Letters of Credit (LC) in Nepal: An Overview

Imports and exports are now commonplace jobs in all countries around the world. To import items from another country, an LC (Letter of Credit) must be issued. We’ll go over what an LC is and how to make one.
Letters of credit are a reliable payment mechanism in business because the nature of international trade includes factors such as distance, different laws in each country, and a lack of personal contact during international trade.The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits governs letters of credit in international transactions.

Payment to suppliers and delivery of goods and services to buyers should be confirmed, especially in international trade. A letter of credit (LC) is a payment instrument used in international transactions. Where a bank/bank/issuing importer’s bank guarantees payment to the exporter on behalf of the importer via remitting bank/bank exporter’s if both parties fulfill their obligations. The main purpose of LC is to reduce the risk of international trade for both importers and exporters while also building trust between them. A letter of credit serves as a link between importers and exporters, assuring payment and fulfilling obligations.

What exactly is a Letter of Credit? (LC)

A Letter of Credit (LC) is a document that guarantees the buyer’s payment to the seller. It is issued by a bank and guarantees that the seller receives payment on time and in full. If the buyer is unable to make such a payment, the bank pays the full or remaining amount on behalf of the buyer.

  • A letter of credit is issued in exchange for the pledge of securities or cash. Banks typically charge a fee, which is typically a percentage of the size/amount of the letter of credit.
  • Signatories to a Letter of Credit
  • The applicant (importer) requests that the bank issue the letter of credit.
  • issuing bank (the bank that issues the LC [also known as the LC Opening banker]).
  • Recipient (exporter)

Documents Required to Begin an LC

  • The importer must provide the following documents in addition to filling out the LC application form as specified by the bank:
  • A certificate of firm registration that has been updated/renewed
  • PAN (Personal Identification Number)/Income Tax Certificate
  • Registration for VAT
  • Proforma invoice, indent, or contract paper with clear information on the name of the 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 payment, harmonic code No., name, address, email ID, and telephone number of both importer and exporter, and Exim.

Form No. 3 of Bi.Bi.Ni
Along with the LC application, an importer must complete three copies of Bi.Bi.Ni Form No-3 and submit it to the importer’s bank, along with the other documents listed above. The first copy must be kept in the relevant files, and the second and third copies must be sent to the relevant Customs office and the Nepal Rastra Bank (NRB foreign )’s exchange management department, respectively. When importing multiple groups of goods and paying with a single LC, the price and quantity of each group must be specified.

Customs Checkpoint

The name and address of the customs entry point must be mentioned in the Letter of Credit at the time of opening. These customs points must adhere to the NRB’s pre-approved list. To amend the customs entry point, the issuing bank can do so by gathering reasonable documentation and submitting it to the relevant customs point. The approval and recommendation of concerned/other departments is not required to change the customs entry point. If the original copy of the previous Bi.Bi.Ni is not received within the time frame specified, a new Bi.Bi.Ni Firm will be issued.

Quantities and amounts must be clearly stated separately for each customs point when importing goods and services through more than one customs point. Importers will be required to bring goods and services into the country

Answers to Questions

Is there a cost associated with obtaining a letter of credit?

The bank charges a fee for issuing a letter of credit. A letter of credit’s fees are determined by a number of factors, including the amount of risk and the type of letter of credit.

What are the advantages of a letter of credit for buyers?

A letter of credit typically supports a beneficiary or a seller in an exchange agreement by ensuring that the seller receives the agreed-upon amount from the purchaser or the issuing bank.
However, in certain circumstances, such as when the buyer pays the seller for an order and the seller fails to deliver the order on time, the letter of credit arrangement can be useful to the buyer. In such a case, the purchaser will be reimbursed for the money spent with the assistance of a letter of credit. As a result, the purchaser will be refunded in this manner.

What benefit does a letter of credit provide to the sellers?

If the buyer is unable to pay the entire outstanding amount, the bank that issued the letter of credit must make the payment to the seller. Sometimes the seller can choose a banker, and that banker is responsible for making the payment. If a letter of credit is transferable, the seller can designate another party to make the payment.

When does a seller or beneficiary receive payment from the bank?

The bank will pay the seller or beneficiary of a letter of credit facility only if the seller follows the terms outlined in the letter of credit document. He or she will be given the necessary documentation to prove that the delivery was completed when it is completed on time. These documents will be submitted to the bank in order to meet the requirements of the bank. The bank will then be held accountable for timely payment of the letter of credit.
What kinds of collateral are needed to open a letter of credit?

Depending on the strength of the applicants’ finances, the bank issuing the letter of credit may require collateral, such as a fixed deposit. The bank’s final decision to enter into a transaction is based on a set of criteria.

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