ bill of exchange to the beneficiary charging interest for up to the maturity of draft depending on reimbursement method incorporated in Letter of Credit or as per credit arrangement.

In order for a negotiation to take place, a Bill of Exchange or Draft (sight or time) must be called for in the credit and is required to be accepted by the issuing bank or the nominated bank or the confirming bank. Negotiation is possible for both restricted as well as freely negotiable Letters Of Credit and payment under a negotiation is usually with recourse.

• LC Related Fraud & Precaution

Fraud can be defined as ‘Any loss, or attempt to cause a loss, involving deception’Fraudsters… who are they?External Habitual CircumstantialInternalCollusion between Staff and CustomersSome causes to Staff fraudFinancial problemsFrustrated personal / career aspirationGreed / envyFearPoor moraleFraud ExampleLC issued favoring non-existent beneficiaryLC issued for forbidden commoditiesForged documents presented without making shipments … fraudulent issue of Bill of Lading by shipping line employeeLC established with payment to be made against ‘stale’ documentsApplicant cleared against shipping guarantee without production of original Bill of LadingCash deposit offered as security by unknown customer to secure issue shipping guarantee unlimited by amountBeneficiary shipping inferior goodsGoods cleared….. importer disappearsInferior goods / empty containersGradual increase in limitInadequate managerial checks on business premisesLC issued with unclear and ambiguous terms like ‘all discrepancies are acceptable’

Fraud…. Possible Risk PrecautionsCheck carefully authenticity of LCDo not get drawn into issuing ‘unworkable’ LCsDo not pay against LCs with unclear termsGoods inspectionVessel check on sailing / routeBe suspicious for requests for quick payment etc.Only handle if deal is min line with customers’ core business.

NRB rules and regulations regarding LC

Nepal Rastra Bank, being the central bank of the country has issued several directives relating to Letters of Credit in order for a smooth operation of Letter of Credit transactions and to put a check over the irregularities in foreign exchange transactions. All banks in Nepal are bound to adhere to these directives.

Some key NRB Guidelines:

Charges / Margin can be deducted from the applicants account only. Firms other than the companies cannot enjoy L/C facility more than 20 times their capital 10% additional margin must be collected for Reimbursement L/Cs at the time of opening the L/C. For sight L/Cs where value is more than $50000, a Business Credibility Report of the Beneficiary is needed. BCR cannot be more than 1 year old. Words like “Credit Risk”, “high Credit Risk” Rating not determined” are not acceptable in the BCR. Various banks can share BCR obtained by one bank. All import letters of Credit shall compulsorily specify the border customer point from which the goods will be brought into Nepal LC’s opened at the request of Nepalese importer can be sent to the foreign beneficiaries through correspondent banks only LC Issuing Bank can accept shipping documents under FCY LC’s received through correspondent banks only. Payment cannot be made directly to the beneficiary by way of drafts or otherwise under FCY LC’s.

Where LC transaction is being done for the first time with any firm, detail information as to the firm’s standing, experience, address, phone no., fax as well as confidentiality of the owners has to be obtained.

Export and Import transaction through LC between Nepal and Bhutan is required to be done Indian currency only. Import of live Poultry i.e. fowls of the species Gallus Domesticus, Ducks, Chicken, Geese, Turkeys and others; meat and edible offal of the poultry; birds’ eggs; unprocessed/ unworked products of birds’ origin is prohibited from all Asian countries except India, Bangladesh, Sri Lanka and Bhutan

Terms and Conditions under Letters of Credit

Definitions of some of the terms used in L / C

a) Tenor the length of time a draft is drawn to run before presentation for payment.

b) Tolerance

The level up to which the quantity and / or value of the LC may exceed or reduce.

c) Delivery Terms

The terms stated in abbreviated from which clearly specify where the seller’s responsibility for the merchandise ends and where the buyer’s begins during the course of transportation.Some examples of delivery terms are FOB, CIF, CFR, FCA, Ex-works etc.

c) Place of Loading

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

d) Place of Discharge

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

f) Final destination

The place where goods are to be finally delivered.

g) The latest shipment date

The last date by which the shipment must be made.

h) Presentation period

Every credit which calls for a transport document should also stipulate a specified period of time after the date of shipment within which the documents must be presented for payment, acceptance or negotiation.

In order to avoid difficulties for the beneficiary, the applicant should pay attention to the time which the beneficiary may need to collect the documents from their issuers, to prepare the documents for presentation and to presenter the documents under the credit, taking into account the time for the delivery by mail to the bank.

i) Date of Expiry

The last date by which a beneficiary must present the documents at the counters of a negotiating bank.

