Trade finance is a short-term credit availed by a bank to their borrower for importing and exporting activities. It includes various kinds of loans, advances and facilities required for imports and exports deals. Since such deals are made on foreign trade, it involves transactions of foreign exchange. The economics of these trade finance facilities depends on local currency (LCY) and foreign currency (FCY) interest rates, the ruling forward terms, exchange rate movement outlook, Central Bank’s (NRB’s) regulations etc.
Letter of Credit
A letter of Credit is a written undertaking of a bank made at the request of applicant (a buyer or Importer) to honor drafts or other demands for payment and acceptance made upon the bank by the beneficiary (exporter), provided the beneficiary has complied with the terms and condition of the letter of credit. It is a bank’s promise to pay upon the satisfactory compliance presentation of the documents with the L/C’s terms and conditions by the L/C’s Beneficiary. In Nepal, Letter of credit is a widely used instrument in the field of international trade. Import and Export by LC in Nepal is regulated by directives of Nepal Rastra Bank. However, import and export by other mode than LC is also available.
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DAP/ DAA (Documents against Payment/Acceptance):
It is one of the terms of payment in International Trade. In this transaction Exporter submits all required documents along with Bill of lading/ Airway Bill, invoice, packing list, bill of exchange by their bank to send to buyer through buyer’s bank. No need to open LC. Buyer pays the accompanying bill of exchange or draft and release the document from the bank and goods from the customs. In DAA, exporter shipped the goods and shipping documents forwarded to buyer (Importer) for acceptance through Importer’s bank. And, importer gives their acceptance to the bank for payment at given maturity and release the documents. All the process to release the goods are same as in LC but LC is governed by UCP 600 whereas CAD/ DAP/DAA is governed by URC 522 rules.
CASH AGAINST DOCUMENT (CAD):
Exporter shipped the goods and shipping documents forwarded to buyer (Importer) for payment directly to the Importer or through Importer’s bank. Importer make payments to the Exporter and release the documents.
Financing under Trade Finance:
A written undertaking issued by a bank (financial Institution) at the request and on behalf of its customer (Accounted/Principal) to pay/to reimburse/or to compensate (in money value) a loss occurred due to not completion/performance of the contractual obligation by the party (Accounted/Principal) within stipulated time upon receipt of the claim in writing on or before the time stated in the instrument.
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