881 trade finance under letter of credit transaction recommendations for joint stock commercial bank for foreign trade of vietnam

I guarantee that my Bachelor’s thesis with the research topic "Trade financeunder Letter of Credit transaction - Recommendations for Joint Stock CommercialBank For Foreign Trade of Vietn

I guarantee that my Bachelor’s thesis with the research topic "Trade financeunder Letter of Credit transaction - Recommendations for Joint Stock CommercialBank For Foreign Trade of Vietnam" is my personal research with the guidance of Dr.Nguyen Thi Hong Hai - Lecturer of the Falcuty of International Business, BankingAcademy of Vietnam Data sources and information used during the study are derivedand cited in accordance with regulations Research results in the thesis topic serve forself - study and objectively analysis I take all responsibility for my thesis

Student’s signature

Nguyen Huong Giang

in the past 4 years and completing this thesis Also, I would like to thank all lecturers

of the Faculty of International Business and lectures of Banking Academy of Vietnamwho equipped me with useful knowledge in the university years; and my classmatesand friends for their suggestions

Especially, I would like to express my sincere gratitude to my advisor Dr.Nguyen Thi Hong Hai for the continuous support of my research, for her patience,motivation, enthusiasm, and immense knowledge Her guidance helped me in all thetime of research and writing of this thesis

Last but not least, I would like to thank my family: my parents, my brother and

my sister in-law for supporting me spiritually throughout my life

TABLE OF CONTENT

DECLARATION i

ACKNOWLEDGEMENTS ii

TABLE OF CONTENT iii

LIST OF ABBREVIATIONS vi

LIST OF CHARTS viii

LIST OF FIGURES viii

LIST OF TABLES ix

INTRODUCTION 1

1 Rationale of the study 1

2 Research purpose 2

3 Research scope and objective 3

4 Research methodology 3

5 Thesis Structure 3

CHAPTER 1: LITERATURE REVIEW AND THEORETICAL OF TRADE FINANCE UNDER LETTER OF CREDIT TRANSACTION 4

1.1 LITERATURE REVIEW 4

1.2 THEORETICAL OF TRADE FINANCE UNDER LETTER OF CREDIT TRANSACTION 6

1.2.1 Overview of Letter of Credit 6

1.2.2 Overview of trade finance under Letter of Credit transaction 12

1.2.3 Criteria for assessing trade finance under Letter of Credit transactions 20

1.3 FACTORS AFFECTING THE DEVELOPMENT OF TRADE FINANCE UNDER LETTER OF CREDIT TRANSACTIONS 22

1.3.1 Subjective factors 22

1.3.2 Objective factors 23

SUMMARY OF CHAPTER 1 25

CHAPTER 2: EXPERIENCES IN TRADE FINANCE UNDER LETTER OF CREDIT TRANSACTION IN SOME COMMERCIAL BANKS 26

2.1 EXPERIENCES FROM ASIAN COMMERCIALBANKS 26

2.1.1 Experiences from BRAC Bank 26

2.1.2 Experiences from Hong Kong & Shanghai Banking Corporation Bank 29

2.2 EXPERIENCE FROM EUROPEANCOMMERCIAL BANKS 30

2.2.1 Experiences from Vnesheconombank 30

2.2.2 Experiences from Roseximbank 30

2.2.3 Experiences from Sberbank 31

SUMMARY OF CHAPTER 2 31

CHAPTER 3: ANALYZE ON THE REAL SITUATION OF TRADE FINANCE UNDER LETTER OF CREDIT TRANSACTION AT JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM 32

3.1 OVERVIEW OF JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM 32

3.1.1 Development History 32

3.1.2 Structure of management apparatus 34

3.1.3 Business Operations of Joint Stock Commercial Bank for Foreign Trade of Vietnam 36

3.2 THE REAL SITUATION OF TRADE FINANCE UNDER LETTER OF CREDIT TRANSACTION AT JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM 40

3.2.1 Trade finance under Letter of Credit transaction at Joint Stock Commercial Bank for Foreign Trade of Vietnam 40

3.2.2 Analyze the real situation of trade finance under Letter of Credit transaction at Joint Stock Commercial Bank for Foreign Trade of Vietnam 43

SUMMARY OF CHAPTER 3 53

CHAPTER 4: RECOMMENDATIONS FOR JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM 54

4.1 SHORT - TERM SOLUTIONS 54

4.1.1 Diversify trade finance under Letter of Credit product 54

4.1.2 Continuing to enhance process modification 54

4.1.3 Implement flexible measures in working 55

4.1.4 Strengthening international trade finance activities by Documentary Credit payment method 55

4.1.5 Marketing 56

4.2 LONG - TERM SOLUTIONS 57

4.2.1 Human resource development 57

4.2.2 Technological development 57

4.2.3 Strengthening inspection, internalcontrol andcompliance 58

4.2.4 Branch network, correspondent bankingrelationship 58

SUMMARY OF CHAPTER 4 59

CONCLUSIONS 60

REFERENCES 61

^API Application Programming Interface

LIST OF ABBREVIATIONS

SMS Short Message Service

Telecommunication

UPAS L/C Usance payable at sight Letter of Credit

Vietcombank Joint Stock Commercial Bank for Foreign Trade of Vietnam

Chart 3.1 The number of transaction offices and branches at Joint Stock

Commercial Bank for Foreign Trade of Vietnam from 2017 to 2019

Figure 2.1 The percentage of traditional trade finance used globally 26Figure 2.2 Import traffic vs average value in FY2019, split by region,

based on SWIFT MT700 traffic

27

Figure 3.1 Management structure of Joint Stock Commercial Bank for

Foreign Trade of Vietnam

35

LIST OF CHARTS

LIST OF FIGURES

Table 3.1 Key financial ratios of Joint Stock Commercial Bank for Foreign

Trade of Vietnam from 2016 to 2020

Table 3.5 The number of customers using trade finance at Joint Stock

Commercial Bank for Foreign Trade of Vietnam

Table 3.8 Revenue and Profit Statement of trade finance under Letter of

Credit transaction from 2018 to 2020

50

LIST OF TABLES

1 Rationale of the study

With any economy, the trend of international trade and global integration ishugely urgent and we cannot deny its importance Economic integration bringsenormous benefits, but nowadays, Vietnamese businesses participating in internationaltrade playground are still facing many difficulties The differences in financialresources, the quality of human resources, and the capital needs of the countries areenormous Knowing this, Vietnamese commercial banks have also used andmaximized their advantages to help Vietnamese enterprises be advantageous in tradingwith foreign businesses