Under UCP 1993 Article 42, all credits must stipulate an expiry date. The validity of the credit should be in accordance with the circumstances of the transaction, i.e. time for manufacturing of goods and presentation of documents.

j) Place of Expiry

This is the city and/ or the country where the documents have to be presented by the expiry of the credit.

k) Partial Shipment

Shipment on more than one vessel or one means of conveyance (more than one truck (lorry), ship, aircraft, etc.) is a partial shipment.

l) Transshipment

Transshipment means unloading and reloading from one vessel to another vessel during the course of ocean carriage from the port of loading to the port of discharge stipulated in the credit.

m) Bank Charges

To avoid difficulties it should be clearly defined in the contract between the importer and the exporter and in the credit by whom the bank charges, e.g. advising commission, postage, confirmation commission, handling commission and so on, have to be borne.

n) Business Credibility Report (BCR):

A Report that shows the credibility position (e.g. current performance, standing, profitability, conduct of account, etc.) of business entities usually provided by internationally accredited Credit Rating agencies (e.g. Dun & Bradstreet) and banks which have been dealing with such entities directly.

A BCR is required for Sight L/Cs where value is more than $50,000. in DC operations, it is essential that the wording of the instrument itself is expressed in clear and absolutely unambiguous terms. Both buyer and seller as well as issuing and advising / confirming / negotiating banks must be able to understand these terms and are also able to adhere to them.

Since a Letter of Credit intends to protect the interests of both buyer and seller, LC staff should carefully check LC application and ensure the following:-

- Documents which beneficiary cannot obtain or provide are not called for in the LC.- LC does not require a document to contain details which are not within the issuer’s Knowledge - LC dose not state conditions or events whose observance cannot be ascertain from the Face of the documents.A certificate as to performance of such conditions or events can be asked in the LC as a supportive document.

o) Letter of Credit Issuance: Application• Should be correctly and completely filled.• Alternations should be authenticated.• Signatures should be verified.• If FOB CFR, Insurance should be obtained.• Check whether the goods fall under any kind of Government restrictions or if the goods require any kind of Government / NRB / other approvals.• Check if Beneficiary Credibility report is required.• Ensure that information mentioned in Performa Invoice tallies with the LC Application.• Performa Invoice or Sales Contract/ Sales Indent/ Sales Confirmation• Performa Invoice should contain the following:• Name of the Product/Goods• Model/Brand• Quantity, Purchase Price Unit, Total Price• 8 digit harmonic code• Country of Origin• Delivery Terms (INCOTERMS)• A Performa Invoice should not contain clauses like “All discrepancies acceptable”

p) Bi. Bi. Ni. 3

Is a controlling mechanism developed by NRB. Bi. Bi. Ni. 3 needs to be submitted to the bank by the customer while requesting FCY L/C issuance for import from outside Nepal. For each convertible currency L/C opened, banks need to submit Bi. Bi. Ni. 3 report to NRB.Bi. Bi. Ni. 3 gives certain details of L/C. Filled in part by the applicant, filled in part by the bank. NRB collects Bi. Bi Ni. 3 data from various banks and submits them to Banijya Bivag (on Tuesdays & Thursdays) and Banijya Bivag transmits the same to Royal Nepalese Consulate in Kolkotta. The list is popularly known as RNC list.For the goods to be released in Kolkotta Port, details of our L/C should be in the RNC list.

q) Disbursement Sheet

A statement that reflects the credit facilities approved by the bank in the name of a credit and utilization made by the client as of a particular date indicating the request made by the client to use the particular approved line.

Must be prepared for both regular as well as clients should include all the credit facilities/ limits approved by the bank in the favor of the customer together with the customer’s outstanding position as of date and any irregularities either in the financial status or the terms and conditions of the requested LC should be mentioned in it.

For new customers, disbursement sheet should be raised showing the amount of the requested LC along with irregularities if any.

r) Discrepancies

When the Issuing Bank receives the documents, the bank has to check them against the LC conditions, to determine whether or not the requirement of LC has been fulfilled.

If any of the documents do not satisfy the requirements of the LC or are not consistent with each other, this inconsistency or deviation is termed as ‘Discrepancy’.

All such discrepancies must be noted down after the examination of the documents. A decision then should be made by the Issuing bank what action is to taken. Depending on the circumstances, the documents may be accepted, rejected or corrected.

Following are few of the commonly observed discrepancies in the documents:

Credit expiredLate shipmentClaused Bill of LadingLate presentation or presented after permitted time from date of issue of shipping documentsShort shipmentCredit amount exceededUnder-insuredDescription of goods on invoice differing from that in the LCBL, insurance documents, Bill of Exchange not endorsed correctlyAbsence of documents called for in LCCharter BL presented instead of Master BLInsurance risks covered not being those specified in LCInsurance risks specified in LC not coveredBL does not bear ‘Shipped on Board’ stampBL does not mark ‘freight pre-paid’ when sor required by the LCTransshipment/ port shipment effected when prohibited by LC

CP 500 & 600 Compared:

Some changes / improvements offered by UCP 600 over UCP500:

Working of UCP500 changed into a plain, simple, precise and concise language with inclusion of terms that are easy to comprehend. Less wordy and better organized than its predecessors. Elimination of phrases like ‘reasonable care’, ‘reasonable time’ and ‘on its face’ (except in article 14) from the rules.

