Himalayan News Service

Kathmandu, May 29

Nepal Rastra Bank (NRB), the central bank of Nepal, changed its policy on issuing letters of credit (L/C) four months ago, following a brief slump in Nepal’s business scenario. But the new policy has failed to win the appreciation from many professionals.

The main purpose of an L/C is to provide payment in foreign currency to an exporter against goods to be received by the buyer. L/Cs are only needed for importing from countries other than India, since Nepal’s trade with India is based on simple transactions. However, with Tibet, businessmen can trade with a bank draft of $30,000. For export, the importing company abroad does not necessarily have to provide an L/C.

According to the new policy, companies have to submit a business credibility information report (BCIR) to the bank before opening an L/C of $50,000 or more. Earlier, the amount was $15,000.

The new policy came into force after NRB issued a directive on 14th of January, 2002.

However, it has not stopped businessmen from misusing foreign exchange, so the professionals say.

“This change in policy has made it easier for businessmen to split L/Cs into two or more parts. If somebody wants to open a L/C of $80,000, for example, he splits it into two or three sums, each below the 50,000 mark so as to avoid having to produce a BCIR,” said Bijaya Shrestha, strategic business manager at Business Information Services (BIS) Nepal.

To open an L/C, companies have to formulate a BCIR. BIS is a local agent for Dun and Bradstreet, a worldwide agency specialising in preparing such reports. BIS is the only one of its kind in Nepal. “This change in policy has created several difficulties. Companies are now trying hard find loopholes,” Shrestha said.

Not a single L/C was issued for several days following the new directive, which was slightly modified on January 25, 2002, following a lot of hue and cry from the business sector and almost no transactions for many days. The modifications gave some freedom to banks by allowing them to issue L/Cs based on a credibility report from the corresponding bank in the relative country.

“Though the NRB says it has imposed the new policy in order to prevent a misuse of foreign exchange, it will be hard for the bank to attain this end due to poor monitoring and corruption,” speaking to The Himlalayan Times, Shrestha said. “The splitting of L/Cs remains a challenge that the central bank has to tackle.”

Though business circles tend to believe the remarks of professionals like Shrestha, NRB officials outrightly reject such possibilities. When asked about the possibility of splitting L/Cs, Dr Ganesh Bahadur Thapa, a top-notch official at NRB said, “The chances of it happening are very rare. For one import transaction, only one L/C can be issued, not two or three.”

“Furthermore, concerned companies and banks abroad also mistrust businessmen trading through more than one L/C in a single transaction,” Thapa said, adding, “The business sector is not affected and the number of L/Cs being issued have not declined.”

He however added that the central bank has not kept records of the number of L/Cs opened after the imposition of the new directive, in comparison to prior provisions.