CHAPTER I

INTRODUCTION

1.1 Background

An internship is a work-related learning experience for individuals who wish to

develop hands on work experience in a certain occupational field. It involves

working in your expected career field. It gives the students a valuable experience

and a chance to get exposed to the business environment. Interns are usually college

or university students, but they can also be high school students or post graduate

adults seeking skills for a new career. Student internships provide opportunities for

students to gain experience in their field, determine if they have an interest in a

particular career and create a network of contacts. Internships provide the employers

with cheap or free labor for low-level tasks and also the prospect of interns returning

to the company after completing their education and requiring little or no training.

This internship program is designed by Tribhuvan University for the partial

fulfillment of the degree of Bachelor in Business Administration (BBA). Being the

student of BBA and specializing in Business and Finance the students are honored

by the internship program under this curriculum. It helps the students develop their

inner ability or the confidence level and the level of understanding to compete in this

complex and sophisticated age. It also increases the ability of the students to tackle

the business problems, to grasp the opportunities and to face the threats. In its

totality, internship program teaches us the corporate culture, develops our public

relationship skills, makes us competent and provides us an excellent working

experience.

The Letters of Credit give importers the most extensively used and conventional

international trade payment means and finance instrument. By making Letter of

Credit terms to permit Deferred Payment or Trade Acceptance, a Letter of Credit

facilitates financing to the importer. It promises payment, provided the seller

complies with the terms and conditions inside the Letter of Credit. The Irrevocable

letter of credit can't be canceled or varied without the approval of all parties.

1

1.2Objectives

The general objectives of the report are as follows:

To acquire knowledge on banking activities and environment.

To understand the practical implications of academic knowledge.

The specific objectives of the report are as follows:

To know the various procedures involved in Letter of Credit.

To know the various parties involved in LC.

To acquaintance with the overall organizational environment of Nepal

Investment Bank Limited.

1.3 Methodology

1.3.1 Source of Data

This study is mostly descriptive in nature where the facts and findings are presented

in a systematic manner. The methods of data collection used for this project are as

follows.

1. Primary Data

Personal Observation of work environment during internship period.

Tasks performed as assigned by the supervisors and their instructions

briefings with questionnaires.

2. Secondary Data

Annual report of NIBL

Publications of NIBL

Website of Nepal Rastra Bank

Website of NIBL

Websites related to Commercial Bank

2

1.3.2 Selection of Organization

Organization selection is a crucial factor in an internship because it is the place

where intern gains practical knowledge, builds up confidence, develops the

interpersonal skills etc. To accomplish the internship, the intern approached Nepal

Investment Bank Ltd which was recently declared the Bank of the Year 2008. It was

a right choice as the bank had internship provision with good learning environment.

The bank was not only renowned in the national market but it was also well known

for its services in the international market.

1.3.3 Placement in Organization

The intern was selected to complete his/her internship at the head office, Durbar

Marga. During the internship period the intern was placed at the different

departments of the bank in order to gain overall knowledge of the banking

operations in the bank. The departments which the intern visited during the

internship period are:

Trade Finance Department (TFD)

Customer Service Department (CSD)

Locker

1.3.4 Duration of the internship

The duration of internship for BBA program as per the Faculty of Management,

Tribhuvan University (T.U.) is for two months, which provided a great opportunity

for the students involved in the program. During the internship the placement was done

in three different departments.

S.N. Department Time period (in Weeks)

1. Customer Service Department 3

2. Trade Finance Department 4.5

3. Locker 0.5

Table 1: Duration of Internship in different departments

3

1.3.5 Activities Performed in the Bank

The intern performed various activities at different department during his stay at the

bank are as follows.

a. Customer Service Department

This department is oriented towards customers and basically manages all the

customers’ queries and if possible tries to solve in the front desk of the organization.

In this department the major tasks that the intern learned are:

Dealing with customers

Opening and closing of accounts

Handling incoming calls

Providing accounts statement

Issuing cheque books

Providing Debit Cards to the customers

Maintaining record of ATM card holders

Providing e-banking facility

b. Trade and Finance Department

This department provides facilities like Import/Export Letter of Credit, issuing of

bank guarantee, telex transfer which is non funded business in which bank does not

have to use its funds at the beginning of the contract. Hence it is a safe mode of

dealing with client. In this department the major tasks that the intern learned are:

Recording of opening of L/C

Separating the documents

Filing of documents

Transport of the Customer Liability Report to the corporate department

Necessary documents were faxed as per the request

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c. Locker Department

Locker is essential in terms of security fro the customers. NIBL provides locker

facility to keep the valuable property and other goods which the customers feel

unsafe at their respective home. . In this department the major tasks that the intern

learned are:

Opening and closing of accounts

Recording of the customers visited on a particular day

Showing the customers their particular lockers

1.4 Limitations of the study

The major limitations of the study are as follows:

Time allotted for the study was limited to eight weeks so detailed analysis

was not possible.

Some of the activities could not be analyzed since some of the matters were

to be kept confidential as per the policy of the bank.

Since the project is confined to only one topic all the collected data cannot be

presented in this report.

The study may not be applicable to other organization of similar nature.

Validity of the report fully depends on the information provided by the

concerned authorities.

5

CHAPTER II

BANKING INDUSTRY

2.1 Meaning of Bank

The term ‘Bank’ is derived from the Italian word banco meaning bench. A bank is a

financial institution where you can deposit your money. It provides a system for

easily transferring money from one person or business to another. Using banks and

the many services they offer saves us an incredible amount of time, and ensures that

our funds "pass hands" in a legal and structured manner.

A bank is a financial institution licensed by a government. Its primary activities

include borrowing and lending money. Many other financial activities were allowed

over time. For example banks are important players in financial markets and offer

financial services such as investment funds. It act as payment agents by conducting

checking or current accounts for customers, paying cheques drawn by customers on

the bank, and collecting cheques deposited to customers' current accounts. It also

enables customer payments via other payment methods such as telegraphic transfer,

EFTPOS, and ATM. It borrows money by accepting funds deposited on current

accounts, by accepting term deposits, and by issuing debt securities such as

banknotes and bonds. It lends money by making advances to customers on current

accounts, by making installment loans, and by investing in marketable debt

securities and other forms of money lending.

