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1.1 INTRODUCTION
1.1.1 MEANING OF BANK
Generally, a bank is defined as an institution established by law, which deals
with money and credit. Bank is also meant to be an institution whose debitsusually referred to as bank deposit are commonly accepted in final
statement of other peoples debts. In other words, it is an institution which
transact in money receiving it on deposit from customers, honoring
customers drawing against such deposits on collecting cheques, for
customers and lending or investing surplus deposits until they are required
for repayment. Banks are among the most Important financial institutions in
the economy and business in thousands of local towns and cities. I the
modern time, bank is known as one of the important financial institution
dealing with money credit and financial institution.
Some of the banking experts have defined bank in the following
types:According to Professior Hart, a banker is one who in the ordinary course of
his business, receives money which he repay by the honoring cheques of
persons from whom or one whose account he receives it
According to Sayers, Ordinary banking business consists of changing cash
for bank deposits for cash, transferring bank deposits from one person or
corporation to another; giving bank deposits in exchange for bills of
exchange, government bonds, the secured or unsecured promises of
businessmen to repay, .
According to Crowther, A bank collects money from those who have it to
spare or who are saving it out of there incomes and it lends this money to
those who requires it.
The banking systems of different
countries vary substantially from one another, but there has been during the
present century a universal tendency for each nation to develop a wide
network of banks centered upon the chief trading centre and grouped round
a quiet different institution referred to as the central bank. These wide
networks of banks have been developed due to multi-functions of bank it
has to perform. In the context of Nepal too, we have different sorts of banks
performing different functions and helping in different sectors of economy for
instance, commercial bank, industrial bank etc.
1.1.2 ORIGIN OF BANK
Economists have their own point of view regarding the origin of
bank. The Greeks and the Mesopotamians had banks as the Romans had. But
these civilizations regarded banking as unnatural, but some banks were
allowed to operate. Some say that the word bank has derived from the Latin
word bancus which refers to the bench on which the banker would keep its
money and his records. Where as some trace its origin to the French word
banquee and the Italian word banca.
Modern banking originated in the medieval Italy. The first bank
developed was the Bank of Venice. It was established in 1157 A.D. in Italy.
Following its establishment, the banks established were Bank of Barcelona
in 1401 A.D. and the Bank of Genoa in 1407 A.D. gradually the Bank of
England was established in the late seventeenth century and it enjoyed a
prestigious position. But the drastic development in the field of modern joint
stock commercial banking occurred when the parliament of England passed
the banking act 1883 A.D. it was only in the 19th century that the modern
joint stock commercial banking system developed in the leading countries of
the world.
In Nepal ,however the first bank was established in 1994 B.S.
in the name of Nepal Bank Ltd. and central bank of Nepal was established
in the name of Nepal Rastra bank under Nepal Rastra Bank Act 2012 B.S.
(1956A.D.). But this act has been repealed and the Nepal Rastra Bank, act
2058B.S. (2002A.D.) is being existed. Nepal Rastra Bank , the central bank of
the Kingdom of Nepal , was established in1956 A.D. to discharge the central
banking responsibilities including guiding the development of the embryonic
domestic financial sector . Since then, there has been a huge growth in both
the number and the activities of the domestic financial institutions.
1.1.3 EVOLUTION & DEVELOPMENT OF BANK IN NEPAL
If we look back into the history of the development of banking,
we notice that money lenders, merchants, goldsmith, landlords were ancient
banks of Nepal. In the Nepalese perspective, the first ever recorded
borrowings were in 723 A.D. when Gunakama Dev borrowed money to
rebuild Kathmandu. However, as an organized bank, the first organization
was established in` the name of Tejarath Adda in the period of rana reign
in 1993 B.S. but Tejarath Adda was not the bank in the original sense
because it was established only to grant loan to government employees not
to general people. Infact, the first organized bank established bank in Nepal
was Nepal Bank Limited in 1994 B.S.
Nepal Bank Limited started to provide the services of commercial
bank to the general people and tried to break
the monopoly of
predominance of Sahu Mahajan in financial activities. Nepals first
commercial bank, the Nepal Bank Limited, was owned by the government by
51 percent of the shares in the bank and controlled its operations to a large
extent. Nepal Bank Limited was headquartered in Kathmandu and had
branches in other parts of the country.