Trade finance plays a vital foreign trade and other business transactions Theyare used in almost every phase of the transaction between the buyer and the seller.With the advantage of accumulated capital, well-trained professional techniques,commercial banks have been holding an increasingly vital role in international tradeand other business transactions Letter of Credit is used popularly in internationaltransactions At the same time, the relationship between exporters and importers isinsufficient to ensure trust with the other party, which means the importer does notagree to pay in advance or the exporter does not open the account Therefore, indeveloping countries like Vietnam, Letter of Credit is used highly in 80% of small andmedium enterprises in trade finance, mainly import finance Current international tradefinance under the L/C method is a service that banks provide both financial andreputable support Enterprises, if they know how to take advantage of this, can expandthe scale of capital, increase production and business efficiency

Moreover, businesses are inevitably being established associated with the need

to finance capital to perform foreign trade contracts Because they do not have manyrelationships with partners, do not have enough financial capacity, time to affirm theirprestige, and trust each other Therefore, banking is the ultimate solution to helpbusinesses overcome this challenging period And Letter of Credit is one of the uniquepayment methods to allow enterprises to solve this problem

In Vietnam, Vietcombank is one of the largest commercial banks; internationalpayment services and trade finance are the key areas that have made Vietcombank'sbrand for more than half a century Currently, the bank is constantly expanding itsagent relationships with central banks in the region and the world, diversifyingproducts and services to affirm its leading position in international payment servicesand trade finance Trade finance under Letter of Credit is a service that Vietcombankfocuses on enhancing the quality of this product to meet the market's needs and helpthe bank affirm its strengths in the banking sector The bank plays many roles likeissuing bank, advising bank or confirming bank in this payment method; which leads

to high potential risk with its bank So, the development and expansion of internationaltrade financing activities in terms of service quality, variety of products in general, andinternational trade finance development by L/C payment method, in particular, have asignificant role in overcoming difficulties for businesses, as well as increasingbusiness efficiency for the bank

Moreover, the need for enterprises from banks is more complicated in thebooming trade period, and enterprises are usually customers of different banks Hence,companies can compare trade financing instruments between banks As a result, banksare pressured to update new products and develop their own devices continuously

Realizing that importance, I have chosen the topic "Trade finance under Letter

of Credit transaction - Recommendations for Joint Stock Commercial Bank forForeign Trade of Vietnam"

2 Research purpose

This thesis is researched for the following purposes:

- Give a general theory on trade finance under Letter of Credit transaction, its legalframework, criteria for assessing it, and experiences from commercial banks aroundthe world that have used service successfully

- Surveying gives an overview of trade finance under Letter of Credit at Joint StockCommercial Bank for Foreign Trade of Vietnam, thereby assessing the achievementsand limitations

- Proposing recommendations to help apply trade finance under Letter of Credit atJoint Stock Commercial Bank for Foreign Trade of Vietnam effectively.

3 Research scope and objective

This scope of the study is at Joint Stock Commercial Bank for Foreign Trade ofVietnam and focuses on trade finance under L/C transaction Market analysis has beencarried out in the following commercial banks in the world focus on trade financeunder L/C transaction such as CBE bank, BRAC Bank, etc The essay is researchedwith data from the period of 2017 - 2020 It will give suggestions till the period of

2030 in which to offer trade finance under L/C transaction for Vietcombank

4 Research methodology

To carry out theory research, I have used the statistic method, experimentalresearch, and combined them with reference and comparison to highlight the researchconcerns

Statistic method: data collected from annual reports of some commercial banks,

export-import enterprises, financial institutions, corporations like ICC, etc

Experimental research: collect information from related studies, compare the

status of trade finance Joint Stock Commercial Bank for Foreign Trade of Vietnam

5 Thesis Structure

To tackle these problems, the research will be separated 4 chapters

Chapter 1: Literature Review and Theoretical of trade finance under Letter of Credit

transaction

Chapter 2: Experiences in trade finance under Letter of Credit transactions in some

commercial banks

Chapter 3: Analysis on the real situation of trade finance under letter of credit

transaction at Joint Stock Commercial Bank for Foreign Trade of Vietnam

Chapter 4: Recommendations for Joint Stock Commercial Bank for Foreign Trade of

Vietnam

CHAPTER 1: LITERATURE REVIEW AND THEORETICAL OF TRADE

FINANCE UNDER LETTER OF CREDIT TRANSACTION

According to International Chamber of Commerce (ICC), engaging in worldtrade holds enormous potential for business yet many companies, especially small -and medium-sized enterprises (SMEs), depend on access to banking services to unlocknew markets Trade finance allows companies to mitigate the risks associated withimporting or exporting goods and services, permitting world trade to flow predictablyand securely The 2018 ICC Global Survey shows that over 60% of banks surveyedhave implemented or are in the process of implementing technology solutions todigitalize their trade finance operations However, only 9% of banks reported that thesolutions implemented have led to a reduction of time and costs in trade financetransactions The report also reveals that the industry needs to agree on commonstandards so that all the benefits of trade digitalization can be realized