The following definition can better signify the meaning of banking:

“A bank is an organization whose principle operations are concerned with the

accumulation of the temporarily idle money of the general public for the purpose of

advancing to other for expenditure.” – Kent

The term commercial bank refers to those who pull together the saving of the

community and arrange their productive use and supply the financial needs of

modern business by various means. They accept deposit form the public on the

6

condition that they are repayable on the demand or on short notice. They are

restricted to invest their funds in corporate securities and finance in fixed assets.

Their activities are confined to financing the short term needs of trade and industry

such as working capital financing. In addition, they grant loans in the form of credit

card and overdraft.

According to Commercial Bank Act 2031 Section 2(a) “commercial bank is 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 cooperatives, agricultural, industrial of similar other specific

objective.”

The main objective of commercial bank is to mobilize idle resources for productive

use after collecting them form different places. The function of commercial bank is

accepting deposit namely fixed, current and saving account, safety of public money,

remittance of money, letter of credit, guarantee, loans lending, locker facilities,

foreign exchange, serving as agent of client, etc. Hence, commercial bank is profit

oriented financial service institution which creates money, makes payment

mechanism, extension of credit facilities and accepting bills of exchange of their

constituents.

7

2.2 Origin of the word ‘Bank’

The origin of the word bank lies in the city of Italy, where the Lombard Jews were

used to keep benches in the market place to transact the business

. Italian word for the bench is banco. Such banco arrangements were used to be

made for smooth exchange of money and other bills of the business. From those

banco arrangements, people used to call them as the banco personnel or the banco

area or some specific banco. Gradually, with the mix up of the population and

spreading the banco styled business, same banco word started giving rise to the

bank. Later on, when the financial organizations started to function with the similar

objectives, people gave them the name banco and then the bank. Though, majority

of the bankers believe the above theory of development for the bank word. But few

also say that the bank word has its origin in the French word beque; incidentally, it

also means a bench. This is not the end. Another group is there who advocates

German word bank as the ancestor of today's English word bank. In German, bank

means a heap of anything or joint stock fund.

2.3 History of Banking in Nepal

The history of modern banking system in Nepal is very new. As in other countries,

goldsmith landlords and merchants were also the ancient’s bankers of Nepal. In the

Nepalese context, it is very difficult to trace the correct chronological history of the

traditional banking system due to lack of historical records of banking. As in other

countries Goldsmiths and landlords functioned as the ancient bankers of Nepal. In

respect of formulation of financial institution in Nepal, simple lending and

borrowing functions existed during "The Lichhabi Period" King Gunakamdev in 780

B.S. Then, in 11th century King Jayasthiti Malla divided the people in 64 castes on

the basis of their professions one of them named "Tenkadhari" who used to perform

simple lending and borrowing function.

During the tenure of Rana Prime Minister Randeep Singh was the first step towards

institutional development banking of Nepal. But their functions were limited only to

granting loan. However, Tejarath has performed the institutional form of

8

commercial banking activities for the first time. "Tejarath Adda" was established to

provide loan facilities for government staffs and to general public under the

collateral of gold and silver in the tern of 5% interest (1933 B.S.-1942 B.S.). There

were moneylenders known as Merwari Merchant, Jamindar, Gold Smith, Brokers,

and Sahukars etc. They still exist in some remotest part of the nation. Indian

currency was accustomed in Terai area. Hundi function had been done through

merchants. "Sainik Dravya Kash" was established in 1993 B.S. specially established

for the future welfare of government staffs and Sainik only once since 2019 B.S.

Karmachari Shanchaya Kosh has been performing more functions than Sainik

Dravya Kosh to give facilities not only to the staff of the government but also to the

staff corporations.

In Nepal, Banking in true sense of term started with the inception of Nepal Bank

Limited (Ltd.), (NBL) on 30th Kartik 1994 B.S. Its functions were to meet the need

for development of banking sector and also to formulate monetary policies, NRB

was established on 14th Baishak 2031 BS under NRB act 2012 since then it has

been functioning as Government’s bank. Being a central bank NRB had its own

limitation and NBL was reluctant to go to unprofitable sector. To cope with these

difficulties, government establishes Rastriya Banijaya Bank in 2022 BS under RBB

Act 2021. These banks carried out the functions of commercial bank and functions

of development bank as well.

Despite government’s effort financial sector were sluggish. Banking service to the

satisfactory of customer was a far cry. In such condition, the inception of Nepal

Arab Bank Limited in 2041 B.S. as first joint venture bank was proved a milestone

in the banking history of Nepal. Having observed the success of Nabil Bank based

on marketing concept and because of liberal economic policy adopted by the

government, other commercial banks were also established in the coming years.

Now the banks, development banks, finance companies and co-operative are

providing banking services to different sectors.

9

2.4 Functions of Commercial Bank

In Nepal, the Commercial Banks perform the following functions:

a. Accepting Deposits

This is the oldest function conducted by commercial banks. It accepts deposits in

three forms. They are as current, saving and fixed deposit accounts. Deposited

amount is repayable on demand or on short notice. Interest is provided in saving and

fixed deposit accounts whereas in current account interest provision is not given.

Customers of fixed deposit account are required to keep fixed amount with bank for

a fixed period.

b. Providing Loans

This is the second important function for commercial banks. It provides loans and

advances from the money it receives from depositors. Different types of loan or

credit facilities are provided to borrowers against tangible and intangible securities.

Various types of loan such as education loan, vehicle loan or personal loan are given

as per the loan need of customer.

c. Agency Functions

The commercial bank acts as an agency and performs variety of services on behalf

of its clients. The bank makes payment of the cheques, draft and bills of exchange

presented by the customers. It can also transfer money from one place to another

through use of draft, mail transfer and telegraphic transfer on customer’s request. It

also pays utility expenses on behalf of its customers. The banks on the request of its

customers buy and sell a company’s shares and government security bonds and also

collects the interest on the same.

d. Credit Creation

Commercial banks accept deposit and advance loan to make profit and survive in the

business environment. Banks open current or loan account in the name of borrowers

and allow them to withdraw required sum according to borrower’s need. Therefore

banks create credit by sanctioning loan or credit.