For the purpose of promoting monetary and banking activities of
Nepal and also to implement monetary policies of government, it felt the
need of central bank and in this process Nepal Rastra Bank was set up in
2013 B.S. This bank has been functioning as the government bank and has
contributed to the growth of financial sector. After establishment of Nepal
Rastra Bank, the banking sector development became possible.
In this series, NIDC, Nepal Industrial Development
Corporation, a state-owned development finance organization headquarter
in Kathmandu, was established in 1959 with United States assistance to offer
financial and technical assistance to private industry. Although the
government invested in the corporation, representatives from the private
business sector also sat on the board of directors. The Co-operative Bank,
which became the Agriculture Development Bank in1967,was the main
source of financing for small agribusinesses and cooperatives. Almost 75
percent of the bank was state-owned; 21 percent was owned by the Nepal
Rastra Bank and 5 percent by cooperatives and private individuals. The
Agricultural Development Bank also served as the governments
implementing agency for small farmers group development projects assisted
by the Asian Development Bank and financed by the United Nations
Development programme was established as an industrial development bank
and agricultural development bank as an agricultural development bank.
Similarly, to enhance the commercial bank facility in the country, Rastriya
Banijya Bank was established as a second commercial bank of the country.
After establishing the Rastriya Banijya Bank, service of commercial bank
spread in both the rural and urban areas. Till 2041 B.S. government adopted
the principles of protectism to protect the interest of Nepal Bank Limited.
Therefore, the rate of development of banking sector was very low till 2041
B.S. but government followed principle of economic liberalization in 2042
B.S. and after that they allowed establishment of joint ventures bank also
with the cooperation of foreign banks. in this series, the first bank
established was Nepal Arab Bank Ltd. In 2041 B.S. and it provided as a
milestone in the development of banking sector in Nepal. Following the
establishment of Nepal Investment Bank formerly known as Nepal
Indosuez Bank was established in 2042 B.S. likewise, Nepal Grindlays Bank
Ltd. (2021B.S.), Himalayan bank Ltd (2049 B.S.), Nepal S.B.I. Bank Ltd.
(2050B.S.), Nepal Bangladesh Bank Ltd. (2051B.S.), Everest Bank Ltd. (2051
B.S.), Bank of Kathmandu Ltd.(2051 B.S.), Nepal Credit and Commercial Bank
Ltd. And so many other banks were established. Therefore, there are so
many commercial banks in operation in Nepal till date operating with their
main objectives of carrying out activities under the commercial Bank Act
2031 B.S., the Nepal Rastra Bank Act 2058 B.S., the companies Act 2053 B.S.
and Contract Act 2056 B.S. After adopting the Liberalization polices various
development banks were established in Nepal according to Development
Bank Act 1996 A.D. with the objective of providing micro credit services to
rural people under group guarantee basis on five rural development banks
were established in each development region. On the basis of above
analysis, we can say that the history of development of modern bank in
Nepal is not so old but is growing rapidly particularly after 2041 B.S.
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.
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
there or not. Deals were made to buy particular goods for payment of
specified amount giving birth to the concept of exporter and importer more
commonly known as buyer and seller.
Though by now trading had become easier, settlement of trade transactions
posed problems for the parties involved. Goods bought and sold abroad
started becoming complicated transactions for number of reasons like
voyage time, import/export control regulations, customs formalities and the
very fact that the buyer and seller were separated geographically.
Moreover in much of the cases, the buyer and seller would not have met or
seen one another and possibility of not knowing each others standing and
integrity also loomed large. So the traders felt the need to safeguard and
protect the interest of both buyers and sellers and decided to take help of
bankers who were widely accepted for its credibility and standings to be
involved in financial transactions. The buyer needed to know that he was
getting the right goods what he paid for and the sellers interest was to get
promptly paid for his goods. As a result the banks started arranging and
extending wide use of credit instruments which satisfied the needs of both
buyer and seller. This instrument was called the Documentary Credit or more
commonly Letter of Credit handled by international banking network calling
for the exporter to present to a bank documents evidencing shipment or
dispatch of the required merchandise for which if the documents are in order
he will be paid.
