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CHAPTER
INTRODUCTION
1.1 ORGANIZATION PROFILE
Nabil Bank Limited is Nepal's first major joint venture Bank, which commenced operation on 12th^ July 1984. Dubai Bank Limited was the initial foreign joint venture partner with 50% equity investment. The shares owned by Dubai Bank Limited were transferred to Emirates Bank International Limited, Dubai by virtue of its annexation with the latter. Later on, Emirates Bank International Limited sold its entire 50% equity holding to National Bank Limited, Bangladesh. Nabil Bank was initially established under the name of Nepal Arab Bank Limited. However, later on with the help of special resolution passed on the Annual General Meeting, the name Nepal Arab Bank Limited had been changed to Nabil Bank Limited on December 31st, 2001. Nabil was incorporated with the objective of extending International Standard modern banking services to various sectors of the society. Pursuing its objective, Nabil provides a full range of commercial banking services through its 43 points of representation across the kingdom and over 170 reputed correspondent banks across the globe. Nabil Bank has a history and culture of its own of setting standard of operations and providing services. It provides international quality of services to its customers and some invaluable advices to its clients with the help of professionals hired by the bank. Nabil Bank, as a pioneer in introducing many innovative products and marketing concepts in the domestic banking sector, represents a milestone in the banking history of Nepal as it started an era of modern banking with customer satisfaction measured as a focal objective while doing business. It provides international quality of services to its customers and some invaluable advices to its clients with the help of professionals hired by the bank. Nabil Bank has expanded its size and volume of transactions and it gives employment to more than 900 staff members who are dedicated professionals workers There are total 50 branches and 77 ATMs lounges launched by Nabil Bank to provide intense facilities to their customers. (See Annex I for the list of Branches of Nabil Bank) Today Nabil Bank holds one of the strongest networks in and outside Nepal compared to other financial institutions of Nepal. Nabil Bank today can be termed as a full service bank in every sense, which is able to meet entire range of financial requirements and services of its
customers and clients. It is the pioneer commercial bank of Nepalese economy, which sets the benchmark for the industry. The management and the board members are the true assets of the organization who have made it what it is today. 1.1.1 OBJECTIVE OF STUDY The primary objective of this study is to get a better understanding of Centralized Trade Operation in commercial bank and the operational procedure of different administrative departments of CTO. Following are the objective of study broken down into specific and general objectives. General: To understand overall activities of Central Trade Operation department of Nabil Bank Head office, Teendhara. Specific: To understand mechanism and processes regarding Letter of Credit. To understand different department functions and structure of CTO department To understand different issues and challenges of CTO department 1.1.2 SCOPE OF THE STUDY This internship report will help individuals to understand the operational processes of CTO department of Nabil Bank Ltd which discusses the mechanism of LC. This report involves methodology used under the study and hints candidates for their future internship. As far as possible, every effort has been made to ensure that all available data are included and reported without any systematic or natural biasness. 1.1.3 LIMITATION OF THE STUDY As this research was conducted along with the internship and other semester course, adequate detail effort that these researches require could not be devoted. Secondly, the source of information is very limited as it is based on the observation; mentor’s quotes and literature review and is in comply with some limited boundary of objectives. This report is carried out for
2. LITERATURE REVIEW
CENTRAL TRADE OPERATION: central trade operation is simply the centralized version of trade operations of different branches of Nabil Bank at its head office. It deals with the different mechanism of trade finance like import letter of credit, export letter of credit, forward contract, bid bond, performance bond, counter guarantee, advance payment guarantee and shipping indemnity. 2.1 MEANING AND DEFINITION OF LETTER OF CREDIT Documentary Credit (DC), popularly known as letter of credit is the safest and convenient means of paying for exports among all other existing methods of payment. It is widely used to effect payments in domestic and international trade. A written undertaking is issued by a bank (usually referred to as the issuing bank) on the instructions of the buyer of goods to the seller. The payment is made under conditions stated in the undertaking. Payments are always up to a stated limit and against stipulated documents. 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 authorise 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. " 2.2 IMPORTANCE/ADVANTAGE OF LETTER OF CREDIT The importance/Advantages of LC (mentor’s hands out) are : To the Buyer Assurance his bank will refuse payment to seller unless terms and condition given by him to his bank as stipulated in the credit are met. Extended terms of payment which in any other form of payments would not be available. Refinance of goods until they are marketed. To the Seller Relies more on the credit extending bank or the confirming bank rather than on the buyer. Less apprehensive that payment for goods might be delayed or jeopardized by political acts or other problems in the buyer’s country. Enable to obtain loan from banks to prepare goods for shipment prior to making a shipment or just after the shipment. 2.3 TYPES OF LC