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e. General Utility Functions

The banks do some services known as general utilities services. It carries out foreign

currencies transactions with central bank’s approval. Banks provides locker facilities

for safe keeping of valuable documents. It also offers investment and merchant

banking services. It gives economic and professional advices to its customers. It also

issues traveler’s cheques on behalf of customer’s name.

f. Foreign Trade Financing

Banks helps customers who deal with foreign trade. It facilitates export and import

business by issuing letter of credit. It discounts the bills of exchange drawn by

Nepalese exporters on the foreign importers and enabled the exporters to receive

money in the home currency. On the other hand, it also accepts the bills drawn by

foreign exporters.

g. Information and Other Services

Some banks provide regular bulletin on trade and economic conditions at home and

abroad countries, and special reports on commodities and markets. They may also

invite enquiries for those wishing to extend their trade and are able through their

correspondents to furnish the name of reputable and interested dealers of goods and

to advice on the appointment of suitable agents in some cases. On request, banks

obtain information for customers, for business purpose, for confidential opinions on

the financial standing of companies or industries at home or abroad countries.

11

2.5 List of Commercial Banks in Nepal

S.No. NamesOperation

Date Head Office

Paid up Capital(Rs. In Million)

1 Nepal Bank Ltd. 1937/11/15 Kathmandu 380.4

2 Rastriya Banijya Bank 1966/01/23 Kathmandu 1172.30

3 Agriculture Development Bank Ltd. 1968/01/02 Kathmandu 9278.00

4 NABIL Bank Ltd. 1984/07/16 Kathmandu 689.20

5 Nepal Investment Bank Limited 1986/02/27 Kathmandu 1203.00

6 Standard Chartered Bank Nepal Ltd. 1987/01/30 Kathmandu 620.80

7 Himalayan Bank Ltd. 1993/01/18 Kathmandu 1013.50

8 Nepal SBI Bank Ltd. 1993/07/07 Kathmandu 874.50

9 Nepal Bangladesh Bank Ltd. 1993/06/05 Kathmandu 744.10

10 Everest Bank Ltd. 1994/10/18 Kathmandu 831.40

11 Bank of Kathmandu Ltd. 1995/03/12 Kathmandu 603.10

12 Nepal Credit and Commerce Bank Ltd. 1996/10/14Siddharthanagar,Rupendehi

1275.80

13 Lumbini Bank Ltd. 1998/07/17 Narayangadh,Chitawan 750.00

14Nepal Industrial & Commercial Bank Ltd.

1998/07/21 Biaratnagar,Morang 792.00

15 Machhapuchhre Bank Ltd. 2000/10/03 Pokhara, Kaski 821.70

16 Kumari Bank Ltd. 2001/04/03 Kathmandu 900.00

17 Laxmi Bank Ltd. 2002/04/03 Birgunj, Parsa 732.00

18 Siddhartha Bank Ltd. 2002/12/24 Kathmandu 790.00

19 Global Bank Ltd. 2007/01/02 Birgunj, Parsa 700.00

20 Citizens Bank International Ltd. 2007/6/21 Kathmandu 560.00

21 Prime Bank Ltd 2007/9/24 Kathmandu 700.00

22 Bank of Asia Nepal Ltd. 2007/10/12 Kathmandu 700.00

23 Sunrise Bank Ltd. 2007/10/12 Kathmandu 700.00

24 Development Credit Bank Ltd. 2001/01/23 Kamaladi, Kathmandu 301.00

25 NMB Bank Ltd. 1996/11/26 Babarmahal, Kathmandu 1000.00

26 Kist Bank Ltd. 2009/05/07 Anamnagar, Kathmandu 200.00

Source: www.nrb.org.np, Banking and Financial

Statistics

Table 1: List of Commercial Banks

12

CHAPTER III

INTRODUCTION TO THE ORGANIZATION

3.1 Introduction to NIBL

Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank Ltd., was

established in 1986 as a joint venture between Nepalese and French partners. The

French partner (holding 50% of the capital of NIBL) was Credit Agricole Indosuez,

a subsidiary of one the largest banking group in the world. With the decision of

Credit Agricole Indosuez to divest, a group of companies comprising of bankers,

professionals, industrialists and businessmen, has acquired on April 2002 the 50%

shareholding of Credit Agricole Indosuez in Nepal Indosuez Bank Ltd.

The name of the bank has been changed to Nepal Investment Bank Ltd. upon

approval of bank’s Annual General Meeting (AGM), Nepal Rastra Bank and

Company Registrar’s office with the following shareholding structure.

A group of companies holding 50% of the capital

Rashtriya Banijya Bank holding 15% of the Capital.

Rashtriya Beema Sansthan holding the same percentage.

The remaining 20% being held by the General Public, which means that

NIBL is a Company listed on the Nepal Stock Exchange (NEPSE).

Figure 1. Share Distribution of NIBL

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3.2 Mission Statement of NIBL

The mission statement of Nepal Investment Bank Ltd is:

“To be the leading Nepali Bank, delivering world class service through the blending

of stat-of-the art technology and visionary management in partnership with

competent and committed staff, to achieve sound financial health with sustainable

value addition to all our stakeholders. We are committed to do this mission while

ensuring the highest levels of ethical standards, professional integrity, corporate

governance and regulatory compliance.”

3.3 Vision Statement of NIBL

The vision statement of Nepal Investment Bank Ltd is:

“To be the most preferred provider of Financial Services in Nepal."

3.4 Objectives of NIBL

The objectives of NIBL are:

To develop a customer oriented service culture with special emphasis on

customer care and convenience

To increase our market share by following a disciplined growth strategy

To leverage our technology platform and penscalable systems to achieve

cost-effective operations, efficient MIS, improved delivery capability and

high service standards

To develop innovative products and services that attracts our targeted

customers and market segments

To continue to develop products and services that reduce our cost of funds

To maintain a high quality assets portfolio to achieve strong and sustainable

returns and to continuously build shareholders’ value

To explore new avenues for growth and profitability

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3.5 Core Values and Ethical Principles of NIBL

The principles by which NIBL pledge to conduct business

Customer Focus: At NIBL, the prime focus is to perfect our customer

service. Customers are their first priority and driving force. It wishes to gain

customer confidence and be their trusted partner

Quality: We believe a quality service experience is a paramount to our

customers and we are strongly committed in fulfilling this ideal.

Honesty and Integrity: NIBL ensures the highest level of integrity to their

customer, creating an ongoing relationship of trust and confidence. They

treat their customers with honesty, fairness and respect.

Belief in the people: NIBL recognizes that employees are their most

valuable asset and their competitive strength. It respect the worth and dignity

of individual employees who devote their careers for the progress of the

Bank.

