Development banks can now issue Letter of Credit: NRB

KATHMANDU, MAY 31:

National level development banks in the country can from now on issue Letter of Credit (LC) for imports.

Issuing a circular, Nepal Rastra Bank (NRB)’s Foreign Exchange Management Department has opened up financing international trade by issuing Letter of Credit for development banks.

However, class ‘B’ financial institutions cannot issue LCs for all sorts of imports for now.

According to the circular, development banks can issue LCs only on behalf of hydro, infrastructure and transmission line projects, financed or promoted by the class ‘B’ banks.

“It is commendable that NRB has opened up LC issuance to development banks as we have been requesting the central bank to allow class ‘B’ banks to engage more in trade financing,” said president of Nepal Development Bankers’ Association Krishna Raj Lamichhane.

“However, there is not much scope for expanding trade financing as NRB only allowed issuance of LC for hydro and infrastructure projects,” pointed out Lamichhane, adding that development banks do have substantial lending to the sector.

“Since the size of these loans are large, only a few national level development banks have lent to hydro and infrastructure projects, and that too through a consortium,” he added.

A Letter of Credit refers to a bank’s guarantee that a certain importer will make the payment of bills to the exporter on time and in case of the buyer not being able to pay for the purchase on time, the bank will pay. Banks usually issue such Letter of Credit on behalf of their clients by extending Trust Receipt loans to importers.

National level development banks that wish to get permission to issue Letter of Credit from the central bank also need to have a working relation for a minimum of three years with international agencies.

Likewise, they also should not have been through NRB’s Prompt Corrective Action within the last two years.

The banks can start foreign exchange transaction to issue LC by taking membership of Society for Worldwide Interbank Financial Telecommunication (SWIFT). At present, SWIFT has 32 commercial banks, NRB and Ace Development Bank as member banks from Nepal.

The central bank has also issued a circular meant for commercial banks and national development banks that allows the banks to invest foreign currency deposits belonging to international agencies in low risk instruments such as foreign government issued bonds, call deposits and certificate of deposit for a maximum of two years.

There is no limit placed on 30 per cent of deposits allowable to invest in the deposits placed by international agencies, according to the circular.

However, financial institutions are

restricted to invest more than 30 per cent of their other types of foreign deposits in agency banks.

Source: THT