History / Origin:
Letters of Credit were in operation in England before World War I US banks
quickly learned the know-how from London bankers. The Federal Reverse
Act of 1913 permitted member banks to issue Letters of Credit. In the 1930s
England went off the gold standard, which together with her loss of
domination of the world trade, the United States further enhanced the
worldwide importance and recognition of US Dollars as a world currency.
After World War II, USA became the most important supplier of goods in
international trade and the largest buyer of foreign goods. This accelerated
the development of Letter of Credit in the USA and American banks today
play a leading role in the field of issuance of Letters of Credit. Various
customs and practice were developed in USA and foreign countries
concerning the interpretations and users surrounding L/C and in order to
ensure uniformity of practice and interpretations in international trade,
International Chamber of Commerce in Paris, in co-operation with various
national chamber of commerce and banks developed the Uniform Customs
and Documentary Credits. This publication was first published in 1962 and
was in effect from July 1, 1963.tually every country and territory in the world
has accepted these rules.
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
Buyer / Importer
Supplier / Seller / Exporter
Applicants Bank
Issuing Banks agent in Beneficiarys place /
Bank which assumes the risk of Issuing Bank
Bank authorized by the Issuing Bank to
nominated by the Issuing Bank to honor
(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 a conditional undertaking subject to compliance with certain
conditions i.e. the presentation of stipulated documents.
1.1.10 TYPES OF L/C
There are different types of L/C that are classified as per the nature and the
function of the credit. Various types of L/C are explained below:
Revocable L/C
A revocable letter of credit can be altered, modified, amended, withdrawn,
cancelled or revoked by the issuing bank at any time without the consent
and notification of the beneficiary, often at the request and on the instruction
of the applicant. There is no commitment on the part of the issuing bank to
honor the bills under the L/C. In a revocable L/C there is no conformity of
payment to the beneficiary and therefore, rarely acceptable for the
beneficiary. However, the credit can be revoked or the negotiating of the bills
under it. The issuing bank is compelled to make payments as per the credit
terms before the amendment or revocation for negotiations made prior to
the receipt of the notification of amendment or revocation.
Irrevocable L/C
An irrevocable letter of credit is a L/C that cannot be amended or revoked by
the issuing bank without the consent of all other parties to the credit i.e. the
applicant, the confirming bank, if any, and particularly, the beneficiary. The
bank guarantees the payment if the credit terms and conditions are fully met
by the beneficiary. It constitutes a definite undertaking by the issuing bank
that it will accept the bill of exchange drawn under the credit and reimburse
the beneficiary if the terms and conditions under the credit are complied
with. This credit is more favorable from the beneficiarys point of view. Any
L/C that does not explicitly specify revocable is an irrevocable L/C.
Transferable L/C
The original beneficiary of the credit can transfer in whole or in a part a
transferable L/C to a second beneficiary (ies). Such credit must necessarily
be
irrevocable and explicitly specified as Transferable on the credit.
However, the
transfer can be made only once and only by the original
beneficiary and not by the
second beneficiary (ies). Such transfers is
to be made without any modification in
the original terms and
conditions of the credit but in exception with the amount of
the credit,
unit price, percentage of insurance terms, and period of validity and
shipment, for transfer to one or more second beneficiaries, it is essential that
credit must permit partial shipment.
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
Anticipatory L/C
Generally, payment to beneficiary is made post-shipment of consignment
against
presentation of necessary documents under the credit.
However, In Anticipatory L/C, payment is made to the beneficiary at preshipment in anticipation of his actual shipment and submission of bills at a
future date. The payment may be full or partial amount of the credit and the
remaining amount are settled at the time of submission of final documents.
Anticipatory L/C may be a Red Clause or
a Green Clause Credit. A Red
Clause Credit authorizes the advising or
confirming bank to provide
advances to the beneficiary prior to the shipment and tender of documents
for the purpose of pre-shipment expenses like purchase & processing of raw
materials, packaging of goods and the like. The advance will be adjusted
later from the proceeds. A Green Clause Credit is an extension of
Red
Clause Credit and in addition to make payment pre-shipment; it also permits
advances for warehousing and insurance charges of the goods at port. In
general, advances are made after the goods are kept in bonded warehouses
etc. In such cases warehouse warrants are given as security.