Teamwork: NIBL believes in team work and feel that loyal and motivated

teams can produce extraordinary results. They are driven by a performance

culture where recognition and rewards are based on individual merit and

demonstrated track record.

Good Corporate Governance: Effective Corporate Governance procedures

are essential to achieve and maintain public trust and confidence in any

company, more so in a banking company. At NIBL, they are committed in

following best practices resulting in good corporate governance.

Corporate Social Responsibility: As a responsible corporate citizen, they

consider it important to act in a responsible manner towards the environment

and society. Their commitment has always been to behave ethically and

contribute towards the improvement of quality of life of their people, the

community and greatly the society, of which they are an integral part.

15

3.6 Organizational structure of NIBL

3.6.1 Hierarchy of NIBL

Figure 2: Hierarchy of NIBL

Chairman / CED

Deputy GM

GM

Senior GM/ Secretary

Assistant GM Assistant GM

Head Corporate Banking

Head Operation

Head Retail Banking

Head Legal

Head Trade & Finance

Head IT

Head Reconciliation

Head General Service

Head R&D

Head Internal Audit & Compliance

Branch Managers

Head Loan Administration

Head Accounts & Treasury

Head Cash & Transfer

Head Card & Remittance

Head Human Resources

Head Credit Administration

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3.6.2 Current Board of Directors of NIBL

The present board of directors and management team are as follows:

Name Designation Group

Mr. Prithivi Bahadur Pande Chairman/Chief Executive Director Group "A

Mr. Prajanya Rajbhandari Director Group "A

Mr. Deepak Man Serchan Director Group "A

Mr. Krishna Prasad Sharma Director Rastriya Banijya Bank

Dr. Shiva Hari Shrestha Director Rastriya Beema Sansthan

Mr. Surendra Bdr. Singh Director Public Shareholder

Mr. Damodar Prasad Sharma Pandey

Professional Director

Under BFIA

Table 2: Current Board of Directors of NIBL

17

3.6.3 Branches of NIBL

The head office of NIBL is located art Durbar Marg, Kathmandu. All the major

functioning such as rules and policy making, issuance of securities, international

banking etc are done through this branch. It has 31 branches within the country in

conjunction with the head.

Branches of NIBL

Branch No Branches Phone No

1 Head Office, Durbar Marg 4228229, 4242530

2 Seepadole Branch 6615617, 6612832

3 Birgunj Branch (051) 523327, 525277

4 Pulchowk Branch 5010188, 5010042

5 Banepa Branch (011) 664315,662401

6 Jeetpur Branch (053) 520297

7 Newroad Branch 4242858, 4230374

8 Biratnagar Branch (021) 534523, 534524, 534525

9 Butwal Branch (071) 549991, 549992, 549993

10 Bhairahawa Branch (071) 526991, 526992

11 Pokhara Branch (061) 538919, 539276

12 Putalisadak Branch 4445302, 4445303

13 Narayangarh Branch (056) 532921,532922

14 Janakpur Branch (041) 527331

15 Nepalgunj Branch (081) 525978,525682

16 Thamel Branch 4218431,4218434, 4218485

17 Kalimati Branch 4672493,4672494, 4672495

18 Birtamod Branch (023) 543810,543811

19 Battisputali Branch 4471690,4471790

20 Dhangadi Branch (091) 523620,523706

21 Gongabu Branch 4365318,4365077

22 Surkhet Branch (083) 524330, 524331

23 Jumla Branch (087) 520132

24 Boudha Branch 4480121,4480122

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25 Hetauda Branch (057) 526001, 525946

26 Palpa Branch (075) 520832,520833

27 Lukla Branch (038) 550120 

28 Dhumbarahi Branch 4009006, 4009007

29 Naya Baneshwor Branch 4785529

30 Bhotahiti Branch 4230797, 4230788 

31 Tulsipur Branch (082)521613,521614 

Table 3: Branches of NIBL

3.6.4 Products and Services of NIBL

Broadly speaking there are two types of products of a normal commercial. They are

deposits and credit. Under these two categories NIBL provides various kinds of

products. They are categorized below:

DEPOSITS

E-zee Saving Account

E-zee Student Account

Pariwar Bachat Khata( Recurring deposit account)

Aafnai Bachat Khata

Keta Keti Bachat Khata

Lotus Saving Account

Fixed Deposit

Call Deposit

CREDITS

Corporate Loan

Home Loan

Vehicle Loan

Education Loan

Loan against gold and silver

Bank overdraft

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There are other types of products too which the bank provides. They are as follows

Visa debit cards

Credit cards

Travelers checks

SERVICES OF NIBL

365 days banking

E-banking

SMS Banking

Any branch banking service(ABBS)

Tele-banking

Mobile bills payment (NTC)

Remittance

Trade finance

Utility payment

Automated Teller Machine (ATM)

Safe Deposit Lockers

20

CHAPTER IV

ANALYSIS OF ACTIVITIES DONE AND PROBLEM SOLVED

4.1 Overview of Letter of Credit

A standard, commercial letter of credit is a document issued mostly by a financial

institution, used primarily in trade finance, which usually provides an irrevocable

payment undertaking.

The LC can also be the source of payment for a transaction, meaning that redeeming

the letter of credit will pay an exporter. Letters of credit are used primarily in

international trade transactions of significant value, for deals between a supplier in

one country and a customer in another. They are also used in the land development

process to ensure that approved public facilities (streets, sidewalks, etc.) will be

built. The parties to a letter of credit are usually a beneficiary who is to receive the

money, the issuing bank of whom the applicant is a client, and the advising bank of

whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e.,

cannot be amended or canceled without prior agreement of the beneficiary, the

issuing bank and the confirming bank, if any. In executing a transaction, letters of

credit incorporate functions common to Traveler's cheques. Typically, the

documents a beneficiary has to present in order to receive payment include a

commercial invoice, bill of lading, and documents proving the shipment were

insured against loss or damage in transit. However, the list and form of documents is

open to imagination and negotiation and might contain requirements to present

documents issued by a neutral third party evidencing the quality of the goods

shipped, or their place of origin.

