Using a Letter of Credit: A Practical Guide for Nepali Exporters

Getting paid across borders is still one of the biggest challenges for Nepali exporters. A letter of credit (LC) remains the most trusted instrument because it moves the payment risk from the buyer to a bank. The outline below reflects the way Nepal’s commercial banks and Nepal Rastra Bank generally operate.

How an LC works in Nepal

1. Application – The exporter (beneficiary) asks the importer to open an LC with a Nepali issuing bank. The importer’s bank transmits the LC to an advising bank in Nepal, often the exporter’s own bank.
2. Advising and confirmation – The advising bank verifies the LC’s authenticity and forwards it. If the exporter wants extra security, a confirming bank (usually a foreign correspondent) adds its own undertaking.
3. Shipment and document preparation – The exporter ships the goods and assembles the documents the LC requires.
4. Presentation – Documents are presented to the advising or confirming bank within the presentation window specified in the LC.
5. Examination and payment – The bank checks the documents against the LC terms. When they comply, payment, acceptance or negotiation follows the internationally recognised UCP 600 rules.
6. Reimbursement – The issuing bank reimburses the confirming or advising bank, and the exporter receives funds in local currency after the export proceeds are repatriated in line with central‑bank requirements.

Typical document checklist

• Commercial invoice – must match the LC description, unit price and total amount.
• Packing list – weight, dimensions and packaging details consistent with the invoice.
• Certificate of origin – issued by the Department of Commerce or an authorised chamber.
• Bill of lading (sea) or airway bill (air) – clean, on‑board, showing the correct consignee and notify party.
• Insurance certificate – covering at least the minimum risk required by the LC, with the LC‑named insured party.
• Inspection certificate – when the LC calls for pre‑shipment inspection.

Common discrepancies that lead to rejection

• Mismatched amounts or currency between documents.
• Missing signatures or authorised signatories.
• Incorrect Incoterms or shipment terms.
• Stale transport documents that fall outside the LC’s presentation period.
• Insurance that does not cover the required risk or amount.

A quick pre‑shipment review with the bank’s trade desk can catch most of these issues before they become costly.

Fees and charges

Fees vary by bank, transaction size and risk profile. Typical charges include issuance commission, advising fees, confirmation fees (if a confirming bank is used), amendment fees, discrepancy handling fees and communication costs such as SWIFT or courier. Always request a current written fee schedule from your relationship manager before committing.

What to expect on timing

• LC issuance – usually a few business days after the importer’s application is complete.
• Advising or confirmation – one to a few business days once the issuing bank transmits the LC.
• Presentation window – set by the LC; exporters must present documents before it expires.
• Payment or acceptance – under UCP 600 the bank has a limited number of banking days after receiving complying documents to honour the obligation.

Best practices to avoid discrepancies

• Use the bank’s standard LC template and ask for a draft before the importer finalises it.
• Align every document field‑by‑field with the LC wording – even spelling of the buyer’s name matters.
• Engage freight forwarders early; they can issue transport documents that match the LC’s shipment period.
• Request a pre‑check from the advising bank’s trade finance desk – many offer it free for existing clients.
• Keep a master checklist and assign a single person to verify each document before presentation.

When to ask for confirmation

Confirmation adds a second bank’s guarantee and is useful when the buyer’s country carries high political or credit risk, when the transaction value exceeds the issuing bank’s comfort limit, or when the exporter wants to eliminate any risk of the issuing bank refusing payment due to local regulations. Confirming banks charge extra, so weigh the cost against the risk.

Regulatory considerations

Nepal Rastra Bank requires that export proceeds be repatriated within the period prescribed by current regulations. Banks file periodic LC utilisation reports and monitor LCs that remain unutilised beyond the timeframes set by the central bank. Exporters should ensure their LC terms allow timely shipment and document presentation to stay compliant. Foreign‑exchange conversions are done at the bank’s prevailing rate on the day of credit; forward cover can be arranged if the exporter wants to lock in a rate.

Alternative instruments

• Bank guarantee – mainly used for performance or advance‑payment guarantees, not for payment on shipment.
• Documentary collection (DP/DA) – lower cost but the exporter bears buyer‑default risk; suitable for long‑standing relationships.
• Supply chain finance – some Nepali banks now offer invoice discounting against confirmed purchase orders, providing faster cash flow without a full LC.

Choosing the right tool depends on buyer creditworthiness, transaction size and how much risk the exporter is willing to absorb. By following the steps above, keeping documents tight and leveraging the bank’s trade finance expertise, Nepali exporters can turn letters of credit from a bureaucratic hurdle into a reliable cash‑flow engine.