The various types of letter of credit are as follows:
1. Revocable LC: These are the LCS that maybe amended/cancelled at anytime by the buyer without the approval of the seller. Thus, it does not provide any sort of protection to the seller and is not much in use these days 2. Irrevocable LC: This type of LC cannot be cancelled or amended without the agreement of all the parties including the exporter. The issuing bank provides a binding undertaking to the beneficiary given that all the terms and conditions have been met. Irrevocable LC provides assurance to the beneficiary that the payment for his goods or services will be received as soon as the LC process comes to an end. Under UCPDC all letters of credit are irrevocable. 3. Unconfirmed LC: It is that Letter of Credit that is forwarded by the advising bank to the beneficiary (exporter) without adding its own undertaking to make a payment at a future date but confirms the authenticity of the credit. 4. Confirmed LC: This is type of LC where a bank usually in exporter’s country adds confirmation to the LC where confirming bank must make the payment to beneficiary if the complaint documents are presented at their counter. Also, if the issuing bank or the applicant fails to make the payment ,confirming bank holds this commitment. In such LC confirmation is added to the LC for the beneficiary on the request of the beneficiary’s bank. The Confirmation LC gives a sense of security in the case when the issuing bank is unknown or the economic/political scenario is unsuitable. A bank will make an additional charge for confirming a LC. Countries that is considered high risk the cost lies between 2%-8% 5. Revolving LC: The Revolving LC is used in the case of regular shipment of the same commodity between the same exporter and importer. The credit must show that it is a revolving LC. The LC may revolve automatically or under some provisions. It helps to avoid the repetitious task of opening/amending the letter of credit. 6.Transferable LC: Under the Transferable LC, the exporter can make a request to the paying/negotiating bank to make partial/full payment of the credit value that is available to the third parties.
the cost, insurance, freight, export and import clearance and other charges incurred during the shipment of goods from the sellers warehouse to buyers place. The INCOTERMS was first published in 1936 and it is revised periodically to keep up with changes in the international trade needs. The complete definition of each term is available from the current publication---INCOTERMS 2010. The seven rules defined by incoterms 2010 for any modes of transportation are: EXW- Ex work’s (named place of delivery) The seller makes the goods available at its premises. This term places the maximum obligation on the buyer and minimum obligation on the seller. The Ex works term is often used when making an initial quotation for the sale of goods without any costs included. EXW means that a seller has the goods ready for the collectioin at his premises (works, factory, warehouse, plant) on the date agreed upon. The buyer pays all transportation costs and also bears the risks for bringing the goods to their final destination. The seller doesn’t load the goods on collecting vehicles and doesn’t clear them for export. If the seller does load the good, he does so at buyer’s risk and cost. If parties wish seller to be responsible for the loading of the goods on departure and to bear the risk and all costs of such loading, this must be made clear by adding explicit working to this effect in the contract of sale. FCA- Free Carrier (named place of delivery) The seller hands over the goods, cleared for export, into the disposal of the first carrier (named by the buyer) at the named place. The seller pays for carriage to the named point of delivery, and risk passes when the goods are handed over to the first carrier. CPT- Carriage Paid To (named place of destinatioin) The seller pays for carriage. Risk transfers to buyers upon handing goods over to the first carrier. CIP- Carriage and Insurance Paid to (named place of destination) CIP is the containerized transport/multimodal equivalent of CIF. Seller pays for carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier. DAT- Delivered at Terminal (named terminal at port or place of destination) Seller pays for carriage to the terminal, except for costs related to import clearance, and assumes all risk up to the point that the goods are unloaded at the terminal.