Introduction of separate articles 2 and 3 on ‘Definitions’ and ‘Interpretations’ which contain the novel concept of ‘honor’ along with the inclusion of certain ISBP working in UCP. The definitive description of negotiation as ‘purchase’ of drafts and/ or documents. UCP has been recognized as ‘rules’. Credit (LC) is recognized as ‘irrevocable’, so there is no place for revocable credit.

Addresses of applicant and beneficiary appearing in any stipulated document need not be same as long as they are within the same country. It is banks and not ‘all parties’ that deal with documents and goods.

It is the issuing bank’s responsibility to honor drafts and / or documents drawn under LC’s, it is how clear that credit MUST NOT call for drafts drawn on the applicant, and not just that they SHOULD NOT.

Clear cut definition of ‘Nomination’ which means authorization by the issuing bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.

Attempt has been made to establish a definite undertaking of issuing and confirming banks to reimburse on maturity whether or not the nominated bank prepaid or purchased its own acceptance or deferred payment undertaking.

Removal of ‘reasonable time, not to exceed 7 banking days’ for checking documents and its replacement by 5 banking days.Resolution of the problem of ‘inconsistency in the data’ by stating that ‘data in a document need not be identical to, but must not conflict with data in that document or any other stipulated document.

The option, while refusing documents on account of discrepancies, to hold documents until receipt of wavier, provided such waiver is acceptable, should free the issuing bank from many unwarranted obligations towards the beneficiary (concerning unauthorized wavier and delivery of documents to the applicant without prior authority of the beneficiary/ negotiating bank), and/or the applicant forcing the issuing bank to take up documents upon the applicant’s wavier of the discrepancies.

Strong language in the credits vs contracts article discourages applicant from including contracts and Performa invoices as integral parts of credits.Permitting presentation of originals where a credit calls for copies The addition of character to the list of authorized signatures for a charter party bill of lading.

The change in insurance documents is that risks must be covered at least between the place of taking in charge or shipment and the place of discharge or final destination specified in the credit, in addition to the existing requirement that the cover must enter into effect not later than the date of shipment.

Another overall improvement in UCP 600 is that the phrase ‘unless otherwise stipulated in the credit’ or words to that effect is not repeated countless times. A new separate article defining what constitutes an original documents transfers this necessary information from an ICC ‘Decision’ to where it belongs in the rules.

Collection:

Collection is an arrangement whereby the goods are shipped and the relevant bill of exchange (draft) is drawn by the seller on the buyer, and/or document(s) is sent to the seller’s bank with clear instructions for collection through one of its correspondent bank located in the domicile of the country.

As per Article 2 of ICC Uniforms Rules for Collections.

“Collection” means the handling by banks of documents (financial an commercial) in accordance with instructions received, in order to:i. Obtain payment and / or acceptance,ii. Deliver documents against payment and / or against acceptance,iii. Deliver documents on other terms and conditions.

Where, “Financial Documents” have been defined as bills, of exchange, promissory notes, cheques, or other similar instruments used fo obtaining the payment of money and;

“Commercial Documents” are defined as invoices, transport documents, documents of title or other similar documents, or any other documents whatsoever, not being financial documents.

Clean Collection

As per URC522, Article 2(c), Clean Collection means collection of:

i. Financial documents accompanied by commercial documents;ii. Commercial documents not accompanied by financial documents

Flow Chart under Documentary Collections

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

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

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

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

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

ICC Uniform Rules for Collection (URC)

ICC Publication no. 522In force from January 1, 1996Applicable to all collections (clean and documentary) if such rules are incorporated into the text of the collection instruction and are binding on all parties there to clear definition of several terms such as clean collection, documentary collection, documents, financial documents, commercial documents, principal, remmiting bank, collecting bank, presenting bank, drawee, presentation, etc.

