Letter of Credit & Telegraphic Transfer in Nepal
No more banking jargon. A friendly guide to how Nepali importers pay overseas suppliers safely - using LC, TT, and the rules that protect both sides.
Imagine a shop in Kathmandu wants to buy fabrics from a new supplier in China. The Chinese seller won't ship without money; the Nepali buyer won't pay without seeing the goods. This is where trade finance steps in, like a trusted referee. Letter of Credit (LC) and Telegraphic Transfer (TT) are the two most common ways to solve this puzzle in Nepal. Let's understand them, no complicated words.
⚖️ Payment methods: who takes the risk?
Source: ICC Trade Finance Guide / WTO Trade Finance Primer
🔐 Letter of Credit (LC) - the bank’s promise
A Letter of Credit is like a guarantee from the importer’s bank. The bank promises to pay the exporter, but only if they show the right documents (like proof of shipment). The bank doesn’t check the goods, just the papers. This protects both sides.
Who are the players?
Importer (Nepal)
Importer’s bank
Exporter’s bank
Exporter
How an LC works (step by step)
Types of LC (simplified)
| Type | What it means | Used in Nepal for… |
|---|---|---|
| Sight LC | Paid immediately when documents are okay | Most imports from India/China |
| Usance LC | Payment later (30-90 days) | Capital goods, cash‑flow management |
| Confirmed LC | A second bank (abroad) also guarantees payment | When exporter doubts Nepal bank’s credit |
| Revolving LC | Automatically renews for regular shipments | Fuel, food, pharma imports |
| Standby LC | Like a bank guarantee that pays only if something goes wrong | Construction, project financing |
⚡ Telegraphic Transfer (TT) - mfast & simple
A TT is just an electronic bank transfer. You ask your bank to send money to the exporter’s account. It’s quick (1-3 days) and cheap, but there’s no bank guarantee. The risk depends on when you pay.
Advance TT
You pay before shipment. Risky for you (buyer), seller might not deliver.
Split TT (30/70)
Pay 30% in advance, 70% after seeing Bill of Lading. Balanced risk, very common in Nepal.
Post‑shipment TT
You pay after receiving goods. Risky for seller, you might delay or refuse payment.
🆚 LC vs TT: Which one to pick?
| Feature | Letter of Credit (LC) | Telegraphic Transfer (TT) |
|---|---|---|
| Security | Very high - bank guarantees payment if documents comply | Depends on timing & trust |
| Speed | 1–6 weeks | 1-3 days |
| Cost | Higher (opening fee, handling, SWIFT) | Low (wire fee ~$20–50) |
| Best for | New partners, large amounts | Repeat suppliers, small payments, services |
| NRB rule | Mandatory above certain import thresholds | Allowed for education, medical, small trade |
📘 UCP 600, the global LC rulebook
Before UCP, every country had its own LC rules - chaos! The ICC created UCP 600, a set of 39 articles that 175 countries follow. When an LC says “subject to UCP 600”, these rules apply automatically.
Article 2
Defines key terms: applicant, beneficiary, complying presentation.
Article 5
Banks deal in documents, not goods. Even if goods are damaged, bank pays if papers are correct.
Article 14
Banks have 5 banking days to check documents which is the most critical deadline.
Article 20
Rules for Bill of Lading: must show “on board”, correct ports.
🇳🇵 Trade finance in Nepal
Nepal imports much more than it exports. In just the first 5 months of FY 2025/26, imports were Rs.766 billion, exports only Rs.116 billion which is a huge trade deficit. Most imports are paid via LC or TT. The Nepal Rastra Bank (NRB) keeps a close watch to protect foreign currency reserves.
How a Nepali importer opens an LC
🏛️ NRB rules you must know
| Rule | What it means |
|---|---|
| LC margin | Deposit % varies by goods (0–100%) – set by NRB circular |
| TT for education | Up to USD 25,000 per year |
| TT for medical | Up to USD 15,000 |
| SWIFT mandatory | All international payments must go through SWIFT |
| Penalties | Fines up to 3× transaction value, even jail for violations |
📄 Required documents under an LC
Banks check these papers carefully. Even a small mistake can delay payment.
📦 Bill of Lading
Issued by shipping company. Proof that goods were loaded on the vessel. (UCP 600 Art.20)🧾 Commercial Invoice
Exporter’s bill. Must exactly match LC: description, price, quantity.📋 Packing List
Details what’s inside each package (weight, dimensions).🌍 Certificate of Origin
Where goods were made. Needed for customs duty.🛡️ Insurance Certificate
Coverage at least 110% of CIF value (if LC requires).🔬 Inspection Certificate
For food, agri, regulated items – confirms quality.⚠️ Risks & how to avoid them
| Risk | Happens when… | How to prevent |
|---|---|---|
| Document discrepancy | Minor mismatch in papers → bank refuses payment | Use ISBP 745 checklist; double‑check everything |
| Advance TT fraud | You pay 100% upfront, seller disappears | Stick to trusted partners, use split TT |
| Currency fluctuation | NPR weakens after LC opening, you pay more | Hedge with forward contract |
| Late presentation | Documents submitted after LC expiry | Add buffer days, monitor deadlines |
| NRB non‑compliance | Wrong HS code, missing KYC → penalties | Work with bank’s trade finance team |
❓ Frequently asked questions
✨ Key takeaways (in simple words)
- LC is a bank guarantee – safe but slower. TT is a direct transfer and fast but risky depending on timing.
- UCP 600 is the rulebook for LCs: 39 articles, used in 175 countries.
- Banks check documents, not goods: if papers match, they pay.
- Nepal’s imports are huge (Rs.766B in 5 months): LC helps manage foreign currency.
- NRB strictly controls foreign payments: Always use a Class A bank and follow the rules.
- Most LC problems come from document mistakes: Use a checklist (ISBP 745).
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