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 is the L/C with a time (tenor) for payment i.e. the
payment
should be made after the time specified in the credit.
Therefore, the buyer receives a grace period for making payments later in
the future. The Usance period is generally 30 to180 days.
Stand by L/C
It is a special kind of standby or backup L/C. It is rarely used and is generally
not seen in practice in Nepal. This form of L/C is issued in specific situations
such as when the law restricts banks from issuing guarantees. In such
conditions, it is used as a substitute for performance guarantee or other
financial guarantees or for securing loans.
Not all these types of L/C are in practice in Nepal. The L/C that
Machhapuchchhre Bank issues, uses or accepts in general is the Sight L/C,
Usance L/C, Revolving L/C, transferring L/C and Back-to-Back L/C.
oviding guarantee to secure advances made to us nationals or companies
resident abroad.
Documents under Letter of Credit
Commercial Documents:
a) Proforma Invoice:
Proforma invoice is basically a form of quotation by seller to a potential
buyer. Its a short of invitation to the buyer from seller to place a firm order
on him. The Proforma invoice normally shows the terms of trade & prices in
addition to the description of goods so that ones the buyer has accepted the
order, there is a firm contract to be performed as per the terms & conditions
mentioned on it.
b) Commercial Invoice:
Contains a detailed description of goods consigned, selling price per unit,
and total amount, quantity shipped, LC and contract numbers, payment and
delivery terms, country of origin, etc issued on the letterhead of the exporter.
c) Packing List:
May be combined with Weight List. Gives full details of goods, viz. number of
cases, bales, pieces or packages, net and gross weights, shipping marks,
numbers, etc.
d) Weight List:
Lists the weights of individuals packages and/or gross and net weight. Detail
of weight of goods.
Official Documents
a)
Certificate of Origin
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)
Insurance Documents
Insurance Policy
A contract outlining what risks are insured, what insurance premiums are to
be paid by the policyholder
Defines the rights of both insured and insurer
Can be assigned merely by endorsement and delivery
Marine or Similar
Covers transit period
Done usually for warehouse to warehouse basis
Financial Documents
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 species Gallus Domesticus, Ducks, Chicken, Geese, Turkeys and others;
meat and edible offal of the poultry; birds eggs; unprocessed/ unworked
products of birds origin is prohibited from all Asian countries except India,
Bangladesh, Sri Lanka and Bhutan
Terms and Conditions under Letters of Credit
Definitions of some of the terms used in L / C
a) Tenor
the length of time a draft is drawn to run before presentation for payment.
b) Tolerance
The level up to which the quantity and / or value of the LC may exceed or
reduce.
c) Delivery Terms
The terms stated in abbreviated from which clearly specify where the sellers
responsibility for the merchandise ends and where the buyers begins during
the course of transportation.
Some examples of delivery terms are FOB, CIF, CFR, FCA, Ex-works etc.
c)
Place of Loading
Place of Discharge
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):
Model/Brand
Country of Origin
A Performa Invoice should not contain clauses like All discrepancies
acceptable
p) Bi. Bi. Ni. 3
Is a controlling mechanism developed by NRB. Bi. Bi. Ni. 3 needs to be
submitted to the bank by the customer while requesting FCY L/C issuance for
import from outside Nepal. For each convertible currency L/C opened, banks
need to submit Bi. Bi. Ni. 3 report to NRB.
Bi. Bi. Ni. 3 gives certain details of L/C. Filled in part by the applicant, filled in
part by the bank. NRB collects Bi. Bi Ni. 3 data from various banks and
submits them to Banijya Bivag (on Tuesdays & Thursdays) and Banijya Bivag
transmits the same to Royal Nepalese Consulate in Kolkotta. The list is
popularly known as RNC list.
For the goods to be released in Kolkotta Port, details of our L/C should be in
the RNC list.
q) Disbursement Sheet
A statement that reflects the credit facilities approved by the bank in the
name of a credit and utilization made by the client as of a particular date
indicating the request made by the client to use the particular approved line.