Standard LC Transaction

Established of a LC always takes place at a bank. However, establishment of LC is made only upon due acceptance & negotiations between the buyer & seller. A standard process of C transaction can be outlined as below:

Flow chart of Standard LC Transaction

1 Negotiation between buyer & seller thus finalization of deal.

2. Buyer approaches its bank to open import LC.

3. Issuing bank issues the LC through its advising bank.

4. Advising bank informs and advises the LC to exporter.

5. Exporter prepares the goods and makes the shipment through the carrier.

6. Exporter prepares the documents demanded in the credit & furnishes to its Negotiating bank.

7. Negotiating bank forwards the documents to issuing bank for payment.

8. Issuing bank obtains payment from importer & provides the documents

9. Importer obtains the goods shipped by exporter through carrier (or its agent)

10. Issuing bank releases the payment to negotiating bank through reimbursing bank.

11. Exporter receives payments through negotiating bank.

Procedures for opening an import letter of credit:

STEP 1.Scrutiny of L/C Application Form:

• Signature verification: Ensure/determine that L/C application form is duly signed by authorized person(s) of the applicant firm.• Availability of Limit: See whether L/C limit is available for the request. If the party does not enjoy L/C limit or the sanctioned limit is not sufficient for the request, refer the matter to Credit Department.• Type of Applicant Firm: Is it Industry or Trading? Trading firm has more restrictions.• Beneficiary Firm: Ensure that it is not the blacklisted. Refer Annex. 1 for the current blacklist.

• Description of Goods: Ensure (i) The item is not restricted by NRB or HMG/N

(ii) The goods to be imported fall under the nature of activity of the Concerned firm (iii) Harmonic code given corresponds the goods mentioned (iv)The goods is not capital item, for capital item special L/C limit is required (v) The goods to be imported as are per pro forma invoice submitted.

a. Tenor: Whether it is Sight or Usance. If it is Usance, approval has to be obtained from M.D. even if it is within sanctioned limit.b. Currency: Whether we can settle the payment for the currency or not.c. Country: Following care should be taken: (a) India: Import from India in Convertible Foreign Currency: Circulars issued by Nepal Rastra Bank, Foreign Exchange Department is to be referred to. (b) Bhutan: L/C can be established in Indian Rupees Only. (c) Members of ACU (except India): Payment should be effected through central banks of respective countries as per ACU Dollar Payment Mechanism; (d) Countries Sanction by U.S.A.: Normally L/C should not be established in those countries as payment can not be made to those countries in USD.d. Shipment Terms: Shipment terms should be mentioned as per the proforma invoice and documents (or wording in the documents) be required accordingly.e. Date and Place of Expiry: Date of expiry should be normally latest date of shipment plus period provided for presentation of documents.f. Document Details: Except of an inland L/C within Nepal, compulsory documents are: (1) Invoice (2) Transport Document, (3) Certificate of Origin, (4) Insurance Policy (if insurance to be arranged by the supplier as per the terms). In addition to these, packing list is usually asked for. ‘Bills of Export for Duty Free Goods’ are to be necessarily asked for if the goods are being imported from India in convertible foreign currency.g. Special Terms & Conditions: Are they acceptable to the Bank? Are any terms and condition contradictory to any other terms and conditions in the application or proforma invoice? Are documents called for all the terms and conditions required to be fulfilled by the Beneficiary or any other party?h. Confirmation Required? Confirmation terms to be checked and mentioned in the L/C. We should have line of credit with the confirming bank so as to enable them for adding confirmation. Normally T. T. reimbursement authority is provided, if an L/C has to be confirmed. Confirming bank charges some commission for the confirmation added by them and it should be checked in the L/C opening form and mentioned in L/C whom the confirmation charges are for to avoid future disputes.i. TT Reimbursement Facility: In case of prime/excellent customers TT reimbursement facility may be provided only after the approval from the competent authority and should me mentioned in the documentary credit. Authorizations for reimbursement for the required amount to be provided to the Nostro bank through swift or filling and dispatching their reimbursement form.j. Enclosures: • Proforma Invoice indicating

(i) Description of goods,(ii) Quantity, (iii) Rate, (iv) Total amount, (v) Country of origin, (vi) Harmonic code, (vii) Shipment terms and duly signed by both buyer and seller.• Up-to-date Firm Registration Certificate and Income Tax Registration Certificate (not required if the same has been obtained and kept in separate file.)• Bi. Bi. Ni. Form No. 3 - three copies (not required for NRS. and IRS. & L/Cs). In case of Branches, four copies are required.• Special License or Permission Letter if required• Insurance Policy (in case the insurance is to be covered by the applicant) covering risks appropriately.

STEP 2.Obtain Approval from Appropriate Authority for Opening of L/C. Approval Sheet to be prepared as per annex xx.

STEP 3.Opening the L/C:a. Entry in the L/C opening Register for obtaining a L/C No.b. Preparation of vouchers. Entries are:• Liabilities Entry: Constituent Liabilities in L/C Open A/C (Currency) – Dr.L/C Open Account (Currency) – Cr.• Margin , Commission and Telex/Postage Charge Entry:Party Account – Dr.L/C Margin Account – Cr.Party Account – Dr.Commission L/C – Cr.Party Account – Dr.Charges Telex/Postage – Cr.Note: Commission & Charges to be recovered as per banks rules I.