Mustafa (2010), Ahn & JaeBin (2011), and Grath (2013) provide all theories oftrade finance Moreover, the significance of trade finance in trading activities is alsodemonstrated in various researches, namely Wandhofer (2012) and Prete & Federico(2014) Using data on outstanding loans extended by Italian banks to a large sample ofItalian manufacturing firms between 2006 and 2010, Prete & Federio (2014) foundthat trade finance was only weakly hit by the funding shock, which mainly affectedordinary lending

The author Henri (2013), in his research, presented a practical process in thetrade financing unit from the perspective of corporate banking employees As thepeople employed more than ten years which are the most satisfied within the strategies

is one of the main reasons providing satisfaction to the trade finances processes So,the place for improvement in the quality of the methods is that banks offer moreinformation to consider services, fulfillment, contact information, simplify informationaccessibility and add more training for employees Therefore, improving theeffectiveness of the trade finances process contributes to the development of banks andenhances the competitive performance of firms In addition, the author addresses theseissues by focusing on employees with less than ten years of experience

In addition, analyzes on the development of trade finance are also mentioned bymany authors, namely Clark (2014) and Garralda & Vasishtha (2015) According toClark (2014), trade finance impact potentially on financial stability and the realeconomy The author also shows that trade finance has been relatively safe and liquidassets even in crisis conditions, posing only limited risks to banks and overall financialstability Garralda & Vasishtha (2015) carried out a comprehensive study entitled

"What drives bank-intermediated trade finance? Evidence from cross-countryanalysis" Their findings suggest that the short-term, self-liquidating nature of tradefinance could generate some area for negative externalities for the global economy,especially if the banking field is subject to global shocks These externalities can beamplified if a large number of banks simultaneously run down their liquidity poolembodied in their trade finance portfolios

Pham Huyen Trang (2016) with a scientific article: "International trade financebusiness, the new trend of commercial banks" printed in Finance magazine The reporthas clarified the current trend of Vietnamese commercial banks' trade finance servicesbusiness with measures and recommendations to improve the efficiency of tradefinance activities The author has evaluated the tendency to use the centralizationmodel in trade finance of Vietnamese commercial banks, suggesting measures to applythe model effectively to improve the quality of trade finance services Besides, DoanThi Nuong Nuong (2012) provides some solutions to develop trade finance inVietnamese commercial banks, and Pham Thi Thu Hang (2015) concentrates onmanaging risks in the trade finance field

Documentary Letter of Credit is among the most popular methods of paymentused in international trade In the nearest research, Nguyen Thi Ha (2015)demonstrates the development of trade finance in Vietnamese commercial banks withanalysis on some modern trade finance products like UPAS L/C, Draft buyback L/C,Trade loan, and L/C Refinancing Hamed Alavi (2016) tried to shed light that not onlythe importance of L/C as a method of payment in international trade which can balanceconflicting interests of buyer and seller by transferring the payment risk from thebuyer to the issuing bank is constantly growing due to constant development in tradeamong countries, but also all involved parties to L/C transaction face large types ofrisk In terms of improving the L/C payment method for foreign trade transactions,

Ermakov et al (2017) provided the problems retard these, such as low availability ofL/Cs for small and medium-sized businesses; cost and complexity of compliance withregulatory requirements, growing global risks They also suggest that the popularpayment system, Blockchain technology, may become one of the promising ways toimprove the L/C payment method for international transactions The differencebetween the legal nature of Documentary Letter of Credit, Negotiable Instruments andContracts is the subject of research of Hamed Alavi (2016) After analyzing the legalcharacters of documentations mentioned above, they imply that there is no doubt aboutsimilarities between them However, the unique nature of their Jurisprudence shouldnot be confused with the latter Additionally, all involved practitioners in internationaltrade law and international trade finance should keep in mind matters related toprinciples of strict compliance and autonomy because of the domestic law ofrespective jurisdiction.

With a wide range of previous researches, all involved parties in internationaltrade can get a lot of information on the trade finance field especially trade financeinstruments However, not to mention that all previous researches do not provide themechanism of trade finance products in a practical view, like trade finance underLetter of Credit transactions are updated at an increasing pace In Vietnam, Letter ofCredit is popularly used as a payment method in international business to reduce therisk of a trade Because of the gap and the fact that it is necessary to this dissertation,

"Trade finance under Letter of Credit transaction - Recommendations for Joint StockCommercial Bank for Foreign Trade of Vietnam" is written

TRANSACTION

1.2.1 Overview of Letter of Credit

1.2.1.1 Definition of Letter of Credit

The definition of Letter of Credit, offered in UCP 600, article 2, is a short anddefinitive statement: “Credit means any arrangement, however named or described,that is irrevocable and thereby constitutes a definite undertaking of the issuing bank

to honor a complying presentation”

In this regard, a functional and practical definition of L/C is given by Dolan: “Acredit is an original undertaking by one party (the issuer) to substitute its financial

strength for that of another (the applicant), with that undertaking to be conditioned onthe presentation of a draft or demand for payment and usually other documents.”

The definition can be said to be, in every way, an exact representation ofcommercial LC, which this article is concerned for In essence, an L/C is said to be a

“financing instrument” by which a bank undertakes to pay the seller against thepresentment ofaspecified document The normal LC process flow can bediagrammatically represented as follows:

Figure 1.1 The entire process under Letter of Credit

transaction

1.2.1.2 Features of Letter of Credit

A commercial L/C is a payment and financing mechanism used to facilitateinternational trade L/Cs can be tailored to meet the needs of a variety of tradingrelationships and contexts, through a series of features that can be included in theterms of the L/C instrument

- Revocable and irrevocable L/C

A revocable L/C may be cancelled or modified for any reason at anytime by theissuing bank without notification An irrevocable L/C may not be amended orcancelled unless the issuing bank, the confirming bank and the seller agree In thelatest version of UCP 600, the ICC has eliminated revocable L/C

- Confirmed and unconfirmed L/Cs

A confirmed and unconfirmed L/C is confirmed when a second bank, usually inthe locale of the exporter, has added its obligation (confirmation, guarantee orassurance of payment) to that of the issuing bank An unconfirmed L/C has beenadvised to the beneficiary solely by the advising bank without adding its confirmation

