Central bank allows development banks to issue LCs

Central bank has allowed national level development banks to issue Letter of Credits (LC) for imports from now onwards.

The Foreign Exchange Management Department under Nepal Rastra Bank (NRB) has opened up financing international trade by issuing LCs for development banks but the class ‘B’ financial institutions cannot issue LCs for all sorts of imports.
The national level development banks have been asking the central bank to let them issue LCs to be engaged in trade financing.

According to the central bank, national level development banks can issue LCs only on behalf of hydro, infrastructure and transmission line projects, financed or promoted by the class ‘B’ banks.
Since the size of hydro, infrastructure and transmission lines loans are large, only a few national level development banks can lend through a consortium.

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 LCs on behalf of their clients by extending Trust Receipt loans to importers.

National level development banks that wish to get permission to issue LCs 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 central bank’s Prompt Corrective Action within the last two years.

They 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.

Meanwhile, the central bank has also issued a circular for commercial banks and national development banks allowing them to invest on foreign currency deposits belonging to international agencies in low risk instruments like 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 central bank. “But banks are restricted to invest more than 30 per cent of their other types of foreign deposits in agency banks.”