Professional Documents
Culture Documents
ABSTRACT
In todays world country like Nepal is into the extensive use of financial products which
are introduced and in use in most of the developed countries. Financial institution do also
offers a standard and commercial letter of credit, a document issued primarily in trade
finance which provides an unchangeable payment activity. Letters of credit are used in
international trade transactions of significant value for deals between a supplier in one
country and a customer in another. The Letter of Credit (L/C) is a payment guarantee by
the issuing bank to the seller on behalf of the importer. The letter of credit gives importer
the most extensively used and conventional international trade payment means and finance
instrument. It promises payment, provided the seller complies with the terms and
conditions inside the Letter of Credit. The bank plays most important role as a mediator in
Letter of Credit. This study focuses on the operation procedures of Import and the various
procedures involved in Letter of Credit and also the report shows how the clients
(importers) perceive the Letter of Credit services of the bank since clients (importers)
satisfaction is the key in the Letter of Credit department.
Keywords: Letter of Credit (L/C), Importer, Customer Satisfaction
activities. Many activities that do a common good to the society have been undertaken by
HBL in the past and this happens as HBL on an ongoing basis. Significant portion of the
sponsorship budget of the Bank is committed towards activities that assist the society at
large.
Literature Review
According to Weber, letters of credit are the most important instrument in international
trade. It is the preferred form of payment because it protects both seller and buyer while
they are engaged in the import and export business. In this transaction, the bank acts as a
middleman to enforce the rules of the Uniform Customs and Practice 500 to both the
exporter and the importer. Both must operate their business according to the 49 articles of
the Uniform Customs and Practice (Weber, 1989, p. 129). Neipert suggested that the letter
of credit is popular because international trade transactions are complicated by the sellers
trepidations regarding the difficulty of collecting funds from a foreign buyer (Neipert,
2000, p. 79).
Hill indicated two basic features of a letter of credit. It is the choice of the importer (buyer)
to select option(s) and ask the issuing bank to proceed in the appropriate manner to meet
an objective of the firm (Hill, 2005, p. 544). Nelson presented the typical format of letter
of credit (Nelson, 2000, p. 94). Although many scholars in international trade suggest a
sight-draft letter of credit or a time-draft letter of credit, each type lacks the capacity to
protect both buyer and seller (Weiss, 2002, p. 106).
Daniels explored the problem of exporting in terms of documentary discrepancy. It was
indicated that exporters often become discouraged or frustrated with the exporting process
because they encounter problems, delays, and pitfalls (Daniels, 2007, p.4 58). Based on the
Uniform Customs and Practice 400, Ruggiero mentioned discrepancies in bills of
exchange (draft), commercial invoices, insurance documents, and transport documents that
caused problems in collection of payments for exporters (Ruggiero, 1991, p. 52).
Practically, the exporter must present the documents required by the terms and conditions
of the letter of credit without any discrepancies, otherwise the exporter will not get paid.
Auboin (2009) reports that spreads on 90-days letters of credit issued by emerging or
developing countries rose from 10-16 bp to 250-500 bp during 2008. These facts suggest
the need to explore the theoretical transmission channels from trade finance shocks to trade
in greater detail.
should be kept in mind that a good sales contract protects the party, which behaves in
goodwill against various kinds of risks.
2. After the sales contract has been signed, the importer (applicant) applies for its bank
to issue a letter of credit. The letter of credit application must be in accordance with
the terms of the sales agreement.
3. If the importer and its bank reach an agreement together on the working conditions
the importer's bank (issuing bank) issues its letter of credit. In case the issuing bank
and the exporter (beneficiary) are located at different countries, the issuing bank may
use another bank's services (advising bank) to advise the credit to the beneficiary.
4. The advising bank advises the letter of credit to the beneficiary without any
undertaking to honor or negotiate. Advising bank's first responsibility is satisfy itself
as to the apparent authenticity of the credit and its second responsibility is to make
sure that the advice accurately reflects the terms and conditions of the credit
received.
5. The beneficiary should check the conditions of the credit as soon as it is received
from the advising bank. If some disparities have been detected beneficiary should
inform the applicant about these points and demand an amendment. If letter of credit
conditions seem reasonable to the beneficiary then beneficiary starts producing the
goods in order to make the shipment on or before the latest shipment date stated in
the L/C. The beneficiary ships the order according to the terms and conditions stated
in the credit.
6. When the goods are loaded, the exporter collects the documents, which are requested
by the credit and forwards them to the advising bank.
7. The advising bank posts the documents to the issuing bank on behalf of the
beneficiary.
8. The issuing bank checks the documents according to the terms and conditions of the
credit.
9. If the documents are found complying after the examination the issuing bank honors
the payment claim.