STEP 4. Preparation of LC message & communicating the same to the 'Advising Bank'. LC message should be prepared as per the instructions of the applicant. While preparing the message, NRB directives & UCPDC should be taken into consideration.

STEP 5.Maintenance of LC file: LC file should prepared which should contain all related documents like application form, proforma invoice, B.B.N. Form 3, approval, office copy of LC message, red copy of voucher, amendments, documents etc.

STEP 6.Reporting to Concerned Authorities:

• In case of LC in convertible foreign currency, 3 copies of B.B.N. form 3 should be obtained and reported to NRB on daily basis & concerned Customs Office on weekly basis after properly filling the same. In case of branches, one more copy should be obtained and reported to Head Office.• The details should also be entered & transmitted to NRB, I. T. Dept., through a special program/software in computer developed provided by NRB on daily basis. This message is again transmitted by NRB to Calcutta Port via Department of Customs.. • If an L/C is opened by obtaining more than 50% cash margin, this should be reported to NRB, Foreign Exchange Department within 7 days from month end. • Branches should advise their respective head Office the particulars of L/C opened having value of more than USD 50,000.00.

Amendment of an L/C:

Step 1: Scrutiny of Amendment Request:a. Signature Verification.b. Availability of Limit: If value of the L/C is to be enhanced, check whether L/C limit is available for the request. c. Enclosures: • Proforma Invoice – in case value/description of goods or terms is to be changed.• Bi. Bi. Ni. Form No. 3 - three copies (not required for NRs. and IRs. L/Cs). In case of Branches, four copies are required.• Special License or Permission Letter if required. For instance, if Customs Entry Point is to be changed, a permission letter from HMG/N, Department of Commerce is required.• Insurance Policy (in case the L/C is amended making the applicant responsible for covering the insurance) covering risks appropriately.

Step 2: Approval from Appropriate Authority: In case of value enhancement only. Branches should also obtain approval from head Office if the value to be enhanced is more than 10% of original L/C value and is greater than USD 1,000.00.

STEP 3.Amendment:

a. Entry in the L/C opening Register for obtaining a L/C No.b. Preparation of vouchers. Entries are:• Liabilities Entry (If value is enhanced): Constituent Liabilities in L/C Open A/C (Currency) – Dr.L/C Open Account (Currency) – Cr.Note: If value is to be reduced, reverse entry of above should be passed.• Margin , Commission and Telex/Postage Charge Entry:Party Account – Dr.L/C Margin Account – Cr.Party Account – Dr.Commission L/C – Cr.

Party Account – Dr.Charges Telex/Postage – Cr.

STEP 4. Preparation of amendment message & communicating the same to the 'Advising Bank'. Amendment message should be prepared as per the instructions of the applicant. While preparing the message, NRB directives & UCPDC should be taken into consideration.

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

STEP 6.Reporting to Concerned Authorities: • Reporting of B.B.N. form 3 to NRB & Customs Office same as L/C opening.• Reporting to NRB, I. T. Dept., through a special computer program/software.

Settlement of Letters of Credit:

STEP 1.Examination of documents received from negotiating bank:Check Lists for examining the documents:Documents received from the negotiating bank should be examined thoroughly to determine:• They appear on their fact to comply with all the terms and conditions of the letter of credit. Article 13 of UCPDC 500 should be referred for this purpose.• They do not violate any of NRB guidelines.

STEP 2.Communication of Discrepancy Message to the Negotiating Bank. This should be done within 7 (seven) working days from the date of receipt of documents as per UCPDC. Article 14 of UCPDC 500 should be referred for the purpose. The discrepancy message should also be notified to the applicant. If the applicant accepts the documents despite of discrepancies, the documents can be retired and payment may be remitted to the negotiating bank deducting the discrepancy fee.

STEP 3.Entry of details of the documents in Import Bills (IB) Register and intimation of the same to the concerned applicant. STEP 4.Retirement of Documents: When the applicant approaches the bank for retirement of the documents, 1. Request Foreign Exchange Department for a fresh exchange rate. However if the transaction amount is less than USD 1,500.00, prevailing common selling rate (CSR) should be applied. Discount on exchange rate of USD/Euro up to 5 Paisa can be provided to prime customers, but only after the receipt of the approval from the concerned authority.