Must be prepared for both regular as well as clients should include all the
credit facilities/ limits approved by the bank in the favor of the customer
together with the customers outstanding position as of date and any
irregularities either in the financial status or the terms and conditions of the
requested LC should be mentioned in it.
For new customers, disbursement sheet should be raised showing the
amount of the requested LC along with irregularities if any.
r) Discrepancies
When the Issuing Bank receives the documents, the bank has to check them
against the LC conditions, to determine whether or not the requirement of LC
has been fulfilled.
If any of the documents do not satisfy the requirements of the LC or are not
consistent with each other, this inconsistency or deviation is termed as
Discrepancy.
All such discrepancies must be noted down after the examination of the
documents. A decision then should be made by the Issuing bank what action
is to taken. Depending on the circumstances, the documents may be
accepted, rejected or corrected.
Following are
documents:
few of
the commonly
observed
discrepancies
in
the
Credit expired
Late shipment
Claused Bill of Lading
Late presentation or presented after permitted time from date of issue of
shipping documents
Short shipment
Credit amount exceeded
Under-insured
Description of goods on invoice differing from that in the LC
BL, insurance documents, Bill of Exchange not endorsed correctly
Absence of documents called for in LC
Charter BL presented instead of Master BL
Insurance risks covered not being those specified in LC
Insurance risks specified in LC not covered
BL does not bear Shipped on Board stamp
BL does not mark freight pre-paid when sor required by the LC
Transshipment/ port shipment effected when prohibited by LC
CP 500 & 600 Compared:
Some changes / improvements offered by UCP 600 over UCP500:
Working of UCP500 changed into a plain, simple, precise and concise
language with inclusion of terms that are easy to comprehend. Less wordy
and better organized than its predecessors. Elimination of phrases like
reasonable care, reasonable time and on its face (except in article 14)
from the rules.
Introduction of separate articles 2 and 3 on Definitions and Interpretations
which contain the novel concept of honor along with the inclusion of certain
ISBP working in UCP. The definitive description of negotiation as purchase of
drafts and/ or documents. UCP has been recognized as rules. Credit (LC) is
recognized as irrevocable, so there is no place for revocable credit.
Addresses of applicant and beneficiary appearing in any stipulated document
need not be same as long as they are within the same country. It is banks
and not all parties that deal with documents and goods.
It is the issuing banks responsibility to honor drafts and / or documents
drawn under LCs, it is how clear that credit MUST NOT call for drafts drawn
on the applicant, and not just that they SHOULD NOT.
document(s) is sent to the sellers bank with clear instructions for collection
through one of its correspondent bank located in the domicile of the country.
As per Article 2 of ICC Uniforms Rules for Collections.
Collection means the handling by banks of documents (financial an
commercial) in accordance with instructions received, in order to:
i.
Obtain payment and / or acceptance,
ii.
Deliver documents against payment and / or against acceptance,
iii.
Deliver documents on other terms and conditions.
Where, Financial Documents have been defined as bills, of exchange,
promissory notes, cheques, or other similar instruments used fo obtaining
the payment of money and;
Commercial Documents are defined as invoices, transport documents,
documents of title or other similar documents, or any other documents
whatsoever, not being financial documents.
Clean Collection
As per URC522, Article 2(c), Clean Collection means collection of:
i.
ii.
The seller ships the goods and obtains the shipping documents and
usually draws a Draft, either at sight or with a tenor of x no. of days, on the
buyer for the value of the goods shipped.
The seller submits the Draft(s) and /or document(s) to his bank which
acts as his agent (the Remitting Bank). The bank acknowledges that all
documents as noted by the seller are presented.
The sellers bank (the Remitting Bank) sends the Draft and other
documents along with a collection letter to a correspondent bank (the
Collecting Bank) usually located in the same city as the buyer,
Acting as an agent for the Remitting Bank, the Collecting Bank notifies
the buyer upon receipt of the Draft and documents, and
All the documents, and usually title to the goods, are released to the
buyer upon his payment of the amount specified or his acceptance of the
draft for payment at a specified future date.
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.
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.
Beneficiary Firm: Ensure that it is not the blacklisted. Refer Annex. 1 for
the current blacklist.
