Expert Level – Trade Finance, Forex, Treasury, Bank Ratios and Your Complete Job-Preparation Plan

Banking Taiyari Nepal: From Zero to Expert

Banking Taiyari Nepal, Part 5 of 5

A plain-language guide for Nepal banking job preparation. Every term comes with its meaning and the reason banks use it. Figures and limits change often, so confirm current numbers on the NRB website.

Sita Goes International

Sita's frozen momo has become a hit. A restaurant owner in Doha wants to buy 2,000 kg every month. But Sita has never met him. He worries she will not send the goods after he pays. She worries he will not pay after she sends the goods. Both of them need a trusted middleman.

That middleman is the bank. This single problem, two strangers who do not trust each other, is the reason an entire branch of banking exists: trade finance. Welcome to the expert level. In this final post, we cover trade finance, foreign exchange, treasury and the ratios that tell whether a bank is healthy. Then we close with what you came for: a practical plan to get the job.

Part A: Trade Finance

The Letter of Credit (LC): A Bank's Promise

A Letter of Credit is a written promise by a bank (on behalf of the buyer) to pay the seller a certain amount, if the seller presents the documents exactly as required.

Let us play it with Sita as the exporter and the Doha restaurant as the importer. (For simplicity, imagine instead that a Nepali importer buys machines from abroad; the flow is the same, only the direction changes.)

The parties:

Applicant (Importer/Buyer): Asks his bank to open the LC.
Issuing bank: The buyer's bank; it promises to pay.
Beneficiary (Exporter/Seller): Receives the payment.
Advising bank: The seller's bank that tells the seller the LC has been opened.
Confirming bank (optional): Adds its own promise on top of the issuing bank's.
Negotiating / Nominated bank: The bank that checks documents and pays or accepts them.

The flow in simple steps:

Buyer and seller sign a sales contract.
The buyer asks his bank to open an LC in favour of the seller.
The issuing bank opens the LC and sends it through the secure SWIFT network to the advising bank.
The seller ships the goods and collects documents: commercial invoice, packing list, bill of lading (or airway bill), certificate of origin, insurance papers and others, as the LC demands.
The seller submits the documents to his bank.
The documents are sent to the issuing bank, which checks them against the LC terms.
If the documents match, the issuing bank pays (immediately or on a later date). The buyer takes the documents and collects the goods.

The central principle: Banks deal in documents, not goods. The bank does not check whether the momo are tasty or the machine works. It checks if the papers match the LC. This is called the doctrine of strict compliance. A small mismatch, like a spelling difference in the consignee's name or a late shipment date, is a discrepancy, and the bank can refuse payment.

Why LC exists: It replaces the trust between strangers with the trust in banks.

Rules of the game: International LCs generally follow UCP 600 (Uniform Customs and Practice for Documentary Credits), published by the International Chamber of Commerce. Trade terms like FOB, CIF and CFR come from Incoterms, which say who pays freight, insurance and risk at each point.

Types of LC:

Sight LC: Payment on presentation of correct documents.
Usance (Deferred) LC: Payment after a set number of days, giving the buyer credit time.
Irrevocable LC: Cannot be cancelled without all parties' consent. Almost all LCs are irrevocable.
Confirmed LC: Extra safety for the seller.
Standby LC: Acts like a guarantee; paid only if the buyer fails to perform.
Back-to-back LC: A second LC opened on the strength of a first one, used by middlemen.

Other ways to settle trade:

Documentary collection (D/P, D/A): Banks only pass documents; they do not promise payment. D/P (documents against payment) releases documents when the buyer pays; D/A (against acceptance) when the buyer accepts to pay later. Cheaper than an LC but riskier.
Telegraphic Transfer (TT) / Advance payment: Money is sent by SWIFT. Risk lies with one party.
Open account: Seller ships first and trusts the buyer to pay later. Riskiest for the seller.

