Mukunda TripatheeIntroduction To Letter Of Credit (LC)
The interdependency of nations has been increasing with the industrial revolution in the 18th century. Isolate, a nation could not fulfill the requirements of people/nations due to the diversification of labor, materials, skills, technological advancement, growth and development, innovations, availability of natural resources, and so on.
Imports and exports have become frequent jobs of each nation in the world. The size of imports and exports of goods and services depends on the country’s advancement. Normally, the advanced country exports goods and services in bulk quantities, which inflows the payments. Thus, the balance of payments of such a country would be in a surplus.
In international trade, the transaction happens between the party of cross borders. Where both importer and exporter are unknown to each other. However, they have to conduct the trade between them. There is a risk of trust to both parties. If the exporter export goods and services to the importer earlier than the receipts payment, there might be the risk of nonpayment by the importer to the exporter after goods being received. Likewise, if the importer makes payment to the exporter earlier than receipts of goods and services, there might be a risk of non-dispatching of goods and services to the importer by the exporter.
Thus, there should be confirmation of payment to suppliers and dispatch of goods and services to buyers, particularly in international trade. Letter of credit (LC) is the payment instrument used in cross-border transactions. Where a bank/importer’s bank/ issuing bank gives a guarantee to make payment on behalf of the importer to the exporter through remitting bank/exporter’s bank if both parties fulfill their obligations.
The main point of LC is to mitigate risk associated with international trade for both importers and exporters and creates trust between them. Letter of Credit is a bridge between importers and exporters assuring of payment and their obligations.
Documents Required To Open LC
The importer shall have to provide the following documents along with filling up the LC application form as specified by the bank:
1. Updated/renewed firm registration certificate
2. Income tax certificate/PAN card
3. Registration of VAT
4. Proforma invoice, indent or contract paper having clear information about the name of goods, brand, model number, name of origin country, per unit cost, quantity and total cost, incoterms (CIF-cost, insurance and freight, FBO- free on board, CFR-cost and freight, EXW-Ex works), mode of payments, harmonic code No, name, address, email ID and Telephone no of both importer and exporter, and Exim code of importer.
Recommended:
LC Document Discrepancies: How To Deal With It?
Balance Of Payment (BOP): Explained
Bi.Bi.Ni Form No-3
An importer who has to open import LC, along with LC application has to fill up three copies Bi.Bi.Ni Form No-3 systematically and submit to the importer’s bank with the above-mentioned documents. The first copy shall have to be in concern files and the second and third copy should be sent to the concerned Customs office and foreign exchange management of the department of Nepal Rastra Bank (NRB) respectively. In the case of import of different groups of goods and make payments through a single LC, price, and quantities of each group shall have to be mentioned.
Customs Entry Point
At the time of opening the Letter of Credit, the name and address of the customs entry point must be mentioned in the Letter of Credit. These customs points should be as per the pre-approved list provided by NRB. For to amendment of the customs entry point, issuing bank can amend the custom entry point by taking reasonable documents for the same and have to submit documents to the concerned customs point. Approval and recommendation of concerned/other departments shall not require to amend customs entry point.
New Bi.Bi.Ni Firm can be issued if the original copy of the previous Bi.Bi.Ni is not received within the stipulated time.
While importing goods and services, more than a single customs point, quantities and amount shall be clearly mentioned separately from each customs point.
Importers shall have to import goods and services through the following customs points of Nepal as mentioned in the Letter of credit.
1. Mechi Customs point, Biratnagar Customs point, Birgunj Customs point, Bhairawa Customs point, Nepalgunj Customs point, Dhangadi Customs point, and Birgunj Dry port Customs point are the customs points to import goods and services from India.
2. In the line of importing goods and services through airways, one shall have to import through Tribhuvan International Airport.
3.Tatopani Customs point, Sindhupalchowk Customs point, and Rashuwa Custom point shall have to used to import goods and services from China.
You May Also Like:
Consortium Financing And Its Provisions In Nepal
How Documentary Collection (DC) Helps In Foreign Trade?
Central Monitoring
The central office of the concerned bank shall have to monitor compulsorily if the value of the Letter of credit is more than 50,000 American dollars or exchangeable foreign currency.
Amendment Of LC Amount
After LC is opened, if the amount of LC needs to be amended by more than 10 percent of LC value, one shall have to get approval from the central office along with following all other processes of LC opening. If the amendment value of LC is lower than 1,000 American dollars or exchangeable foreign currency, there is no need to take such approval.
Amendment Of Letter Of Credit
Letter of Credit which had opened based on Proforma Invoice (PI), Indent or Contract paper can be changed as per policy, approval of beneficiary and applicant. The clause like all discrepancies acceptable cannot be placed in LC.
Settlement Or Payment Of Letter of Credit
After LC is opened, issuing bank shall have to forward/SWIFT (Society for Worldwide Interbank Financial Telecommunication) LC to the beneficiary through a correspondent bank. After then, the LC documents which have prepared by the beneficiary/exporter based on LC received from the importer shall forward to issuing bank, issuing bank shall examine the documents to ensure whether documents are as per terms and conditions of LC or not. Then only the payment process shall have to proceed.