An exporter should consider confirming an L/C if there is uncertainty about the creditstanding of the issuing bank or if the buyer is located in a country where politicalunrest, economic instability, currency devaluation or exchange controls put payment atrisk

- Straight and negotiable L/C

With a straight L/C, the obligation of the issuing bank to honour drafts islimited solely to the beneficiary, and not to any other endorser, negotiator, or bona fideholder of the drafts With a negotiable L/C, the issuing bank is obligated to pay thebeneficiary or any bank nominated by the beneficiary

- Restricted and unrestricted

Under a restricted L/C only a specific bank, which is usually the advising bank,can purchase a bill of exchange from the exporter In the case of unrestricted L/C, thepurchasing bank is not specified Hence, the exporter can present the bill of exchange

to any bank and receive payment

- Term (Usance) versus Sight L/C

A term or usance L/C involves a payment undertaking at a future point in time,

as agreed between the buyer and seller A term L/C can specify, for example, thatpayment will be made 30 days after the shipment date, or 60 days ‘sight’ (60 days afterthe documents are ‘seen’ by the bank and determined to be compliant) A ‘Sight L/C’,

or an ‘L/C available at Sight’, provides for payment after the presentation of the draftand documents, and after verification that the documents conform to the terms of theL/C

1.2.1.3 Parties to Documentary Credit transaction

Letter of Credit is understood better if all the following elements or terms of theLetter of Credit are known:

- Applicant: The buyer in the business transaction.

- Beneficiary: The person in whose favour a credit is issued.

- Issuing Bank: The issuing bank provides an assurance to the beneficiary that the

payment will be paid duly if all the documents presented comply with the stipulationsstated in the Letter of Credit The issuing bank also needs to examine the documentssubmitted by the beneficiary It is absolutely liable to pay once all the terms andconditions in the L/C are complete

- Advising Bank: The bank which, at the request of the issuing bank, advises the

beneficiary when the credit has been issued An advising bank owes no obligation tothe beneficiary other than to satisfy itself as to the ostensible authenticity of the creditupon which it is advising

- Confirming Bank: The confirming bank confirms the Letter of Credit and assumes

the same obligation as the issuing bank The confirming bank is typically the advisingbank The conforming bank does a strict evaluation of the country and the issuing bankbefore confirming the L/C

- Nominated Bank: The bank nominated by the issuing bank as being the bank at

which the beneficiary may present the documents required by the credit and obtainpayment If the nominated bank negotiates or honours a credit that is subject to UCP

600, that nominated bank is entitled to reimbursement from the issuing bank

1.2.1.4 Types of Letter of Credit

a Revocable L/C

A Revocable Letter of Credit is a type of Letter of Credit in which the issuingbank can amend the terms of the Letter of Credit or cancel the Letter of Creditcompletely without giving prior notice to the beneficiary

Issuing bank must reimburse any nominated or confirming bank with which therevocable Letter of Credit has been made available if these banks fulfill theirobligations under the documentary credit terms against complying presentation beforethey receive the amendment or cancellation notice from the issuing bank

A Revocable Letter of Credit can serve as a limited security payment method tothe beneficiaries, because they are subject to amendment or cancellation without theirprior knowledge As a result revocable letters of credit are not used frequently ininternational trade

b Irrevocable L/C

Irrevocable Letter of Credit (ILOC) is a Letter of Credit type which can not becancelled or amended by the issuing bank without the agreement of the parties of theLetter of Credit transaction

For example, issuing bank has no power to modify Letter of Credit terms if thebeneficiary does not find them acceptable In other words, every amendment at leastrequires the beneficiary’s acceptance to be effective

Irrevocable letters of credit give much more payment security to thebeneficiaries than revocable letters of credit because of the reasons explained above

As a result, irrevocable letters of credit are the types of L/Cs that are dominantly seen

on the market place

But the irrevocable Letter of Credit does not mean revocable In the case, allparties agree to cancel L/C, it is recognized as no longer valid However, afteragreeing with the beneficiary about canceling the L/C, an applicant must negotiatewith issuing bank, this bank contact confirming the bank (if any) to get authenticatedagrees to cancel the L/C But to cancel L/C, it is compulsory to obtain the consensus ofthe beneficiary, issuing bank, and confirming bank (if any) Customers oftenmistakenly think that it is right for both the buyer and the seller to agree to cancel LC,but underestimate the role of the bank Likely, the issuing bank/confirming bank doesnot agree to cancel L/C because they have granted credit to the opener, or exportfinance to the beneficiary, the cancellation of the LC leads to the damage of the banksinvolved

c Irrevocable Confirmed L/C

Irrevocable Confirmed Letter of Credit is one to which the advising bank addsits confirmation, makes its own independent undertaking to effect payment,negotiation or acceptance, providing documents are presented which comply with theterms of the Letter of Credit The advising bank, which may also be the confirmingbank, assumes the country (political and economic) risk of the applicant’s country aswell as the credit risk, failure and default of the issuing bank and affects payment tothe beneficiary without recourse Due to the reason mentioned above, IrrevocableConfirmed L/C is the most guaranteed to the exporter

d Transferable Credit

A transferable Letter of Credit is one, which specifically states that it istransferable This will only occur if the applicant for the Letter of Credit (buyer)agrees In a transferable Letter of Credit, the rights and obligations of the beneficiaryare transferred to another party, usually a manufacturer or wholesaler The transfermay be either full or partial

e Back to Back L/C or Counter L/C

Back-to-Back Letters of Credit consist of two letters of credit (LoCs) usedtogether to finance a transaction Back-to-Back Letter of Credit is usually used in atransaction involving an intermediary between the buyer and seller, such as a broker,

or when a seller must purchase the goods it will sell from a supplier as part of the sale

to his buyer

Back-to-Back letters of credit are actually made up of two distinct LoCs, oneissued by the buyer's bank to the intermediary and the other issued by theintermediary's bank to the seller With the original L/C from the buyer's bank in place,the broker goes to his own bank and has a second L/C issued, with the seller asthe beneficiary