Nepal angle: Much of Nepal's trade runs with India and overseas through Indian ports and land borders. Banks open LCs for imports (like machinery, vehicles, fuel, electronics and raw materials) and handle remittances for those payments. NRB has had rules on margin requirements for opening LCs and on controlling imports in times of foreign-currency pressure, so check the latest directive.

Bank Guarantee (BG)

A Bank Guarantee is a bank's promise to pay a third party if the bank's customer fails to fulfil a duty. It is not about money flowing for goods; it is about trust in performance.

Common types:

Bid bond / tender guarantee: Proves a bidder is serious about a contract.
Performance guarantee: Protects the buyer if the contractor does not complete the work.
Advance payment guarantee: Protects the party who gave an advance.
Financial guarantee: Backs a borrower's debt to another party.

Banks charge a commission for guarantees. Why is this attractive for banks? No cash goes out at the start (a non-funded facility), yet the bank earns a fee. But if the customer defaults, the bank must pay, so the credit risk is real.

Funded vs non-funded facilities (useful classification):

Funded: The bank puts money out immediately (term loan, overdraft).
Non-funded: The bank gives a promise, not cash (LC, BG). Cash goes out only if something happens.

Part B: Foreign Exchange (Forex)

Foreign exchange means converting one currency into another. A bank deals in forex when Sita receives US dollars or an importer pays in euros.

Key words:

Exchange rate: The price of one currency in another.
Buying rate (Bid): The rate at which the bank buys foreign currency from you.
Selling rate (Ask/Offer): The rate at which the bank sells foreign currency to you. Always higher than the buying rate.
Spread: The difference between buying and selling rates. This is the bank's earning from forex.
Spot rate: Rate for immediate delivery (usually within two working days).
Forward contract: An agreement today to buy or sell a currency at a fixed rate on a future date. Why? To protect against rate movement. Sita can lock her dollar income today even if she will receive it in three months. This is a form of hedging.
Exposure: The amount of money at risk from currency movement.
Open position: When the bank has more of a currency than it needs (long) or less (short). NRB limits it, because large open positions can cause heavy losses.
Nostro account: "Our account with you." The bank's account held at a foreign bank, in foreign currency. Used to settle international payments.
Vostro account: "Your account with us." A foreign bank's account held with a local bank.
Correspondent bank: A foreign bank that provides services to a local bank abroad, such as clearing dollars.
SWIFT: The secure messaging network banks use for cross-border instructions. Banks identify each other by a BIC / SWIFT code.
Convertibility: Nepal's rupee is not fully convertible; foreign currency use is regulated, and the bank must follow NRB's Foreign Exchange rules for outward payments.

Quick calculation (cross-check your understanding):
Suppose a bank buys USD at Rs 133 and sells at Rs 133.60 (illustrative numbers). If it buys $10,000 and sells it on, it earns about 0.60 × 10,000 = Rs 6,000 as spread. Real rates move every day, so use the figures from NRB or bank rate sheets.

Part C: Treasury and the Money Market

The treasury department manages the bank's liquidity, investments and forex positions. It is the bank's "cash manager."

Main treasury activities:

Liquidity management: Make sure the bank always has enough cash for withdrawals and loans.
Investment in securities: Buy government securities and other approved investments.
Interbank lending and borrowing: Banks with extra cash lend to banks short of cash (the call money / interbank market), usually overnight or for a few days.
Forex dealing: Buy and sell currencies.
Asset-liability management (ALM): Match the timing of money coming in and going out.

Government securities you must know:

Treasury bills (T-bills): Short-term government paper (for example 91, 182 or 364 days). Sold at a discount and redeemed at face value.
Development bonds: Longer-term government bonds that pay interest.
Other: Citizen savings bonds and corporate debentures.

Why banks buy government securities: They are very safe, they help satisfy SLR, and they can be pledged with NRB to get cash when needed.

Asset-Liability Mismatch. Suppose a bank funds a 20-year home loan with 3-month deposits. The deposits will need to be renewed 80 times. If deposit rates jump, the bank's cost rises while the loan rate stays low. This is maturity mismatch and a classic cause of banking trouble. ALM tries to avoid it.