2. Preparation of vouchers, Entry & Verification. Entries are:• Liability Entry: L/C Open Account (Currency) – Dr.

Constituent Liabilities in L/C Open A/C (Currency) – Cr.• Entry for Nostro Account (Document Value):Party Account – Dr.Nostro Account – CrCommission Account (discrepancy fee, if any) – Cr.• Entry for Margin, Commission, Interest & Charges:Party Account – Dr.2% L/C Margin Account – Cr. (for industries) 10% L/C Margin Account – Cr. (for trading unit)L/C Margin Account – Dr.Party Account – Cr. (Refund of L/C Margin retained)Party Account – Dr.Commission L/C (Document Handling Charge) – Cr.Party Account – Dr.Interest Income L/C – Cr (in case our nostro is debited before the settlement date).Party Account – Dr.Charges Swift/Telex/Courier – Cr.• Entry for Disbursement of TR loan (if applicable):Trust Receipt Loan Account – Dr.Party Account – Cr

3. Disbursement of Trust Receipt Loan (If applicable): Approval from appropriate authority should obtain and separate TR Loan account must be opened. The amount is normally rounded to lower thousand. While opening account, one should be very careful about, TR loan amount, rate of interest, due date etc. The TR loan details including TR Loan No., date of disbursement, amount, validity period and interest rate should be entered in TR Register also.

4. Entry in Import Payment Certificate (IPC) Register: Bills (documents) details should be entered in IPC register and allocate an IPC number to the bills. (In case of NPR & INR LC, there is no need to do so.)

5. Preparation of documents for Kolkata (in case of shipment by sea and coming through Kolkata Port). Documents required: (a) Duly endorsed Original Bill of Lading, (b) Invoice, (c) Packing List, (d) Insurance Policy (copy). (e) Certificate of Origin, & (f) other documents mentioned in L/C.

6. Preparation of documents for Customs Office: Documents required: (a) Invoice, (b) Transport Document, (c) Packing List, (d) Insurance Policy (copy). (e) Certificate of Origin, (f) First two copies of Bi. Bi. Ni. Fa. No. 4 (required for LCs in convertible foreign currency to be prepared in printed security form by the bank) & (g) other documents mentioned in L/C. All the documents must be stamped and signed by authorized signatory of the bank and enclosed in covering schedule. The envelope should be sealed with wax and special stamp before delivering the same to the applicant.

D. Reporting to Concerned Authorities: a. In case of LC in convertible foreign currency, third copy of B.B.N. form 4 should be reported to NRB, Foreign Exchange Department on daily basis. b. The details should also be entered & transmitted to NRB, I. T. Dept., through a special program in computer developed provided by NRB on daily basis. c. If documents are received after 45 days from the date of transport document, the same should be reported to NRB, Banking Operation Department within 7 days from the month end.

E. Payment of Documents under the LC to Negotiating Bank: a. As per the instruction of the negotiating bank, payment message should be prepared and transmitted preferably by SWIFT or Telex. In case of payment by demand draft, DD will me made accordingly completing the banking procedure required if any .After getting the draft , a covering letter should be prepared and sent to the negotiating bank enclosing the draft.b. The details should also be entered & transmitted to NRB, I. T. Dept., through a special program in computer developed provided by NRB.

Procedures for Copy Document Settlement:Copy documents settlement means retirement of copy documents submitted to bank by the concerned customer by recovering 100% document value & margin (if any) as per NRB guidelines. However, payment can be remitted to the negotiating bank (not the beneficiary) only on receipt of ORIGINAL DOCUMENTS from them.On receipt of copy documents for settlement/retirement, the documents should be thoroughly examined to determine whether the documents appear on their face to be in conformity with the terms & conditions of the letter of credit. Bank should also obtain an undertaking from the customer that: (1) they accept all the discrepancies in original documents; (2) accept prevailing exchange rate; (3) indemnify the bank against all the consequences arising due to copy document settlement etc.Following entries should be passed while settling copy documents:• Entry for Document Value:Party Account – Dr.L/C Margin (USD) Account – Cr.Commission Account (for discrepancy fee, if any) – Cr.

• Entry for Margin, Commission, Interest & Charges:Party Account – Dr.2% L/C Margin Account – Cr. (for industries), or10% L/C Margin Account – Cr. (for trading unit)L/C Margin Account – Dr.Party Account – Cr. (refund of margin retained while opening L/C)Party Account – Dr.Commission L/C (Document Handling Charge) – Cr.Party Account – Dr.Interest Income L/C – Cr (in case our nostro is debited before the settlement date).

• Entry for Disbursement of TR loan (if applicable):Trust Receipt Loan Account – Dr.Party Account – Cr

Liability entry, entry for nostro account and communication charge entry should be passed after receiving the original documents. While passing nostro entry, L/C Margin (USD) account would be debited instead of the customer account. Exchange rate applied while settling copy documents is to be treated as final.Document retirement and reporting procedures are same as procedures for 'Settlement of Letter of Credit'. Only payment has to be effected on receipt of original documents.