DAP- Delivered at Place (named place of destination) Seller pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer. DDP- Delivered Duty Paid (named place of destination) Seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes. This term places the maximum obligations on the seller and minimum obligation on the buyer. PROFORMA INVOICE/SALES CONTRACT: Proforma invoice includes name of the contracting parties; the seller and the buyer. It should be signed and stamped by both the parties. It should include Tenor(sight, usance or otherwise), description of imported Goods, eight digit Harmonic code that denotes the imported goods, proper incoterm in the proforma invoice, proper country of origin, validity of contract and unit price and total amount. SWIFT: SWIFT refers to Society for Worldwide Interbank Financial Telecommunication. It is the fastest and most secured mode of transmission of financial messages. Specific message types (MTs) as per the nature of the transaction is indicated. Pre-formatted template, require specific values in each field, conditional values as well in some fields. Certain characters are not allowed e.g!,@,#,$,%,&,*etc. 2.6 MAJOR RULE OF NRB IN DC OPERATION: No DC is required for import of goods worth USD 35000or equivalent. The importer can send advance payment to the supplier. This is valid for import from third countries other than India. 2.7 AMENDMENT OF LC Seller may ask for amendment if any of the conditions mentioned in the LC is practically not possible for him to comply with. LC will also be amended if the underlying contract between
According to the designed patterned of this program, students need to complete internship for the period of 8 weeks and prepare the report. The report is prepared by using the information that is obtained from different sources like booklet, websites, and report from the Nabil bank. Some of the methods followed to successfully accomplish this internship are as follows: 3.1 Organization selection Being a BDFin student specializing in “Finance”, doing an internship in a reputed financial institution is always in a top priority. Nevertheless, selecting an organization has been a tough job because of the numbers of alternatives available in the market and of all the dilemmas regarding the top bank with hunger of ample of work experience lead to one. Internship from a reputed financial institution helps to build career by creating bond between classroom knowledge and practical business world experiences. So, Nabil Bank Limited came as preference for the internship program so that the intern can mould his class room knowledge into real life working experience. The recommendation letter provided by the college was dropped in the head office, Durbar Marg, along with the CV. Then and there, the intern was informed that he was selected and was asked to commence the internship period at the head office itself in Central Trade Operation department. Finally, the intern began the internship with Nabil Bank with effect from 5th^ November and continued till 4th^ January , completing the stipulated 8 weeks of internship. 3.2 Placement Regarding the placement, intern was placed at Head Office, Durbar Marg in Central Trade Operation(CTO) department under the supervision of the CTO chief Mr. Jyoti Bahadur KC and CTO supervisor Mr. Manish Raj Maharjan along with my mentor Mr. Rabi Acharya(CTO-officer) and other various department staffs as well. The intern worked under the supervision of staffs and performed each and every task efficiently to meet their expectations. During the period, intern got an opportunity to learn about working procedures and, get familiar organizational culture and working environment most specifically related to letter of credit. During the period, the student got full support and cooperation from the staff members and maintained working environment with each of them. Department Placed Supervisor Mentor Central Trade Operation Mr. Manish Raj Maharjan Mr. Rabi Acharya
Table 1.1: Department Placed and Supervisor and Mentor. 3.3 Duration of Internship As per the TU curriculum intern has eight weeks to learn about the organization functions and its operation. During the duration of eight weeks intern was only placed at CTO. Even though intern was placed in CTO for eight weeks, it was ample for anyone as even the eight weeks looked lesser to work and know all the process of the department. As per the curriculum intern worked in Nabil bank corporate office from 5th^ November, 2014 to 4th^ January, 2015. Table 1.2: Duration of Internship 3.4 Methods used Nabil Bank has its CTO department as competitive advantage in compare to other very few trade operations of commercial banks that operate its CTO. Nabil Bank’s CTO department facilitates trade operation by saving the cost of hiring employees at different branches for trade operations. The followings are few general function of CTO department, where it was allowed to participate and learn during the internship period. The general functions of CTO department were classified mainly on the basic of Import LC, Export LC and settlement of LC. The methods used for the preparation of LC are based on:
- Observation: Observation method is concerned with watching rather than taking part in the context. Observation method helped me to get familiarize with the organizational environment and its behavior and be proactive in the nature of my work. This method is useful in understanding different emerging issues in organization and how organization solves it.
- Interaction with mentors: Confusion and an urge for good understanding in the context of my activities had stimulated me to a situation of Interaction with mentors.
WEEKS 1 2 3 4 5 6 7 8
Central Trade Operation
they may not be as accurate as the primary data. The main sources of secondary data are as follows: Annual Reports of Nabil Bank Brochures Policy Manuals Articles published in different newspapers about LC operations Banks website Paper documents used by the bank like LC application, checklist, etc NRB Directives and Circulars on commercial banks reports on the internet, etc CHAPTER 4 RESULTS
The results are in form of description of understanding, the operation of the department, and general overview of CTO department, which came out of the study upon use of methods and methodology stated in previous chapter. The results are process oriented and the necessary discussions are included consecutively to better describe the results. This has resulted in merger of the two sections of the report; result and discussions. The results of LC operation are discussed as: 4.1 LETTER OF CREDIT FLOW Letter of credit flow at Nabil Bank Limited: Part-
- At first the credit worthiness of customer is checked and on the basis of collateral, cash deposits of customer, they are issued a certain line of credit.
- Customers fills LC Application form at the Nabil Bank which is made as per current version of UCPDC
- Customers should submit proforma invoice/sales contract (which should be signed and stamped by both the parties) along with LC application form which should clearly mention the name of contracting parties i.e. buyer and seller, tenor (sight, usance or otherwise),Harmonic code number(should be of 8 digits), Incoterm, country of origin, expiry of contract, unit price and total amount.
- Customer attaches the important documents such as Insurance Certificate, Firm registration certificate and Bi Bi Ni Form-3 along with proforma Invoice.