Part D: Reading a Bank's Health with Ratios

Bank analysts, regulators and share investors all look at the same few numbers. Know what each means, which direction is good and why.

Ratio	What it tells you	Good direction
CAR (Capital Adequacy Ratio)	Capital cushion versus risky assets	Higher, above regulatory minimum
NPL ratio	Share of bad loans in total loans	Lower
CD / CCD ratio	How much of deposits is lent out (CCD uses core capital plus deposit)	Within NRB limit; not too high, not too low
Liquidity ratio (SLR/LCR)	Ability to meet short-term payments	Above minimum
ROA (Return on Assets)	Profit earned per rupee of assets	Higher
ROE (Return on Equity)	Profit earned per rupee of shareholders' money	Higher
NIM (Net Interest Margin)	Interest income minus interest cost, relative to earning assets	Higher, but not by overcharging
Cost-to-Income ratio	How much of income is eaten by expenses	Lower
Provision coverage	Loan-loss reserves versus NPLs	Higher
EPS (Earnings per Share)	Profit per share	Higher
P/E ratio	Share price divided by EPS	Compare with peers
Book Value per Share	Net worth per share	Higher

How to speak about them in an interview: "A bank with a high ROE but a thin capital cushion and rising NPLs may be taking too much risk. I would look at ROE together with CAR and the NPL trend." Linking ratios is the mark of an expert.

Bank share vocabulary in Nepal (because NEPSE news is everywhere):

IPO (Initial Public Offering): First sale of shares to the public.
Right share: Offer of new shares to existing shareholders to raise capital.
Bonus share: Free extra shares given from retained profit. It does not create new value by itself; it increases the number of shares and the share capital, not the owner's total wealth.
Dividend: Profit distributed to shareholders (cash or bonus).
Merger / Acquisition: Combining banks, with a swap ratio deciding how many new shares each old shareholder gets.

Part E: Where Nepali Banking Is Heading

Interviewers love candidates who can speak about the future. Prepare short, thoughtful points on these:

Digital transformation: QR payments, mobile banking, digital onboarding and paperless processes. The challenge: cyber security, digital literacy and system stability.
Financial inclusion: Taking banking to rural and unbanked people through branchless and agent banking, and microfinance.
Consolidation: Mergers continue to produce fewer but stronger banks. Integrating people, systems and culture is the real test.
Asset quality: Managing NPLs, especially in real estate, margin lending and some business sectors.
Compliance pressure: Stricter AML/CFT standards and global scrutiny.
Remittance and reserves: Channelling remittance into productive use rather than only consumption.
Green and sustainable finance: Lending for renewable energy, hydropower and environment-friendly projects.
Data and AI in banking: Smarter credit scoring, fraud detection and customer service. Skills in analytics will be valuable.

Part F: Laws You Should Know by Name

You do not need to memorise every section. But you should know which law does what.

Nepal Rastra Bank Act, 2058 (2002): Powers and structure of the central bank.
Bank and Financial Institutions Act, 2073 (BAFIA): Licensing, classes A–D, operations and supervision of BFIs.
Companies Act, 2063 (2006): How companies are formed and run.
Negotiable Instruments Act, 2034 (1977): Cheques, promissory notes and bills of exchange.
Assets (Money) Laundering Prevention Act, 2008 (2064): AML framework.
Banking Offence and Punishment Act, 2064 (2008): Banking-related crimes and penalties.
Payment and Settlement Act, 2075 (2019): Regulation of payment systems and payment service providers.
Contract Act, 2056 (2000): Basic law behind loan agreements and other contracts.
Foreign Exchange (Regulation) Act, 2019 (1962): Foreign exchange rules.

(Always check the latest versions, amendments and any replacement bills before an exam.)

Part G: Your Banking Job Taiyari Plan

Now, the practical part. Remember that every bank has its own selection style, so read each vacancy notice carefully. The plan below works for most.