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:
Bi. Bi. Ni. Form No. 3 - three copies (not required for NRS. and IRS. &
L/Cs). In case of Branches, four copies are 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.
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:
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:
Bi. Bi. Ni. Form No. 3 - three copies (not required for NRs. and IRs.
L/Cs). In case of Branches, four copies are 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:
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:
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.
Liability Entry:
L/C Open Account (Currency) Dr.
Constituent Liabilities in L/C Open A/C (Currency) Cr.
Nostro Account Cr
Commission Account (discrepancy fee, if any) Cr.
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:
Nostro Account Cr
Commission Account (discrepancy fee, if any) Cr.
Entry for Nostro Account, Margin, Commissions & Charges
Nostro Account (Currency) Cr.
2% L/C Margin Account Cr. (for industries)
10% L/C Margin Account Cr. (for trading unit)
Commission L/C (Docs. Handling Charge) Cr.
Interest Income L/C (If any) Cr.
Charges Swift/Telex/Courier Cr. (for Payment message)
etc:
A copy of Bi.Bi.Ni. Form No. 4 is received back from Customs Office and
signature verified;
some questions have been to the concerned personnel, who are measured as
primary data, secondary data embrace annual reports published by the
banks, financial testimonial of NRB, review material composed from different
concerned magazines, newspaper, library etc. such datas information has
been processed through various processes like auditing, tabulating and result
have been interpreted in the form of ratio percentage and diverse nature of
diagrams for clear view.
Basically, this research design is prepared for the student of Banking &
Insurance practical fieldwork report of BBA 8th semester. Research has been
done by the following ways:1.9.1) Research Process:Figure No:-2
This research rapidly develops the conceptual framework. For building up the
conceptual framework, the researcher notices hypothesis research question.
Mitigating the research question the researcher reviews correlated literature
on the basis and assembles the necessary data in sequence from the field.
The researcher analysis and research problem in order to justify the problem
sampling work. The researcher collects some data and interprets to make the
final report.
RESEARCH PROBLEM
The number of banks in Nepal is in the increasing trend every year. Although
there are huge numbers of LC transactions which has conveyed some
problems in opening Letter of Credit. There are various problems some are
presented below:a) LC deals with the document not with goods.
b) Chances if fraudulent are high.
c) The changing rules and regulations in the international market.
d) Lengthy clause may involve plenty amount of time.
e) Govern by USPDC 600 which might change at times.
1.9.3) DATA COLLECTION METHOD
Any figures and information presented numerically is called data. Data are
useful in every field. As far as out topics is concern, the required data has
been collected from following two sources which are being prescribed below:
Primary Data Collection: Primary data are those data collected
originally and from the field or direct personal contact. Data is collected
personally through face- to face interview.
Secondary data collection: secondary data are those data which has
been collected by internal and external sources.
Internal sources
External sources
a) Annual Report
b) Balance Sheet
c) Cash Flow Statement
d) Income Statement of Bank
by NRB
e) Website of Bank
e) Libraries
working style which helps to increase our mental abilities in the related field.
This helps in obtaining practical experience related with that topic.
As far as the study of the bank GBL is concerned; it is the first joint
venture bank having maximum Nepali shareholders, the need of this study is
to know about position of Letter of Credit in Nepal, the management system,
loan and credit policy of GBL.
ORGANIZATION OF STUDY:The study has been organized into the chapters as presented in the format to
cover partial fulfillment of BBA program.
The titles of the chapter are as follows:Chapter One
Chapter Two
Chapter Three
:
:
Introduction
Presentation & Analysis Data
The report on Letter of Credit has been prepared by the details study of
international or foreign trade especially for the partial fulfillment of the
sector area of Banking & Insurance course provided by the curriculum of
Purbanchal University for Bachelor of Business Administrative. The effort has
been taken to detect the true condition of international trade of the Banking
sector of Nepal which has certain limitations. Some of the limitation faced
during the preparation of this study is prescribed below:a)
b)
c)
d)
e)
RESEARCH QUESTION
While preparing the report the main emphasis was given to the question
regarding the bank Global Bank Limited and the research topic Letter of
Credit. These questions played vital role in collecting data & make report in
accordance with my report objective. The related question as follows:a)
b)
c)
d)
e)
f)