The seller is thus ensured of payment upon fulfilling the terms of the contractand presenting the appropriate documentation to the intermediary's bank In somecases, the seller may Back-to-Back L/C essentially substitute the two issuing banks'credit to the buyer's and intermediary's and thus help facilitate trade between partieswho may be dealing from great distances and who may not otherwise be able to verifyone another's credit.not even know who the ultimate buyer of the goods is

f Revolving Credit

Revolving Letter of Credit is a single Letter of Credit that covers multipletransactions over a long period It is very specific in the way that it is used for regularshipments of the same commodity between the same buyer (importer) and the seller(exporter) This Letter of Credit is issued only once for a certain period or a certainnumber of transactions It avoids the need for repetitive arrangements to open a newLetter of Credit for every transaction

g Standby Credit

Standby Letter of Credit (SLOC) is a legal document that guarantees a bank'scommitment of payment to a seller if the buyer-or the bank's client-defaults on theagreement A standby Letter of Credit helps facilitate international trade betweencompanies that don't know each other and have different laws and regulations.Although the buyer is certain to receive the goods and the seller certain to receivepayment, a SLOC doesn't guarantee the buyer will be happy with the goods A standbyLetter of Credit can also be abbreviated SBLC.

h Reciprocal L/C

Reciprocal L/C becomes valid when another L/C that is reciprocal to it isopened The applicant for this LC is the beneficiary of the other LC and vice versa Ofthe two LCs, the LC opened before must be written: “This LC becomes validity whenthe beneficiary reopens a reciprocal LC for this applicant for L/C to benefit.” and thereciprocal L/C must be written: “This LC is reciprocal to LC no dated Issuedby ”

Reciprocal L/C is used when raw material suppliers and machinists are in twodifferent countries This method ensures the benefits of the machinists because thefinished products have their own characteristics that the orderer defines, so only theorderer consumes them

i Red Clause L/C

A red clause Letter of Credit is a specific type of Letter of Credit in which thebuyer can extend the facility of advance payment to the seller against a certaindocumentary requirement In other words, under the red clause Letter of Credit, theissuing bank will make any advance payment to the exporter before the seller ships thegoods to the importer This is usually done to provide aid to the seller in the form

of working capital to purchase raw material, processing and packaging of goods, etc.The advance payment is done against the documentary requirement which includeswritten undertaking and receipts

1.2.2 Overview of trade finance under Letter of Credit transaction

1.2.2.1 The concept of trade finance under Letter of Credit transaction

Trade finance can help reduce the risk associated with global trade byreconciling the divergent needs of an exporter and importer Ideally, an exporter would

prefer the importer to pay upfront for an export shipment to avoid the risk that theimporter takes the load but refuses to pay for the goods However, if the importer paysthe exporter upfront, the exporter may accept the payment but refuse to ship the goods.

A standard solution to this problem is for the importer's bank to provide a Letter

of Credit to the exporter's bank that provides for payment once the exporter presentsdocuments that prove the shipment occurred, like a bill of lading The Letter of Creditguarantees that once the issuing bank receives proof that the exporter shipped thegoods and the terms of the agreement have been met, it will issue the payment to theexporter

With the Letter of Credit, the buyer's bank assumes the responsibility of payingthe seller The buyer's bank would have to ensure the buyer was financially viableenough to honor the transaction Trade finance helps both importer and exporter buildtrust in dealing with each other and thus facilitating trade

1.2.2.2 Types of trade finance under Letter of Credit transaction

a Import financing

* Issuing L/C

- Consulting opening the Application for Issuance of L/C

Consulting opening L/C usually is demonstrated by specific professionalmeasures in receiving the application for issuance of the L/C process This can befurther advice or simply modifying the terms of the application to the best interests ofthe importer based on ensuring the security of the issuing bank itself

The content of the consultation is also reflected in advising the applicant forissuance of L/C to choose a correspondent bank of the issuing bank to perform thefunctions of confirmation, discount and refund

- Prestigious sponsor through issuing L/C

The applicant's advantage for issuance of LC gets through being issued the L/C

by a commercial bank is very clear as described above However, the businessopportunity of the importer is different depending on the prestige of the issuing bank.The exporter will decide to sell the goods to the importer if the issuing bank is aprestigious enterprise

- Accepting payment (Accepting payment by deferred B/E or deferred L/C)

In L/C payment, issuing bank is responsible for making payment or acceptingpayment For deferred L/C, issuing bank accepts payment by telegram or by letter.Letter of acceptance or bill of exchange accepted for payment is evidence to determinethe liability of the parties in the event of a dispute Accepting by SWIFT is nowcommonly used in L/C payment.

* B/L endorsement and Authorization to receive goods

- B/L endorsement

B/L endorsement by the bank occurs with B/L made out to the order of Issuingbank The importer can only carry out procedures to receive goods when the BL isendorsed by the bank under regulations The relationship between the importer and theissuing bank will determine the level of financing through BL endorsement If theimporter is allowed to use the limit, they can receive the goods before makingpayment Banks may also consider lending for cases where there is no limit The B/Lendorsement fee is collected according to the regulations of the bank in each periodand depends on the policy of each bank

- Authorization to receive goods

Authorization to receive goods is a trade finance transaction of bank for theairline importer For the airway bill, if the commercial contract stipulates thatconsignee is the issuing bank, the importer can only receive the goods when he has theauthorization to receive the goods from the issuing bank Basically, authorization toreceive goods is carried out like B/L endorsement

international trade and payments The advantage for exporters is not only in paymentsecurity but also in terms of the time and opportunity for a bank's financing.