Step 1: Know the exam shape

Public banks and some institutions commonly run an open competition with a written exam (objective and subjective papers), then interview. Papers often include general knowledge, banking and finance, accounting, law basics, quantitative aptitude and English.
Private banks may use online tests, aptitude and personality tests, group discussion and multiple interview rounds.
Management trainee posts usually focus more on aptitude, communication and case discussion.

Collect the syllabus and past question papers (often shared in banking exam groups and preparation centres) and arrange your study accordingly.

Step 2: The 30-day plan

Week 1 – Foundation (Posts 1 and 2)

Day 1–2: Banking basics, history, NRB, A/B/C/D classes.
Day 3–4: Account types, KYC, maker-checker, debit/credit.
Day 5–6: Cheques, clearing, payment systems, remittance.
Day 7: Revision. Write the 40 most important terms from memory.

Week 2 – Lending (Post 3)

Day 8–9: Loan cycle, 5 Cs, loan types.
Day 10–11: Collateral terms, LTV, interest rate formula, EMI practice.
Day 12–13: NPL classification, provisioning, recovery, CIB.
Day 14: Revision and 20 mock questions on lending.

Week 3 – Regulation (Post 4)

Day 15–16: NRB functions, monetary tools (CRR, SLR, repo, SLF).
Day 17–18: Exchange rate, reserves, BoP, inflation basics.
Day 19–20: Basel, CAR, risk types, three lines of defence.
Day 21: AML/CFT, KYC, STR, TTR, FATF. Revision.

Week 4 – Expert (Post 5) and Mock Tests

Day 22–23: LC, BG, forex terms.
Day 24: Treasury, securities, ALM.
Day 25: Ratios and bank shares.
Day 26: Laws and the latest monetary policy.
Day 27–28: Full-length mock tests, timed.
Day 29: Mock interview with a friend. Record yourself.
Day 30: Light revision and rest.

Step 3: Subjects beyond banking

Do not neglect these, because many candidates fail here:

Accounting basics: Debit/credit, trial balance, financial statements.
Mathematics and reasoning: Percentages, simple and compound interest, ratio, profit and loss.
English: Reading comprehension, grammar, short writing and email drafting.
General knowledge and current affairs: Nepal's economy, budget highlights, latest NRB decisions, bank mergers.
Computer and digital basics: Spreadsheets, safe online behaviour, basic cyber security.

Step 4: Build a strong application

CV (one or two pages): Show education, internships, volunteering, any customer-facing work and measurable results. Example: "Managed a college fund of Rs 2 lakh with full record-keeping."
Cover letter: Short and specific. Explain why this bank and this role.
Documents: Keep citizenship, academic certificates, transcripts, experience letters and recommendations ready, both scanned and printed.
Online presence: Make your professional profile clean. Recruiters do look.

Step 5: Interview skills

Structure answers. Use a simple pattern: point, reason, example. "Maker-checker is important (point) because it prevents single-person fraud (reason). For example, a payment entered by a teller is approved by a supervisor (example)."
Speak about the bank. Learn its history, products, size, recent news and CEO's name.
Handle "I don't know." Say, "I am not sure about the exact figure, but I know the concept, and I would verify it from the NRB directive." Honesty with reasoning beats a confident wrong answer.
Show integrity. Banks hire trust. Be ready for ethical situations.
Dress and body language. Neat, simple, calm and polite.

Term Box: Post 5 Glossary

LC – Letter of credit. Why: Replaces trust between strangers with a bank's promise.
UCP 600 – International rules for LCs. Why: One standard worldwide.
Discrepancy – Mismatch between documents and LC terms. Why serious: The bank can refuse to pay.
Bill of lading – Transport document that also acts as receipt and title to goods. Why central: It controls who can collect the goods.
BG – Bank guarantee. Why: Assures performance or payment to a third party.
Funded / Non-funded – Cash out now / promise only. Why separate: Different risk and capital treatment.
Spot / Forward – Immediate / future exchange. Why forward: To hedge risk.
Nostro / Vostro – Our account with you / your account with us. Why: Settling cross-border payments.
SWIFT – Secure messaging network. Why: Fast and authenticated instructions.
T-bill – Short-term government security. Why: Safe and liquid.
ALM – Asset-liability management. Why: Avoid timing mismatch.
NIM, ROA, ROE – Profitability ratios. Why: Judge performance.
Swap ratio – Share exchange ratio in a merger. Why: Fair treatment of both banks' shareholders.