Procedures for settlement of Usance L/CDocuments received under Usance L/C should be handled in the same way as other original documents received. For retirement of documents, customer should accept the document and undertake to pay the document value on maturity date. On the basis of the acceptance of customer, the documents should be retired in same way as described in procedures for 'Settlement of Letter of Credit (after passing the following entries:• Liability Reversal Entry: L/C Open Account (Currency) – Dr.Constituent Liabilities in L/C Open A/C (Currency) – Cr.

• Entry for Booking into Acceptance (Document Value):Customers Liability for Acceptance (Currency) – Dr.

FC Liability for Acceptance (Currency) – Cr.

An acceptance message also confirming the maturity date should be sent to the document forwarding bank. On maturity, payment must be effected to the negotiating/accepting bank after passing following entries:• Entry for Reversing Acceptance Entry (Document Value):FC Liability for Acceptance (Currency) – Dr.Customers Liability for Acceptance (Currency) – Cr.

• Entry for Nostro Account (Document Value):Party Account – Dr.Nostro Account – CrCommission Account (discrepancy fee, if any) – Cr.

• Entry for Margin, Commission, Interest & Charges:

L/C Margin Account – Dr.Party Account – Cr. (Refund of L/C Margin retained)

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

Party Account – Dr.Charges Swift/Telex/Courier – Cr.

• Entry for Margin, Commission, Interest & Charges:Party Account – Dr.

2% L/C Margin Account – Cr. (for industries) 10% L/C Margin Account – Cr. (for trading unit)Party Account – Dr.Commission L/C (Acceptance Commission) – Cr.Commission L/C (Document Handling Charge) – Cr.Party Account – Dr.Charges Swift/Telex/Courier – Cr. (for acceptance message)

A form called Bi.Bi.Ni.Fa. No. 4'Ka' should prepared for the purpose of reporting to NRB, Foreign Exchange Department.

Procedures for booking into 'Devolvement of Bills under Import L/C (DBills)':If a customer (applicant) does not settle the L/C within the expiry period for remitting the payment as per the L/C terms or UCPDC and documents are in order, payment to the negotiating bank should be remitted after obtaining approval from appropriate authority for debiting an account called 'Devolvement of Bills under Import L/C'. The details should be recorded in a register also. The transporter should be contacted for arrangement of secured storage of the goods imported under the L/C. Depending on the situation, necessary action should be initiated to take the custody of the goods which may later be auctioned also, if necessary. Further L/Cs should not be opened except the settlement of such dues.Entries while remitting payment by booking into 'Devolvement of Bills under Import L/C':• Liability Reversal Entry: L/C Open Account (Currency) – Dr.Constituent Liabilities in L/C Open A/C (Currency) – Cr.

• Entry for Nostro Account, Margin, Commissions & Charges etc:Nostro Account (Currency) – Cr.2% L/C Margin Account – Cr. (for industries) 10% L/C Margin Account – Cr. (for trading unit)Commission L/C (Docs. Handling Charge) – Cr.Interest Income L/C (If any) – Cr.

Charges Swift/Telex/Courier – Cr. (for Payment message)

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

• For Settlement of Dbills: Party Account – Dr. Devolvement of Bills under Import L/C – Cr. Interest Income L/C – Cr.

Post Settlement Follow-up & Reporting:

One copy of Bi.Bi.Ni. Form No. 4 should be received back by the bank within 90 days from the date of issue from concerned Customs Office. If the same is not returned, a reminder should be sent to Customs Office & c.c. to Nepal Rastra Bank & customer concerned also as reminder and reporting.

After receipt of the form, signature should be tallied with the specimen signature received from the Customs Office.

LC margin retained at the time of retirement of documents can only be refunded when:• A copy of Bi.Bi.Ni. Form No. 4 is received back from Customs Office and signature verified;• Copy of Customs Declaration Form (Pragyapan Patra) & Customs Receipt (duly verified with original) has been submitted.

NRB L/C Margin account should be reconciled with the statement received from Nepal Rastra Bank on monthly basis. Any item not reconciled should be taken care of immediately. Long pending item should be reported to Management.

1.9) RESEARCH DESIGN:- The research design is less vivid but more standpoints because the chronological derived date has been mainly engaged for analysis. For the conceptual framework and literature part more sensibly pragmatic books are followed as for basic familiarity about this report. For the logical purpose, some questions have been to the concerned personnel, who are measured as primary data, secondary data embrace annual reports published by the banks, financial testimonial of NRB, review material composed from different concerned magazines, newspaper, library etc. such data’s information has been processed through various processes like auditing, tabulating and result have been interpreted in the form of ratio percentage and diverse nature of diagrams for clear view.