A commercial letter of credit is a contractual agreement between banks, known as

the issuing bank, on behalf of one of its customers, authorizing another bank, known

as the advising or confirming bank, to make payment to the beneficiary. The issuing

bank, on the request of its customer, opens the letter of credit. The issuing bank

makes a commitment to honor drawings made under the credit. The beneficiary is

normally the provider of goods and/or services. Essentially, the issuing bank

replaces the bank's customer as the payee.

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As per the definition of International Chamber of Commerce (ICC) "documentary

credit is any arrangement however named or described whereby a bank, (the issuing

bank) acting at the request and in accordance with the instructions of a customer (the

applicant), is to make payment to or to the order of a third party (the beneficiary) or

is to pay, accept or negotiate bill of exchange (drafts) drawn by the beneficiary, or

authorize such payments to be made or such drafts to be paid, accepted or negotiated

by a other bank against stipulated documents in compliance with stipulated terms

and conditions."

4.2 Parties involved in LC transaction

a. The Applicant is the party that arranges for the letter of credit to be issued.

b. The Beneficiary is the party named in the letter of credit in whose favor the

letter of credit is issued.

c. The Issuing or Opening Bank is the applicant’s bank that issues or opens the

letter of credit in favor of the beneficiary and substitutes its creditworthiness for

that of the applicant.

d. An Advising Bank may be named in the letter of credit to advise the beneficiary

that the letter of credit was issued. The role of the Advising Bank is limited to

establish apparent authenticity of the credit, which it advises.

e. The Paying Bank is the bank nominated in the letter of credit that makes

payment to the beneficiary, after determining that documents conform, and upon

receipt of funds from the issuing bank or another intermediary bank nominated

by the issuing bank.

f. The Confirming Bank is the bank, which, under instruction from the issuing

bank, substitutes its creditworthiness for that of the issuing bank. It ultimately

assumes the issuing bank’s commitment to pay.

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4.3 Types of Letters of Credit at NIBL

To suit the nature of requirement of the involved parties, documents letter of credit

are classified into various categories depending upon nature, feature and the function

of the letter of credits. The broad classification of documentary letter of credit is as

follows:

A. Security Wise

a. Revocable Letter of Credit

A Revocable Credit may be amendment or cancelled by the issuing Bank at any

time and without prior notice the Beneficiary. As per the UCPDC 600, Letter of

Credit means irrevocable only. This type of credit is not favorable to exporters

and is not in practice. Once the documents have been presented and meet the

terms and conditions in the LC, and the draft is honored, the LC cannot be

revoked. Sunrise Bank does not entertain any request for issuance of recoverable

letter of credit.

b. Irrevocable Letter of Credit

This type of credit is the converse of revocable LC. It gives the beneficiary

greater assurance of payment; however, he remains dependent on an undertaking

of a foreign issuing bank. Irrevocable credit is a firm undertaking on the parts of

the issuing bank and cannot be amendment/cancelled without prior consent of all

the parties concerned thereto.

c. Confirmed Letter of Credit

As discussed above, issuing bank gives a firm undertaking under a credit

(irrevocable). If the issuing bank asks nominated bank to add confirmation on

their credit and so is done by the nominated bank it is deemed to be a confirmed

credit. In other words, the nominated bank provides an undertaking for payment

in addition to that of the issuing bank. A confirmed LC is preferred when the

beneficiary is not able to ensure payment surety form the issuing bank and/or

have faith on it. It is costly since it includes the confirmation charge from the

confirming bank.

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B. Payment Wise

a. Sight Letter of Credit

When LC term stipulates that “Credit is available by Sight”, this means that the

payment of the documents drawn under the LC will be paid immediately upon

receipt of same, hence, is called sight credit. The amount is payable as soon as

the prescribed documents have been presented and the bank has checked them.

So the proceeds are normally at the immediate disposal of the beneficiary.

b. Usance Letter of (Acceptance) Credit

When a credit calls for drawing of drafts at a stated date or after a stated period

(usance period) requiring acceptance and/or payment by drawee at the end of

such usance period, it is known a Usance Credit. This type of credit is also

referred as “Term Credit”.

c. Red Clause LC

This particular type of LC allows for advance payment to the exporter. This type

of LC has been prohibited by Nepal Rastra Bank in case of import Letter of

Credit. Release of advance payment is subject to fulfillment of certain prescribed

conditions. In short, a red clause LC allows the beneficiary to avail finances in

advance to execute the required order in the LC.

d. Back-To-Back Credit

When a credit is opened against the security of another credit it is called a Back-

To-Back credit. It is also called as countervailing credit. These type of LC is

quite popular in Nepalese garment exporters who require to import fabrics from

back to back import LC to execute their export order of ready made garments. In

Nepal the back to back Import LC can be opened only up to 50% of the Export

LC.

e. Green Clause Letter of Credit

A credit providing facilities for warehousing and storing of goods at the port of

shipment at the cost of opener/opening bank till the goods covered under the

credit is put “on board” the carrying vessel is called Green Clause Letters of

Credit. In such cases, warehouse warrants are given as security.

f. Reimbursement Letter of Credit

Any standard LC having special payment conditions that the negotiating bank is

authorized to claim and get the payment against the LC directly from the

opening bank’s nominated agency bank after presentation of credit confirmed

24

documents is known as reimbursement LC. It ensures more security and faster

payment for the exporter and it is always at the cost of the importer as the risk

and cost of the fund is higher.

g. Deferred Payment Credit

A LC in which payment is made by designated bank, on respective due dates,

determined in accordance with stipulations of the credit, without the drawing of

drafts in installment basis or in a lump-sum is known as deferred payment LC. It

is an extended payment credit, in which no draft will be called upon to be drawn,

but it must specify the maturity at which payment is to be made and how such

maturity is to be determined.

h. Installment Letter of Credit

Installment LC calls for shipment of goods in specified quantity on stated dates

or periods. Since this credit is for shipment in specifically stated installments, it

is called installment credit. An installment LC is similar to any simple LC with

partial shipment. However, an installment LC specifies quantities and dates of

such partial shipments.

i. Negotiation Letter of Credit

In a negotiation credit, the negotiation can be restricted to a specific bank or it

may allow free negotiation, which is called ‘freely negotiable credit’ wherein

any bank willing to negotiate can do so. If the bank nominated as negotiating

bank and refuse to negotiate, then the responsibility of issuing bank would be to

pay as per terms of that credit.

