Sourcing from Nepal: Banking, payments & export documentation

This article is an excerpt from Sourcing From: Nepal, a series of reports that provides buyers sourcing information from alternative manufacturing hubs in Asia. To read the entire articles, click on the following links: Banking & finance, Paying for your purchase and Export documentation. The Sourcing From series is produced by the Hinrich Foundation, a development organization that aims to promote sustainable global trade by, among others, helping create jobs in emerging Asia. It also produces industry-specific sourcing reports through Online Developing Country Sourcing.

BANKING & FINANCE

Nepal has an extensive banking and financial system composed of commercial banks, development banks and nonbanking financial companies. Commercial banks represent the biggest segment in the banking sector and provide full commercial banking solutions to its customers.

Nepal Rastra Bank

Nepal Rastra Bank (NRB) is the central government bank of Nepal and is the regulatory body of the national banking system. It was established in 1955 by the NRB Act, which was eventually repealed and replaced by the new NRB Act in 2002. NRB is fully owned by the government and managed by a seven-member, government-appointed board of directors. Its main function is to regulate and supervise the banking institutions in Nepal. It issues currency, determines the daily buying and selling rates of foreign currencies and implements monetary policy to secure financial stability and growth in the economy.

The NRB Act authorizes NRB to issue mandatory directives to commercial banks and financial institutions on banking operations, currency and credit. So far, NRB has issued 10 directives dealing with, among others, maintenance of minimum capital fund by commercial banks, loan classification and loan loss provision, limit on credit exposure and facilities to a single borrower, group, or sector, accounting policies and format of financial statements, and minimization of inherent commercial bank risks.

The NRB directives have prescribed principal accounting policies for commercial banks. Commercial banks are required to publish their annual financial statements in public newspapers and to create audit committees to carry out internal audits.

Commercial banks

According to NRB, there are 31 commercial banks in operation with a total of 1,486 branches across Nepal as of 2013. In the past, bank branches were concentrated in the urban areas rather than the rural areas, where people are still deprived of basic services. With a growing number of branches, financial intermediaries have reduced the dependency of Nepalese households on moneylenders for loans. According to Nepal Living Standard Survey conducted by the Central Bureau of Statistics, only 15 percent of total households borrowed from local moneylenders in 2010-11, compared with 40 percent of households 15 years ago.

Two large banks, Nepal Bank Ltd and Rastriya Banijya Bank (National Commercial Bank), dominate the commercial banking sector. These banks account for 16.5 percent of all banking deposits and 11.9 percent of all loans in Nepal. Nepal Bank Ltd is 40.5 percent government-owned whereas Rastriya Banijya is 100 percent government-owned.

Nepal opened up the commercial banking sector to foreign banks in the 1980s. Several joint venture banks were then founded, including Nabil Bank, Nepal Investment Bank, Standard Chartered Bank, State Bank of India, Bank of Kathmandu, Everest Bank, Nepal Sri Lanka Merchant Bank, Nepal Bangladesh Bank, and Nepal Credit and Commerce Bank.

Ministry of Finance

The Ministry of Finance (MOF) is the central authority of the government of Nepal charged with the responsibilities for maintaining both micro- and macroeconomic stability, including the economic and financial affairs in the country. Moreover, the key role of the Ministry lies with the more rational allocation of resources, better management of public expenditure, enhanced mobilization of both internal and external resources, greater performance in public investments and strengthening of public enterprises' productive capacity, open and simple foreign exchange policies and regulation, and prudent fiscal and monetary policies.

The strategic goal of the MOF is to contribute to the formulation of an appropriate economic policy and undertake economic policy management via various applicable modes, which include:

• Adapting a transparent and accountable fiscal and financial information system
• Improving the efficiency and effectiveness of tax administration
• Improving public-private confidence and helping create a conducive environment for private sector involvement in overall economic development
• Institutionalizing effective and efficient incentives system for public sector employees
• Institutionalizing monitoring and evaluation systems for economic management of aid resources
• Pursuing efficient, effective and equitable resource allocation policy for the identified prioritized sectors

Project financing

Major projects are usually financed through a consortium of international funding agencies, such as the World Bank and the Asian Development Bank. Both have been active in lending for development activities in Nepal such as building roads, telecommunications, hydroelectric power plants, and other infrastructure projects.

Foreign exchange controls

The Nepali rupee is convertible for all current account transactions although converting the rupees is sometimes considered cumbersome and requires approval. Earners of foreign exchange are permitted to keep 100 percent of earnings and are able to open a foreign exchange account in Nepal. However, payments to people outside of Nepal must be approved by the NRB. Permission from NRB is also needed to draw, accept or negotiate any bills of exchange, promissory notes or loans, if the payee lives outside of Nepal.