Basically, this research design is prepared for the student of Banking & Insurance practical fieldwork report of BBA 8th semester. Research has been done by the following ways:-

1.9.1) Research Process:-

Figure No:-2

This research rapidly develops the conceptual framework. For building up the conceptual framework, the researcher notices hypothesis research question. Mitigating the research question the researcher reviews correlated literature on the basis and assembles the necessary data in sequence from the field. After analyzing and interpretation of the data, some empirical observation is done. It raises authentic preposition of the project. This formulated preposition and supports to the framework.

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

RESEARCH PROBLEM The number of banks in Nepal is in the increasing trend every year. Although there are huge numbers of LC transactions which has conveyed some problems in opening Letter of Credit. There are various problems some are presented below:- a) LC deals with the document not with goods. b) Chances if fraudulent are high. c) The changing rules and regulations in the international market. d) Lengthy clause may involve plenty amount of time. e) Govern by USPDC 600 which might change at times.

1.9.3) DATA COLLECTION METHOD Any figures and information presented numerically is called data. Data are useful in every field. As far as out topics is concern, the required data has been collected from following two sources which are being prescribed below:- Primary Data Collection: Primary data are those data collected originally and from the field or direct personal contact. Data is collected personally through face- to –face interview. Secondary data collection: secondary data are those data which has been collected by internal and external sources.Internal sources External sources

a) Annual Report a) Various Books on Subjectb) Balance Sheet b) Journal & Published articlesc) Cash Flow Statement c) Internetd) Income Statement of Bank d) Various Bulletins Published by NRB e) Website of Bank e) Libraries

STATISTICAL TOOLS USED

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

a) Simple Bar Diagram b) Multiple Bar Diagramc) Trend Lined) Pie Chart

OBJECTIVE OF THE STUDY

The main objectives of the fieldwork are being highlighted below:- a) To examine the official instructions of Nepal Rastra Bank in L/C activities. b) To gain the work experience of the field visit. c) To access the contribution, sources and tackles. d) To find out the process and problems of L/C opening. e) To develop practical knowledge and skill in report writing. f) To get knowledge about Commercial Banks & specially about GBL.

NEED TO STUDY

Today knowledge is the biggest assets and valuable resource of mankind. Without knowledge, we are handicapped in every share of our life. Knowledge has been accumulated over the centuries which are the result of the ever hanging social phenomena and the environment which surrounded them. In this world; there are repositories of vast knowledge.

Knowledge can be acquired through various sources. However research is the prime source of knowledge generation. Research opens new frontiers of knowledge. It is through research that new evidence is discovered, old evidence is recorded, new facts are gathered and new insights are brought to light. Research thus provides broader and deeper understanding.

The student of BBA 8th semester needs this study to get the knowledge about the related sector (i.e. Letter of Credit). Due to which we can understand the sector, their condition, their position, their environment, working style which helps to increase our mental abilities in the related field. This helps in obtaining practical experience related with that topic.

As far as the study of the bank GBL is concerned; it is the first joint venture bank having maximum Nepali shareholders, the need of this study is to know about position of Letter of Credit in Nepal, the management system, loan and credit policy of GBL.

ORGANIZATION OF STUDY:-

The study has been organized into the chapters as presented in the format to cover partial fulfillment of BBA program.

The titles of the chapter are as follows:-

Chapter One : Introduction

Chapter Two : Presentation & Analysis Data

Chapter Three : Summary & Conclusion

The rationale behind this kind of study is to follow a simple research methodology approach. The contests of each of the chapter of this study are briefly mentioned here:

The Introduction deals about the meaning and definition of the bank, its role, functions and objectives towards the nation and customer. This chapter deals with the Letter of Credit of Global Bank Limited. The process, rules, criteria, principle, its function and procedures are the major area of the study. This chapter emphasizes on the objectives, need and organization of study.

The presentation & Analysis of Data emphasizes on the performance of Global Bank Limited with table & figure. The data shows the shareholding pattern and other LC related items.

The last chapter Summary & Conclusion explains the whole report in briefly. Technical know-how as well as the summary of the study is presented in this chapter.

LIMITATION OF STUDY

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

a) Limited to Letter of Creditb) Doesn’t deals with other aspect of the bank as a whole.c) Data based on secondary basis, probability of error is high.d) Time Constraints.e) Lack of proper knowledge of the related study in banking sector. RESEARCH QUESTION

While preparing the report the main emphasis was given to the question regarding the bank Global Bank Limited and the research topic “Letter of Credit”. These questions played vital role in collecting data & make report in accordance with my report objective. The related question as follows:-

a) What is letter of Credit (L/C)?b) What is L/C policy of GBL used?c) What are the objective, policy & strength of GBL?d) What is the today’s level of GBL is standing?e) How the GBL is handling L/C program?f) Major drawback of L/C