C. Others

a. Transferable Letter of Credit

It is a credit which can be transferred by the original beneficiary in favor of a

second beneficiary or several beneficiaries. As per the article 48b UCPDC,

credit can be transferred only if it is expressly designated as ‘Transferable’ by

the issuing bank. Further, such credit can be transferred only once, i.e. from the

first beneficiary to a second beneficiary and not thereafter from the second

beneficiary to a third beneficiary.

b. Standby Letter of Credit

A bank will issue a stand by LC on behalf of a customer to provide assurances of

his ability to perform under the terms of a contract between the beneficiaries. It

assures the beneficiary of the performance of the customer’s obligation. As per

25

ICC International Standby Practices (ISP98), “Standby LCs are issued to support

payments, when due or after default, of obligations based on money loaned or

advanced, or upon the occurrence of non-occurrence of another contingency.”

These credits are used generally as substitutes for performance guarantees or

securing loans.

c. Revolving Letter of Credit

In this type of LC, value of credit is reinstated automatically to its original value

after each drawing. Importers who maintain an ongoing relationship with a

supplier occasionally open revolving letter of credit. The amounts under such

type of LC are reinstated in terms of value or time and payment is made

accordingly.

4.4 Benefits of using Letter of Credit

a. The beneficiary is assured of payment as long as it complies with the terms and

conditions of the letter of credit. The letter of credit identifies which documents

must be presented and the data content of those documents. The credit risk is

transferred from the applicant to the issuing bank.

b. The beneficiary can enjoy the advantage of mitigating the issuing bank’s country

risk by requiring that a bank in its own country confirm the letter of credit. That

bank then takes on the country and commercial risk of the issuing bank and

protects the beneficiary.

c. The beneficiary minimizes collection time as the letter of credit accelerates

payment of the receivables.

d. The beneficiary’s foreign exchange risk is eliminated with a letter of credit

issued in the currency of the beneficiary’s country.

4.5 Risks involved in Letter of Credit

Since all the parties involved in Letter of Credit deal with the documents and

not with the goods, the risk of Beneficiary not shipping goods as mentioned

in the LC is still persists.

26

The Letter of Credit as a payment method is costlier than other methods of

payment such as Open Account or Collection

The Beneficiary’s documents must comply with the terms and conditions of

the Letter of Credit for Issuing Bank to make the payment.

The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political

risk on the Issuing Bank’s country and Foreign Exchange Risk in case of

Usance Letter of Credits.

4.6 Documents required in LC at NIBL

When making payment for product on behalf of its customer, the issuing bank must

verify that all documents and drafts conform precisely to the terms and conditions of

the LC. Although the credit can require an array of documents, the most common

documents that must accompany the draft include:

A. Financial document:

a. Bill of exchange: A bill of exchange is also referred to as “Draft” or

“Hundi”. It is a financial instrument in writing containing an unconditional

order, signed by the maker, directing a certain person to pay a certain sum of

money only to, or to the order of, a certain person, or to the bearer of the

instrument. It is a means of collecting payment, demanding payment,

extending credit. It is a promise for payment after it is accepted by the

drawee at specified tenor. Morever, it acts as the receipt for payment when

the payee endorses the bill of exchange as ‘Received Payment’ and hands it

over to the drawee after the amount shown on the B/E is paid by the drawee.

B. Commercial Document:

a. Performa Invoice/Sales Contract: Basically it is form of quotation by the

seller to a potential buyer. Normally it shows the terms of trade and prices in

addition to the description of goods so that once the buyer has accepted the

order, there is a firm contract to be performed as per terms and conditions

mentioned in it. It normally forms the basis for all transactions.

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b. Commercial Invoice: It is also called a “document of contents” because it

generally contains all the information required for the preparation of all other

documents. It is the accounting document for seller’s claim on the buyer of

goods sold to the buyer. It includes a description of merchandise, quantity of

goods, terms of sale, port of shipment and port of destination, value of

goods, unit prices, shipping marks, date, name and address of buyer and

seller etc. The buyer and seller information must correspond exactly to the

description in the LC. The main use of commercial invoice is to check

whether the proper merchandise is shipped at an agreed price.

c. Packing List: It is a document which shows the nature and number of goods

put in each packer/container etc., with distinctive numbers or marks. This is

generally needed by the importer when he is importing different types of

sizes of merchandise so that he may identify the nature of goods in each

package or when an importer is importing goods for ultimate direct

distribution to various suppliers. It is also used by customs for checking the

goods on random basis or otherwise. Thus it mainly facilities easy

identification of goods in each package/container by the importer customs

etc.

d. Certificate of Origin: It is a document which specifies the country of

manufacture or growth of goods or its origin. It is generally issued by the

Chamber of Commerce. In some countries, the customs law requires this

certificate to be produced before clearance of goods and assessment of duty.

e. Certificate of Analysis and Quality (Inspection Certificate): It is a

certificate which indicates the inner composition, quality, technical

composition and intricate nature of the goods broadly described in the

invoice. This certificate may be given by the exporter himself or an

institution/organization which is competent or nominated to give such a

certificate. In certain types of goods like chemical, food articles, clothes etc.,

this certificate is generally required called for so that goods exported

conform to the desired quality/standard analysis.

C. Transport Documents

a. Bill of Lading (B/L): Bill of Lading is a format receipt given by the ship owners

or their authorized agents stating that the goods mentioned therein (quantity,

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quality, and description) are shipped to specified date and vessel and are

deliverable to the person mentioned therein or to his order after payment of all

dues of shipping company. The main functions of B/L are- to act as an evidence

of contract of affreightment, a receipt for the merchandise shipped and a

document of title of goods. The documents evidence control of goods and also

serve as evidence of the carrier’s obligation to transport the goods to their proper

destination. The different types of B/L are: clean B/L, on board B/L, charter

party B/L, stale B/L, and house B/L.

b. Air Way Bill: It is an acknowledgement issued by an airline company or their

authorized agents stating that they have received the goods detailed therein

(number of packages, quantity and nature of goods) for dispatch by air to named

consignee at the address stated therein.

c. Truck/Rail Consignment Note: It is used when trade is between two

neighboring countries physically attached together or when one of the trading

partners is a landlocked country like Nepal. It is issued by trucking or rail

Transport Company and goods are usually delivered against surrender of

consignee copy. It is usually issued in a non-negotiable form.

D. Risk Covering Documents:

a. Insurance Policy: It is a document detailing all the terms of a contract of

insurance and risk covered by the contract. Normally it is issued in negotiable

form and rights under the contract could be assigned by endorsement and

delivery.