* Negotiation with and without recourse

A Letter of Credit with recourse means if the issuing bank refuses to pay to thenominated bank, the nominated bank will claim the reimbursement with interest fromthe customer A non-confirmed Letter of Credit can be negotiated between a customerand its nominated bank to be with recourse A confirmed Letter of Credit cannot bewith recourse unless otherwise specified with special conditions

A Letter of Credit without recourse means the nominated bank does not have arecourse if the issuing bank fails to make the payment or does not accept thedocuments If the confirming bank and the nominated bank are the same, then therewill be no recourse with a Letter of Credit

c Financing under special credits

* UPAS L/C

UPAS stands for “Usance Payable at Sight” which is the combination of UsanceL/C and Sight L/C UPAS L/C is a Usance L/C where payment is made on a sightbasis to the beneficiary but the payment of the applicant will made to issuing bank atthe usance term L/C commission is charged by issuing bank quarterly and the chargedinterest against L/C settle amount

Two sources of finance of UPAS L/C are discounting the Export Bill andbuyers credit Buyers Credit are using as a source of finance to settle the L/C payment.The situation of UPAS L/C happens when the beneficiary wants immediate paymentfor his goods but the applicant may not have the facility with his bank to issue sightL/C’s Under this Letter of Credit, the exporter will get the payment at sight if thedocuments are credit compliant The importer will be charged interest, acceptancecommission and other charged as per the terms of L/C for using this Letter of Credit

On the other hand, if the applicant provides usance L/C and the beneficiary willarrange to get the bill immediately from his bank, is called discounting Usually, thisdiscount fee and interest will be charged against the account of the beneficiary

* Red clause L/C

The funds provided in a red clause Letter of Credit are known as advances.These advances are then deducted from the face amount of the credit when it is

presented for payment Red Clause Letters are usually employed to facilitateinternational exports and trade These letters of credit were originally written in redink.

A red clause Letter of Credit allows for an exporter to obtain pre-shipmentfinance, although available credit is usually only part of the estimated value It couldeven be the entire sales value A buyer can expand their supply sources with a redclause Letter of Credit Most buyers shy away from becoming involved in financinggoods that have not yet been shipped, but exporter and buyer may be linked togetherthrough a normal contract with the trade bank establishing the red clause Letter ofCredit against a registered contract with an approved buyer Interestingly, when usingthis specialized form of credit, the clause is printed or typed in red ink

* Transferable Credit

- Transferable Letter of Credit Approval

The Letter of Credit approval process is similar to the process of receiving abank loan The buyer must submit a letter of credit application, including details ontheir credit profile A bank will analyze a buyer’s credit score and financial stability inthe underwriting process If approved, the Letter of Credit shows the bank is willing toissue a loan for a specified amount to the borrower if a loan is needed to cover thepayment of the customer’s order with the seller

- Transferable Letters of Credit in Trade Agreements

A transferable Letter of Credit is a form of credit support used in both domesticand international trade agreements Assume a buyer has contracted $45,000 worth ofgoods with a seller In the deal, the seller specifically requires a transferable Letter ofCredit before proceeding with the production

A buyer needs to partner with a bank to obtain approval for a $45,000 Letter ofCredit with a transferable provision allowing payout to the seller as a secondarybeneficiary If the bank agrees to a $45,000 transferable provision, then the originalbeneficiary can request a $45,000 payment from the bank directly to the seller at thetime of sale

- Transferable Letter of Credit Versus Confirmed Letter of Credit

A transferable Letter of Credit can be a more convenient option for a buyer than

a confirmed Letter of Credit That's because the buyer is only required to deal with onebank for a transferable Letter of Credit

In a confirmed Letter of Credit, however, the buyer must obtain two letters ofcredit to make the first Letter of Credit confirmed They are obtained from twodifferent banks, and the second bank guarantees the letter from the first bank.Confirmed letters of credit are required by a seller if the first bank defaults onrepayment

* Back-to-Back L/C

Back-to-Back Letter of Credit is a negotiable instrument in which the sellergets a Letter of Credit from the buyer and the seller further transfers the Letter ofCredit to its supplier In simple words, the seller first gets the Letter of Credit from thebuyer to ensure timely payment and further the same seller hands over the Letter ofCredit to someone from whom he buys goods or materials

+ Transferring Bank

- Procedure for Back-to-Back Letter of Credit

The issuing bank upon getting the instructions from the customer agrees to issueLetter of Credit, which is transferable to the first beneficiary This means that the firstbeneficiary can transfer the Letter of Credit to its customer or third party or secondarybeneficiary The transferring bank i.e the bank issuing the Letter of Credit shall issue

a “Transferred Letter of Credit” The “Transferred Letter of Credit” looks identical tothe original Letter of Credit The first beneficiary holding the original Letter of Creditgives the “Transferred Letter of Credit” to the secondary beneficiary

- Payment Clause in Back-to-Back Letter of Credit

When the first beneficiary transfers the original LC to the secondarybeneficiary, it is assumed that the payment has been made to the first beneficiary of thetransaction when LC is presented at the bank However, if partial payment is made tothe secondary beneficiary, in such case the original beneficiary has the right to present

the invoice and draft to the bank after the secondary beneficiary has presented thedocuments.