10. The documents transmit to the applicant. The applicant uses these documents to
clear the goods from the customs.
service of HBL is better than other banks. Only 40 percent said that other bank is better
than HBL in terms of LC services.
Area in which other banks are better than HBL: The study indicates the area in which
other banks are better than HBL. 84 percent said that other banks have good process than
HBL. Only 16 percent said that the responsiveness of the employees of other bank is better
than HBL.
Findings
The HBL is providing good LC services to its clients even if the clients expressed process
as major area of dissatisfaction. Here the process means the first step of opening LC that is
the approval from Relationship Manager, the Head of the Customer Relation Department,
Deputy Branch Manager and then Branch Manager and the Management Credit
Committee (MCC) (if the LC amount is huge) which usually takes 3 days (2 more days if
approval has to be done by MCC). The approval from all of them is required to open LC.
These 3 days is what clients wanted to be reduced.
Also the major area of dissatisfaction is that the LC limit given by the bank to the clients is
not enough to import more and more goods. If the clients get LC Limit more, there is some
chance than they try to do more and more LC transactions with the HBL only.
Still there is plenty room for the bank to improve the services gradually so that the 40
percent clients who said that other banks are better than HBL will reverse their opinion.
Suggestions
1. Quick Circulation of Approval Sheet
From the above analysis, it is clear that clients want the process of the LC improved. Here
the process refers to the circulation of approval sheet. When clients apply to open LC, a
sheet, which shows the different kinds of facilities given by the bank to its clients, is
prepared. The reason for preparing sheet is to see whether amount of LC, applied by the
clients, is within the LC Limit given by the bank. This sheet has to be approved by the
Relationship Manager, the Head of the Customer Relation Department, Deputy Branch
Manager and then Branch Manager. If the amount of LC is huge, then the sheet has to be
approved by the Management Credit Committee, which is the team of CEO, Senior
General Manager and other top level managers. This whole process requires maximum 3
days and in the case of large LC, it takes 2 days more. What the clients want is to reduce
this process by one and half day so that further LC process begins. Till the approval is
made, LC process cannot be taken further. And researcher recommends the same to reduce
the approval process by 1 and half day.
2. Increasing LC Limit
LC Limit is one facility, same as other loan facilities but without collateral security, given
by the bank to the clients. Within the limit only the clients can import the goods. Till limit
is not cleared, the clients cannot open another LC. Another area of dissatisfaction of clients
is that they are not getting the enough limits to import goods. So researcher recommend
increasing the limit based on the clients that is enough limit should be given to those
clients, who are doing sound business with good credit history. The bank can take the
collateral as a security against LC limit.
3. Full Fledged Software
The bank is currently using software called Synergy for LC operations. This software is
used only to transfer documents from one branch to another. The need for even better
operation of LC is full-fledged software customized to the need of LC only. This software
should be capable of keeping records of whole LC files for future references. This will
eliminate the need to keep the LC files for so many years. Also paper work can be reduced
to some extent with the use of software.
Conclusion
Himalayan Bank as a pioneer in introducing many innovative products and marketing
concepts in the domestic sector represents a milestone in Nepalese banking sector as it
started an era of modem banking with customer satisfaction measured as a focal objective
while doing business.
Trade Operation Centre is very important for bank as it generates significant amount of
profit to the organization. Trade Operation Centre deals with Letter of Credit. Letter of
Credit facilitates customers to import as well as export the goods. Letter of
References:
Bhandari, D. R (2006). Principle and Practice of Banking and Insurance, Kathmandu: Ayush
Publication
Michalski, Tomasz and Evren Ors, (forthcoming), "(Inter-state) Banking and (Inter-state) Trade:
Does Real Integration Follow Financial Integration?," Journal of Financial Economics
Muls, Mirabelle, (2008), Exporters and Credit Constraints. A Firm Level Approach, London
School of Economics Working Paper.
Myers, Steward and Nicholas Majluf, (1984), "Corporate Financing and Investment Decisions
When Firms Have Information That Investors Do Not Have," Journal of Financial Economics,
13(2), 187 221.
Paravisini, Daniel, Veronica Rappoport, Philipp Schnabl, and Daniel Wolfenzon, (2011), "Credit
Shocks and the Margins of Trade: Evidence from Matche Credit-Export Data," NBER Working
Paper 16975.
Smith, Janet, (1987), "Trade Credit and Informational Asymmetry," Journal of Finance, 42(4), 863
72.
Satisfaction of Clients
Particulars Frequency Percent (%)
Yes
18
72
No
7
28
Total
25
100
Area of Dissatisfaction of Clients
Particulars
Process
Responsiveness of the
Employees
LC Limit
Total
14
25
56
100
Frequency
9
13
22
Percent (%)
40
60
100
Frequency
8
1
9
Percent (%)
84
16
100