- After the above steps are completed by applicant , employees of Nabil Bank checks whether the Goods that are being imported are not prohibited by the central bank or other regulatory authorities, application submitted by customer is free of error or not, Permission of the concerned authority is obtained wherever applicable or not.
- Then employees create LC through after doing necessary entry in software known as Finacle.
- The advising/confirming bank is informed about the LC. These banks are communicated with the help of SWIFT.
Commercial Invoice: A commercial invoice must contain description of the goods that has been shipped like the description of the items, cost of items per unit, number of items supplied, various transport charges and fees, date of shipment and mode of transport, prices, discounts as well as the delivery and payment terms and must be issued by the beneficiary made out in the name of the applicant. Transport document: They are the rail/truck receipt, parcel post receipt, inland waterway bill of lading (canal, river, etc), airway bill, etc. Some transport documents such as Bill of lading is negotiable if it transfers title to goods. A bank will only accept a clean transport document. Bill of lading: It is a document used in foreign trade. It is a contract for delivery from the port of shipment to the port of destination. A bill of lading must indicate the name of the carrier and also must indicate that the goods that has been shipped. Moreover, it also must show shipment from the port of loading to the port of discharge stated in the credit. Insurance Policy: It is the document that is given by the insurance company if the exporter is responsible for arranging insurance and minimum insurance should be 110% of invoice value. It shows the important provisions of the insurance contract. Insurance policy generally covers all risks excluding risks such as war, strikes and riots. Bill of Exchange: It is an unconditional demand for the payment made by one party to another. It must be in written form and must be signed as well as dated. A bill of exchange is also called a draft. Certificate of Origin: This document must state that the goods in a particular shipment have been wholly produced/manufactured or processed in a particular country. And may provide importer with preferential duty rate. It is in a printed form that is completed by the exporter and is certified by the issuing body. Normally, it is issued by the Chamber of Commerce. Packing List: It is the list of packing of goods being sent that is usually included in each shipping package and gives the information about the quantity and weights. It is prepared by the shipper and is sent to the consignee for the accurate tallying of the goods that has been delivered. Inspection Certificate: It is requested by an agent of the applicant to ensure quality of goods. Weight list: It is a document stating weight of goods. 4.3 DOCUMENTS REQUIRED FOR ISSUANCE OF LC IN Nabil Bank Limited:
For issuing a LC, at first applicant needs to have approved credit limits sanctioned by the bank. According to Central bank(Nepal Rastra Bank ) regulations, following documents should be presented by applicant along with the LC Application form : Proforma Invoice/sales contract containing the following:
- Harmonic Code number of the goods that is being imported. Harmonic code should be of at least 8 digits.
- Country of origin
- Payment term PAN (Permanent Account number) Certificate Company Registration Certificate Nabil offers various products to finance the trade, it offers Import loan and import bill discounting for the importers. 4.4 REGULATORY REQUIREMENTS: All the LCs that are opened are reported next day to The Central Bank. Also, as a result of the restrictions on for ex trading imposed by Nepal Rastra Bank (Central Bank) all the transactions in currencies other than the Indian currency (INR) has to be reported. The applicant availing to the LC facility need to fill the forms on Foreign Exchange Regulations called Bi. Bi. Ni. 3 which the bank need to submit to the central bank for recording. Bi.Bi.Ni. 3 is divided into two halves among which 1st^ half is filled by applicant itself and second half is filled by issuing bank.(Refer to the Appendix 2 for the Bi.Bi. Ni. 3 format). 4.5 PROCESSES FOR LC
Foreign exchange risk: A depreciation in the local currency i.e. the transaction currency may lead the importer to pay more for the consignment than originally envisaged. This may render the LC account irregular from the very beginning. CHAPTER 5 DISCUSSIONS
5.1 ISSUES OF CTO DEPARTMENT
Sometimes during the processes of LC it was found that proper communication between different departments was at utmost necessity. The conflicting situations regarding documents may arise and be solved by discussions with the head officer and managers. Monitoring and evaluation was done by CTO head.Mr. Jyoti Bahadur karki was head of CTO department. Further activities of CTO head was to check, verify and correct documents, monitoring and assuring corrections for the mistakes of employees and assigning important work to employees. Hence this reflected as knowledge to me for the importance of monitoring and evaluation The numbers of LC opened on an average were 20 per day. After 3pm bank does not accept any LC’s request. LC which yields in USD amount and INR were the most frequent cases then followed by EUR, NPR, JPY and others respectively. Birgunj customs, Trivuwan International Airport customs, Bhairahawa Customs and Biratnagar Customs are the places through which the goods are received by applicant. NCELL and Nepal Telecom are found to be among the applicant who order’s goods with high amount figure. CHAPTER CONCLUSION AND RECOMMENDATION