* Standby L/C

A standby Letter of Credit (SBLC) can add a safety net that ensures paymentfor a completed service or a shipment of physical goods With such an arrangement, abank guarantees payment to a beneficiary if something fails to happen The SBLCdescribes the conditions that would cause the bank to pay A bank providing a Letter

of Credit should be a disinterested third party If the bank's customer fails to satisfyspecific terms of an agreement, the bank not the customer who failed to deliver, paysthe beneficiary Because it is credit, the customer ultimately is responsible for repayingthe bank

SBLCs, like standard letters of credit, are useful for international trade as well

as domestic transactions like local building projects Should something unforeseenprevent the terms of a deal to be completed, the SBLC ensures financial obligations to

a beneficiary are met

* Revolving L/C

The prime benefit of the revolving Letter of Credit is saving a lot of time andenergy for all hree parties: bank, importer as well as exporter Just that thearrangement should be clear and long-term between the buyer and the seller Therevolving Letter of Credit can be further divided into two subcategories One is based

on time, the other is based on value Let’s understand each in detail Following are thetwo types of revolving Letter of Credit:

- Revolving Letter of Credit Based on Time

In the revolving Letter of Credit that is based on time, a specific amount(payment) is allowed to be drawn within a defined period

+ Cumulative: In a revolving LC based on time, if it is the cumulative type, theprevious unused L/C limits can be used in future months

+ Non-cumulative: In a revolving Letter of Credit based on time, if it is the cumulative type, then the previous unused L/C limits cannot be used in future months

non Revolving Letter of Credit Based on Value

The second type of revolving Letter of Credit is based on value In this, anamount and validity for the Letter of Credit are set, and the seller has to work on these

criteria Thus we can say that the revolving Letter of Credit is a good paymentinstrument when the transactions are long-term in nature It helps in avoiding theprocedural hassle and cost of issuing a regular Letter of Credit for every transaction.

1.2.2.3 Legalframework of trade finance under Letter of Credit transaction

All international laws for trade financing are just uniform rules and customs sothat they only bind parties of transactions when trade financing instruments refer tothem and they are lower than national laws in the legal aspect International lawsmentioned are almost published by International Chamber of Commerce - ICC which

is the most representative business organization in the world Its hundreds ofthousands of member companies in over 130 countries have interests spanning everysector of private enterprise ICC has three main activities: rule setting, disputeresolution, and policy advocacy Because its member companies and associations arethemselves engaged in international business, ICC has unrivaled authority in makingrules that govern the conduct of business across borders Although these rules arevoluntary, they are observed in countless thousands of transactions every day and havebecome part of international trade

International law for trade finance under L/C transaction:

- Uniform Customs and Practice for Documentary Credits, UCP 600, (ICC Publication

No 600), approved by the ICC Commission on Banking Technique and Practice on 25October 2006 and the implementation date is 1 July 2007

This is a set of rules on the issuance and use of letters of credit UCP 600 alsoincludes the 12 Articles of the UCP, ICC’s supplement to the UCP governing thepresentation of documents in electronic or part-electronic form

- International Standard Banking Practice for the Examination of Documents underDocumentary Credits - ISBP 745 is an International Chamber of Commerce (ICC)publication in July 2013 It is the most up-to-date, comprehensive guide to handlingand examining trade documents under documentary credits subject to UCP600

- The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits

- ICC Publication No 725 - URR 725, effective since 01 October 2008 and applicable

to any bank-to-bank reimbursement when the text of the reimbursement authorizationexpressly indicates that it is subject to these rules These rules are usually used whenL/C have reimbursing bank

1.2.3 Criteria for assessing trade finance under Letter of Credit transactions

1.2.3.1 Quantitative criteria

a Number of customers using the service

The more customers use this product, the more the bank gains profit and theincrease in revenue Therefore, the bank always concentrates on looking after thecustomer who has used its service and raises the number of potential clients byimproving its products and services

b Banking transaction offices, Branches, Correspondent Bank

L/C payment is a popular method of banks in the world To meet customers'needs everywhere and provide convenience for customers to access the bank'sproducts quickly, the expansion of branches and transaction offices is essential There

is a criterion for assessing the popularity of banking services to customers At the sametime, the more diverse the number of correspondent banks, the quicker and moreconvenient the customer's needs will be; transaction time, L/C notice will be faster Itshows the high reputation of the bank in the world, from which the staff - the coreteam of the bank also has the opportunity to learn from other banks' experiences

c Revenue from trade finance under Letter of Credit transaction

The growth of L/C revenue is assessed through the development of the revenueyears and the comparison of the export L/C and the import L/C turnover The bankcalculates the total income of trade finance under L/C transaction by the total amount

of service fees collected from customers (L/C advising fee, issuing bank charges, L/Cconfirmation fee ) This difference between banks may vary on the reputation, quality

of products, services, policies, and the size of the bank itself in each period

Turnover Oftrade finance under L/C

Turnover ratio L/C = - -—- -

— -Turnover of trade financeThis ratio evaluates the level of L/C service charge collection in the bank's tradefinance instrument The higher the rate and much more increase over the years, themore manifest the bank's success in developing trade finance effectively under L/Ctransaction

d Profit from trade finance under Letter of Credit transaction

The bank calculates profit based on the revenue, and the cost of trade financeunder L/C transaction contributes to the bank’s total revenue The big profit

demonstrates that the transactions are more effective and bring the bank's goodperformance.

Profit of trade finance under L/CProfitZRevenue ratio = -——-— -:———

Turnover of trade finance under L/C

In trade finance under LZC transactions, this ratio illustrates that each revenuegenerated the bank's profit The higher this ratio, the more influential the cost

management stage, thus increasing the bank's profit

1.2.3.2 Qualitative criteria

a Customer diversity

The level of customer diversity is not only reflected in the fact that the bank has

a large number of customers, but also has to take advantage to fully meet the needs ofall customers such as commercial enterprises, products, and services, construction, etc

or SMEs, large enterprises or domestic and foreign enterprises In this way, the bankcan prove to make the most of its resources to develop trade finance instruments

b Customer satisfaction

Customer reviews are through service quality, products: quick procedures,convenient records, fast processing, affordable prices, appropriate discounts, etc.Customer care service is also one of the factors that build up success and differentiatebanks to entice customers

c Bank’s prestige and credibility to its customers

One of the factors that create customer's trust and willingness to repay the debt

is the prestige and image of the bank A bank with a large scale and network coveragewill be famous for customers to choose from for convenient transactions In today'seconomy, trade finance activities in general and LZC payments, in particular, contain alot of risks: payment risk, market risk, foreign exchange risk, etc Therefore, the bankshould focus on operating effectively as well as gain the trust of customers Andbuilding an image and reputation is extremely important

d Bank’s prestige and credibility to its counterparts

In the integration period, the bank's counterparts are not only domestic but alsoforeign Therefore, building an image by improving service, shortening time, accurateprocessing, affordable price, and ranking high in the evaluation of reputable

organizations, will create more external relationships Therefore, the network ofagents and partners will be expanded for future development.