Payment shall be done as per nature of LC such as if reimbursem*nt basis goes through reimbursem*nt basis, if collection basis goes through collection basis, similarly if usance basis goes through usance basis.
While making payment for more than 500 dollars and euro for TT, Draft, and LC to AUC (Asian Clearing Union) countries (except India), Payment shall be done through the AUC mechanism.
Payment shall be done to the exporter/beneficiary through the nominated bank by issuing the bank’s Nostro account of convertible foreign currency. It is not allowed to make payment to the beneficiary directly through the draft, TT, and wire transfer.
After LC being settled, documents received from the nominated bank shall have to forward to the Indian port to release goods and services by endorsing in the name of clearing and forwarding agents as per the request of the importer.
Issue Of Bi.Bi.Ni form No.4
To release the imported goods through the concerned customs point, the importer’s /LC opening /LC issuing bank shall have to issue Bi.Bi.Ni for No.4 along with the following documents.
1. Signed copy of LC by an authorized person of bank affixing the stamp of “Certified True Copy”.
2. Commercial invoice
3. Packing list- if indicated in LC
4. Certificate of origin
5. Transport documents
6. Copy of insurance documents
Bank shall have to prepare 4 copies of Bi.Bi.Ni Form No.4., first and second copy along with above said document shall be forwarded to the concerned customs office. Similarly, a third copy shall be provided to NRB (Nepal Rastra Bank) concern department and the fourth copy shall be kept in the bank for official purposes.
Copies provided to the customs office will be returned to the concerned bank after being verifying imported goods and services have arrived. If the issued form would not return from customs point verifying goods and services arrived in Nepal into bank till 90 days from the date of issuance, it shall report to NRB’s concerned department within 7 days of coming month after 3 months being completed.
In case of import of goods and services through Usance and Deferred payment LC too, Bi.Bi.Ni Form No-5 has to be issued to release the goods and services containing payment shall be done later on for the customs purpose.
Payment for imported goods and services through usance and deferred payment LC shall be done after a certain time interval. So, additionally Bi. Bi. Ni Form No-4 (Gha) has also to be issued/filled up and arranged to provide NRB’s concern department regularly.
Margin Related Provisions
LC which are opened to import goods and services from a foreign country (including India) to make payment through exchangeable foreign currency shall maintain a certain level of margin into the bank.
The industry that imports goods and services through LC (any kinds of LC) shall maintain a 2 percent margin of the document amount/value forwarded by the nominated bank before issuing Bi.Bi.Ni Form No-4 by issuing bank. Whereas, the firm has to maintain a 10 percent margin of document value/amount. However, the time of maintaining the margin shall be as per LC terms and conditions.
Margin amount can be taken as per following by bank:
1. Directly cash deposited by the importer
2. By debiting call/current/saving account and overdraft account of importer
3. Mortgaged of national saving bonds, national debentures, and treasury bills issued by Nepal Government.
4. Bonds, debentures, and Fixed deposited issued by licensed institutions from NRB
5. Air marking of current and saving accounts of the importer.
6. Air marking of overdraft and funded loan limit of the importer.
The margin-related transactions shall be transacted through the account which is maintained at NRB by the central office of the concerned bank for the same purpose.
If the importers wish to issue an account payee cheque for margin amount to the concerned Customs office name, it shall have to issue through the same account maintain in NRB by the central office of the concerned bank for the same purpose.
In the back part of such cheque following information shall have to be clearly indicated:
1. No of Letter of Credit
2. Name of importer
3. Commercial invoice number
4. Value/amount of foreign currency of the commercial invoice
5. Exporter Name
6. Serial No of Bi.Bi.Ni Form No-4
Parties Involved In Letter of Credit
1. Applicant (importer)
2. Beneficiary (exporter)
3. Issuing bank (importer’s bank)
4. Advising bank (exporter’s bank)
Process Of Letter Of Credit
| 1 | Issuance of Letter of credit by issuing bank with the request of importer and SWIFT to the beneficiary through advising bank |
| 2 | Shipping goods and documentation by exporter |
| 3 | Documents submitted by exporter to advising bank and advising bank analyze/examine the documents and forward to issuing bank |
| 4 | Checking of Documents by issuing bank and getting payment from importer to release documents. |
| 5 | Receiving of documents by the importer from issuing bank |
| 6 | Goods clearing through documents received |
| 7 | Transfer of payment by issuing bank to advising bank |
| 8 | Deduction of service charges by advising bank and transfer remaining amount to seller/exporter |
(Mr. Mukunda Tripathee is a Banker.)
From The Author:
End Of Paper Money: Why Physical Cash Has No Future?
NPL Management: A Crucial Aspect In Banking
(Liked this article??? If you also want to publish your articles related to business, finance, and economics, then mail us your article at Investopaper@gmail.com.)