Interview Corner: Expert Round

Q1. Why does a bank charge commission on a guarantee even though no money is paid out?
Model answer: "Because the bank is taking on a contingent liability. If the customer fails, the bank must pay. The commission compensates for that risk and for the bank's name and credit being used."

Q2. What is a discrepancy in an LC and what do you do?
Model answer: "A discrepancy is any mismatch between the presented documents and the LC terms. The bank informs the beneficiary, who can correct the documents if time allows, or request the applicant's waiver. Without correction or waiver, the bank may refuse payment."

Q3. How does a forward contract help an importer?
Model answer: "It locks today's exchange rate for a future payment, so the importer is protected if the foreign currency becomes more expensive."

Q4. Two banks have the same ROE. One has a much lower CAR and higher NPL. Which is stronger?
Model answer: "The one with the higher CAR and lower NPL, because its profit is earned with a bigger safety cushion and better asset quality. The other may be earning returns by taking more risk."

Q5. Why do banks buy treasury bills?
Model answer: "They are very safe, easy to sell, count towards liquidity requirements and can be used as collateral to borrow from NRB."

Q6. Where do you see Nepali banking in ten years?
Model answer: "I see fewer, stronger banks, mostly digital services with personal advice for complex needs, wider financial inclusion through agents and mobile, stronger compliance and more lending to productive and green sectors. Skills in technology and risk will be in great demand."

Q7. Tell me about a time you showed honesty or responsibility.
Model answer idea: Choose a real example, even small, like returning extra change, reporting an error in a college fund, or refusing to share copied work. Use situation, action, result. Banks hire for character.

Q8. Why do you want to join banking?
Model answer idea: Link your interest in money, trust-based work and helping people grow businesses with a real example. Avoid saying only "for a stable job." Show curiosity and learning energy.

Final Taiyari Checklist

Before you walk into the exam hall or interview room, tick these:

I can explain asset vs liability with an example.
I can list the A, B, C, D classes and say who regulates them.
I can describe KYC, CDD, EDD, PEP, maker-checker.
I can calculate an EMI and explain the 5 Cs.
I know NPL classes and provisioning.
I can explain CRR, SLR, repo, SLF and CAR in my own words.
I know the three stages of money laundering and what an STR is.
I can explain an LC step by step.
I know at least five bank ratios.
I have read the latest monetary policy highlights.
I have two ethical-situation answers ready.
I have researched the bank I am applying to.

Quick Recap of Post 5 and the Whole Series

Post 1: Bank basics, Nepal's banking map and the asset-liability mirror.
Post 2: Accounts, KYC, cheques, payments and daily controls.
Post 3: Lending, collateral, pricing, NPLs and recovery.
Post 4: NRB, monetary policy, capital rules, risk and AML/CFT.
Post 5: Trade finance, forex, treasury, ratios, laws and your job plan.

A Last Word from Sita

Sita started with a biscuit tin and a rat-chewed bundle of notes. Today she has a bank account, a loan, an export order and a business that employs eleven people. Along the way, she discovered that banking is not about complicated words. It is about trust, rules and careful judgement.

The same is true for you. Every term in this series exists because someone once lost money, trusted the wrong person or ignored a risk, and the system learned from it. When you understand the why behind a term, you no longer memorise; you think like a banker. That is exactly what interviewers want to see.

Study steadily, revise often, stay honest and keep learning from the latest NRB circulars. Shubhakamana, and may your banking journey begin soon!

Disclaimer: This series is for educational and exam-preparation purposes. Laws, directives, rates and limits change frequently. Always confirm current figures and rules with the Nepal Rastra Bank website, official bank notices and the latest vacancy syllabus.

End of the series. Study steadily and verify current NRB figures before your exam.

BankTalk