PAYING FOR YOUR PURCHASE

As of 2012, the only readily available way of financing trade transactions in Nepal is by using a letter of credit (L/C). The government of Nepal has yet to open an export-import bank, although they have announced intentions to do so in the past. Nepal does not have credit rating or collection agencies.

Letter of credit

A documentary letter of credit (L/C) is an internationally accepted and commonly used method of export payment. In Nepal, as in other parts of the world, an L/C is the most acceptable method of payment, offering protection to both buyer and seller. By using an L/C, not only do suppliers get their money but buyers get the title to the goods.

An L/C is an advice issued by the bank on the buyer's behalf, authorizing the exporter to receive payment for goods in exchange for specified documents evidencing shipment. The L/C also stipulates strict terms that must be complied with before the exporter can claim payment.

Six players are potentially involved in every L/C situation: the buyer, seller, issuing bank (buyer's bank), notifying bank (seller's bank), negotiating bank and confirming bank. While the notifying bank, negotiating bank, and confirming banks are typically all the same, that is not always the case.

L/Cs take several forms. A revocable L/C can be amended or canceled by the person who opened the credit without prior warning or notice to the beneficiary. Given this inherent weakness, the use of revocable L/Cs is unusual in international trade.

An irrevocable L/C is commonly used and can be amended or canceled only with the agreement of all parties concerned. It is important to specify that the credit is "irrevocable" otherwise it will be deemed revocable. It is generally accepted that the irrevocability of the credit starts when the credit is actually received by the supplier.

Nepalese exporters prefer the irrevocable L/C, as it is normally withdrawn only when the exporter does not meet the terms and conditions of shipment leading to the rejection of documents by the bank. Therefore, this type of L/C ensures safety of payment to the exporter.

Opening an L/C

When opening an L/C, the simpler the better. A supplier is not bound to accept the terms of an L/C, and he may be more inclined not to if there are many stipulations that he cannot or will not accept. If the supplier is careful and does not start to fill an order until he has received the complete L/C and checked it for changes from the original order, the buyer could be involved in delays, particularly if he asks for amendments or corrections to the L/C before he starts production.

Before an L/C is issued, the buyer is required to have approved credit limits with the bank. The following documents are required to apply:

• Application form
• Company registration certificate
• PAN Certificate
• Proforma invoice/sales contract with the following information
• Harmonic code number of the merchandise being imported (at least 8 digits)
• Country(ies) of origin of the merchandise
• Payment term as per ICC Incoterms 2000.

It is also required by the NRB to obtain Business Credibility Information of the overseas parties if the transaction is $ 50,000 or above.

EXPORT DOCUMENTATION

Exporting is both challenging and rewarding. Export procedure and documentation in Nepal has been simplified to encourage foreign trade and generate foreign exchange earnings. Only government-registered businesses that have proper licenses can engage in export and import business.

Export procedure

There are common documents required by many countries to export goods. Exporting goods from Nepal via air freight cargo requires the following:

• Advance payment certificate or copy of letter of credit from bank
• Airway bill
• Authorization letter to act as custom agent
• Certificate of origin
• Copy of export license, if applicable
• Commercial invoice
• Custom declaration form (yellow paper)
• Enterprise registration certificate/PAN
• GSP form 'A' (if applicable)
• Packing list
• Photocopy of income tax clearance

Similarly, the following documents are required for export by sea freight cargo mode:

• All of the documents for air freight cargo listed above, except GSP form 'A'
• Custom transit declaration (CTD)
• Transit declaration Invoice for goods in transit via India/Bangkok to third country destination
• Transport manifesto, one copy per truck

Certificate of Origin

A Certificate of Origin is required by Nepalese Customs on all exports. Two private sector associations, the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and Confederation of Nepalese Industries (CNI), have the authority to issue the Certificate of Origin.

FNCCI issues a Certificate of Origin for exports to member countries of SAPTA (SAARC Preferential Trading Arrangement). The format as specified by the SAPTA agreement is very similar to GSP Form A. Certificate of Origin used for export to SAPTA countries is different from that used for non-SAPTA locations.

Generalized System of Preferences Form A (GSP)

If the product is eligible for tariff preference under the Generalized System of Preferences, an exporter has to fill in a separate standard document called GSP Form A. The GSP Form A is printed on a special colored paper and in a format approved by UNCTAD for GSP member countries. The original GSP Form A is then stamped and certified by Nepalese Customs at the time of export. When it is time for customs in the importing country to release the goods, the overseas buyer then receives a tariff reduction.

Nepal’s Trade and Export Promotion Centre (TEPC) issues the GSP Form A (for the export of all products except woolen carpets) to exporters who apply with a cover letter, copies of certificates of enterprise registration and income tax registration.