E. Discrepant Document

After receiving the documents, it needs to be thoroughly checked with terms and

conditions of L/C. If any document contains any discrepancies which are not

accepted by the issuing bank, then it immediately informs the settlement bank and

the client within seven working days as per UCP Act. If the issuing bank fails to

inform the settlement bank then the bank is bound to remit the payment even though

the documents contain any discrepancies. If the client accepts the discrepancies then

s/he immediately has to submit an acceptance letter to the bank before retiring the

documents and remittance the payment.

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4.7 Amendments in the Documentary Credit

Amendments may be necessary when the stipulation of the credit does not comply

with the sales contract, or when there is a need to modify the stipulations of the

credit or the wording in the credit.

The letter of credit (L/C) is often amended by means of a full text cable. The L/C

amendment is advised through the same advising bank that advised the credit.

Nevertheless, the advising bank that has confirmed the L/C may not add its

confirmation to the amendment of the L/C.

The advising bank mails the amendment advice to the beneficiary. The beneficiary

pays an amendment fee to claim the L/C amendment from the advising bank.

In the event of an amendment, the beneficiary must give notification of acceptance

or rejection of the amendment to the advising bank. If the beneficiary fails to notify

the advising bank, it is deemed that the beneficiary has accepted the amendment.

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4.8 Eligibility for opening Letter of Credit

A. To open Import L/C

a. L/C application form

b. Firm registration certificate

c. Renewed tax registration certificate

d. Proforma invoice

e. Bi.Bi.Ni. form no. 3

f. Declaration of import

C. At the time of L/C received

a. Packing list

b. Bill of lading

c. Insurance

d. Certificate of original

e. Commercial invoice

D. At the time sending Bi.Bi.No. form no. 4 to the concerned customs office also

enclose the following documents

a. Copy of L/C

b. Commercial invoice

c. Transport documents

d. Certificate of origin

e. Packing list

f. Bi.Bi.Ni. Form No. 3

D. Following particulars are required to be disclosed in the proforma invoice

a. Name, brand and model no., if any, of merchandise

b. Name of the manufacturing country

c. Harmonic code

d. Unit price

e. Quantity

f. Total amount

E. The cheques issued for custom purpose or to custom office, in the reverse side of

such cheques, the particular as to

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a. The letter of credit number

b. The importer

c. The exporter

d. Invoice number

e. Amount in foreign exchange as per the invoice

f. Serial number of Bi.Bi.No. form no.4

F. To refund the security deposit

a. Original copy of Bi.Bi.No. form no.4 endorsed custom copy

b. Copy of declaration form ( pragyapan patra)

c. Customs duty payment receipt

4.10 Process of Opening L/C Account

Before opening a L/C Account, the applicant must have a current account with the

bank. The following are the systematic steps of opening a L/C account:

Procedure of opening LC

a. Apply for the application of L/C.

The applicant needs to fill in application of L/C, declarations of imports and

Bi.Bi.Ni. Form no.3; provided that the applicant brings along the Company

registered form, tax form and proforma invoice.

b. Documentation of the forms in a file and filling up the offering sheet. After

getting the above documents and forms, they need to be kept in a file. This ensures a

systematic record keeping of the applicant’s information. Based on the documents,

the offering sheet is filled.

c. Filling of Bi.Bi.Ni. Form no.3. This form is important for the evidence that the

applicant and its goods transaction are legal and bear no fraud. It is necessary to fill

Bi.Bi.Ni. Form no.3.

d. Double entry transaction and multiple entries in form and in computer.

e. Stacking of transaction and clearing it.

f. Insertion of applicant’s information in computer software and sending it.

g. Filling up the “Advice of Debit” card or take out the print of it and get checked by

supervisor and give one copy to customer.

h. Fill up the worksheet.

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i. Check before filling the document so fill up the checking form.

j. Type the L/C in software and send it to Advising Bank.

k. If there is any amendment, then fill up the form and complete the procedure.

4.11 Process of Closing L/C Account

The following process states the process of closing L/C Account:

a. After receiving document, check it thoroughly according to L/C. See required

documents are full and well or not.

b. Fill up bills under Import Credit.

c. Fill offering sheet and take approval.

d. Double and multiple entry transaction and post it in computer and stack it and

clear it.

e. Fill up the debit advice.

f. Fill up the worksheet.

g. Fill up IDT form for Remittance and Loan Department.

h. Fill up the Bi.Bi.Ni. Form no. 4 and issue cheques to custom office.

i. Submit those documents (required) to Applicant.

j. If the 10% margin is saved then credit applicant’s account and fill and give

“advice of credit” to applicant.

4.12 Problem Solved

There were some problems faced by the department. All the employees put their full

effort to manage the situation.

Applicants would come to the department to ask whether the LC have been

issued or not, in such situation if the client is important, their work are

completed first. This would give the customer higher satisfaction. The

bank would also try to convince other customers that their LC would be

issued the following day.

Customers were always in a hurry to get the cheques to be paid, on such

situation staff with good customer handling skill dealt with them.

Discrepancies in the documents (sent by the beneficiary) are identified and

it is informed to the customer. If it is accepted by the customer then there is

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no problem if they are not accepted then another set or documents would

be ordered.

Documents which were to be sent to respective branches were sometimes

misplaced in such conditions all the documents of that particular day had to

be rechecked.

4.13 Activities performed by internee

Transport of the Customer Liability Report (CLR) to the corporate department

and the bank guarantee form to the RM for authorization for opening the Letter

of Credit and Guarantee were done by internee.

The documents received from the advising bank in the respective registers such

as Bills Collection Inward, Post Financing Bills and Trust Receipt Loan

depending upon the nature of the documents and instructions were recorded by

the internee

The files of the applicant were extracted by whenever the documents were

received.

Entering the information about the SWIFT messages send to the beneficiary in

the register and filing the Xerox copy of the message in the brown file of the

branch bank.

Separation of the documents for head office and respective branch to be sent

depending upon the nature of the documents, to branches from where the L/C

was opened with sufficient Xerox was done by the internee.

Necessary documents were faxed, as per the request or instruction, to the branch

and the concerned applicant, by the internee

As the bank printed large number of debit advice at a time and as the customers

were not regular to collect the advice due to which misplacing was possible. So,

proper arrangements of all the advices were done by the internee.

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4.14 SWOT Analysis

SWOT Analysis is a strategic planning method used to evaluate the Strengths,

Weaknesses, Opportunities, and Threats involved in a project or in a business. It

involves specifying the objective of the business venture or project and identifying

the internal and external factors that are favorable and unfavorable to achieving that

objective

Every organization is influenced by both the internal as well as external forces. It

acquires some strength over its rivals and at same time it may possess some

weaknesses internal to the organization’s boundary. There are a lot of opportunities

and threats in the external environment. A SWOT analysis is done by the internee to

evaluate the NIBL banks effectiveness in the Trade and Finance Department. The

strength, weakness, opportunities and threats of NIBL in Trade and Finance

Department are given below:

Strengths

Large network within the nation and outside the country.

Customized and reliable service.

Advance banking software (Finacle) implemented.

Goodwill (Awarded as Bank of the year – 2008 by the banker).

Goal oriented, motivated and smart professional employees.

Sound relationship with the correspondent bank and link ups in almost every

part of the world.

Very good relationship with the credit administration department of the bank

as well as the governmental agencies concerned.

Allocation of an entire flat for the department has made the department more

spacious and easy to access.

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Weaknesses

The record keeping facility if the department is very poor especially at the

physical level.

The fact that the credit administration and TFD lies in different buildings can

sometimes make the work tiresome and time consuming in urgent cases.

Relatively high price compared to rival banks though quality of service is

outstanding and the negotiations can be made in case of large transactions.

Opportunities

Prospects to enter into a new market.

New rules and regulations by the government

Increase in number of industries involved in trading of goods and services.

Technological Advancement.

Threats

High competition from other competitive banks

Political instability within the country

Change in rules and regulation by the government

Establishment of new commercial banks and its operation in various parts of

the country.

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CHAPTER V

SUMMARY AND CONCLUSION

5.1 Summary

The internship Program of BBA under the Tribhuvan University is to provide a

blend of practical knowledge to the theoretical knowledge we have gained till now.

The knowledge that has been acquired in the courses has proved to be very much

relevant in the context of the job placement made. It provided an opportunity to put

the theoretical aspect of the studies into practical use.

The feeling of being responsible towards a work was very new and challenging

though it was performed to best efforts possible. Dealing with the customers and the

responsibility of making decisions under difficult situations has helped me a lot to

have an insight of my future career. One of the important experiences learnt from

the internship program is to know the various facets of an organization and their

functioning, and learning customers and the ability of the employee to handle the

various types of customers with varied needs, demands and temperament.

The letter of credit primarily has been developed to provide the security to both the

parties of international trade where the conditions are uncertain or if there is no

previous trading relationship. Over the past decade, the use of the LC has grown

significantly as it mitigates the risk and makes the trade simple. LC is a simple

concept but it has wide coverage and is very vast and sensitive by nature; so, LC is

to be handled by the person having complete knowledge and training.

In our country the use of LC is increasing at a rapid pace. Every commercial bank in

Nepal has LC department and they all have to follow NRB directives for LC

operation. The rapid increment of international trade of Nepal has provided the

various opportunities for every sectors of economy including the commercial banks.

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5.2 Conclusion

Trade and Finance department are very important for the bank as it generates

significant amount of profit for the organization. Trade and Finance Department of

NIBL deals with Letter of Credit and Bank Guarantee. Letter of Credit facilitates

customers to import as well as export the goods. Letter of credit is an instrument

issued by a bank at request of its customer (applicant) where by it undertakes to pay

value, provided all terms and conditions stipulated in LC have been complied with. .

LC has been very important for the country like Nepal where there is significant

volume of import than export. Bank Guarantee is a contract between the bank and

beneficiary and the beneficiary has a legal right to enforce such an agreement to pay

a specified sum of money either on simple written demand or a demand

accomplished by stipulated documents in the event of default by the principal.

5.3 Lessons Learnt

Today’s world is very dynamic and competitive. A person cannot be competitive

enough without acquiring knowledge in both theoretical and practical aspects and

getting exposure in the practical field. The main objective of internship program is

to provide us the platform and foundation for starting our career in the field which

we have done our specialization. Practical knowledge is more important than the

theoretical knowledge in a sense that once the people enter into the real work

setting, diverse situation, novel problems, difficulties and challenges arises which

makes the person more dynamic and enthusiastic. Dealing with the complexities

develops the interpersonal and communication skills and further shapes our

personality.

Working in the LC department has helped me in gaining a deep knowledge and

understanding of the basic concept, different aspects, procedures, problems, risk and

challenges of LC operation as whole, internationally as well as in the context of our

country. Since, LC involves the people of different countries with differing laws,

rules, regulations, culture, the noble problems, challenges and difficulties are its part

and parcel. LC department of any bank is a very risky department since any party

involved in the particular LC transaction can be sued by another party in the

38

international court as LC is governed by international articles of UCPDC. I have

learned different tactics and techniques to resolve problems arising from LC.

The 8 weeks long internship at NIBL did not only gave me an opportunity to learn

about the basic activities of the various departments that I worked in but also helped

me to shape my personality and character to greater extent. The valuable lessons that

I learned apart from the basic activities of concerned department that I worked in

are:

Learned about the general banking practices and corporate culture.

Learned to communicate and deal with the customers belonging to different

classes.

Learned to handle the grievances of the customers.

Learned to be calm under the adverse conditions and tactfully handle the

complex situations.

Learned about the importance of time and punctuality.

Learned to socialize with the professionals.

Learned the importance of displayed emotion on the work place.

Learned to use office equipments like fax, photocopy, cheque writer, printer

etc.

Learned to use different banking software like Finacle, Pumori Plus and MS

office tools.

39

APPENDICES

Purchase Order (1)Sales Confirmation (2)

DC

Applic

atio

n (

3)

Letter of Credit (4)

Lett

er

of

Cre

dit

(5)

Doc

umen

ts (

7)

Documents (8)

Docu

men

ts (

10)

Paym

ent

(9)

Paym

ent

(11)

Payment (12)

Paym

ent (8

or

13

)

Goods/Services (6)Buyer

Seller

Buyer’s Bank

(Issuing Bank)

Negotiating Bank

Reimbursing Bank

Advising Bank

Carrier

Goods/Services (6)

Figure 3: Process of Letter of Credit

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