e Diversity in the category of trade finance under Letter of Credit transaction

The bank has a diversified product portfolio showing good competitiveness andcan fully meet the needs of customers To do that, banks must invest in researchingand developing new products, maintaining old products, actively learning the needsand tastes of customers, and bringing products that are convenient and appropriate.Only then, the new bank can bring benefits to customers and profits for the bank itself

f Correspondent banking system

Due to differences in customs, traditions, habits, and market, trade financeservices require the help of correspondent banks abroad is enormous Greatdevelopment managers abroad will reduce risk and costs while increasing advantage,effective results for the development of trade finance

g Trade finance - related services

Trade finance is one of the activities related to many departments andoperations at the bank, such as credit activities, foreign exchange business,international payment, etc These operations, which are all closely related tointernational trade finance activities, play the role of promoting support and enhancingmutual assistance Have support professions; trade finance will become sustainabledevelopment

UNDER LETTER OF CREDIT TRANSACTIONS

1.3.1 Subjective factors

a Operation scale and bank’s prestige

We can recognize that the larger the bank has, the longer its reputation is, theperfect service it provides, the better the service attitude is The bank has made a lot ofeffort to build the brand and is also one of the invisible factors that pull customers intothese services Large scale means having many branches and transaction officesconveniently for customers to reach the nearest transaction point In addition, thereputation makes it easy for the bank to expand and develop services at home andabroad, helping them improve their competitive position with other banks

b Financial capacity

The amount of charter capital or annual revenue of the bank represents theirgrowth Banks who want to finance businesses, whether in terms of capital orreputation, must also have the stable financial capacity, not only activities such asprepayment loans or loans for pre-production of goods but also financial support Itcan say that financial capacity is the core factor to develop comprehensive services ofcommercial banks in general, international trade finance services in particular.

c Quality human resources in the trade finance department

Trade finance is an activity that requires careful attention and flexibility inmany cases, so the quality of bank staff is always the most vital issue

Therefore, the trade finance department team is proficient in the processingsteps related to documents and must be skilled in international treaties and conventionsfor the most accurate settlement Banking is a specific industry that always has manypotential risks Therefore, in recruitment newsletters for trade finance or internationalpayment specialists, there are always very high professionalism, personality, foreignqualifications, language, etc

d Technology in banking

Thanks to the development of technology, the process is faster, and customerinformation is more secure Therefore, developing and improving the informationtechnology system helps to improve the bank's competitiveness, and using a simpleupdate system saves time and costs for both the bank and the customer Banks createprestige for customers, helping them to feel completely secure when coming to thetransaction

1.3.2 Objective factors

Objective factors are factors from outside the bank such as from thegovernment, consumer market, banking industry, domestic and foreign political andeconomic context

a Tariffpolicy

Tariff policy is one of the policies that directly affect domestic import andexport activities and indirectly affect international trade financing activities The mostconcerning tax the import and export tax Import and export taxes are issued andregulated by the state, subject to change, and regularly updated The higher the tax

rate, the higher the price of goods sold abroad and imported goods, limiting thepurchase and sale of goods across the customs border.

b Foreign economic policy

Each period, the government has different foreign economic policies, so importand export activities also influence and impact For example, in 1998, Vietnam joinedthe APEC economic forum; in 2006, Vietnam became an official member of the WTO.Every policy, economic-political events may be a strategy to change the export policychange and indirect trade finance services in commercial banks

c Exchange control policy

The Central Bank will be the unit to manage foreign exchange and the inflowand outflow of money in the country These policies will control foreign currencystatus at credit institutions in general and commercial banks in particular, ensure theavailability of foreign currency in banks, and affect the entire economy and services ofthe bank

d Customer factor

Trade finance is a complex and potentially risky activity; therefore, the bank'sstaff must have expertise, knowledge, laws, and practices Therefore, when deciding tofinance or not and considering financial capacity, the bank's business plan must also beconsidered business ethics, customer reputation, etc., to ensure safety for itself

e Exchange rate volatility

Exchange rate volatility is an objective factor that banks or consumers cannotcontrol Therefore, not only for customers but also for banks, exchange ratefluctuations are essential Exchange rates can have a positive or negative impact on thedevelopment of international trade finance services When the exchange rate falls, theprice of the domestic currency increases, the amount of foreign currency earned fromexports will decrease, the revenue in local currency will also drop, so in this period,exports will not be encouraged, or the general trend is to reduce exports This directlyaffects the demand for international trade finance at banks Similarly, when theexchange rate increases, the domestic currency depreciates, which will further promotethe export activities of enterprises

SUMMARY OF CHAPTER 1

In short, in the current integration trend, banks are constantly increasing theproportion of services in their activities, so improving service quality is highly urgentfor all banks In chapter 1, the author presented the development of trade finance underLetter of Credit transaction, including the theory, criteria for assessing this service at acommercial bank, factors affecting its growth, recent national laws, and internationalrules for it Because trade finance under Letter of Credit transaction service plays avital role at commercial bank, it brings more revenue The bank has enhanced thisproduct to meet the market's need and affirm its position in the banking sector.Therefore, consulting with other commercial banks is a practical way for Vietcombank

to determine appropriate actions to develop trade finance in Letter of Credittransactions by analyzing the actual situation of trade finance under Letter of Credittransaction

CHAPTER 2: EXPERIENCES IN TRADE FINANCE UNDER LETTER OF

CREDIT TRANSACTION IN SOME COMMERCIAL BANKS

2.1.1 Experiences from BRAC Bank

According to ICC 2018, in terms of traditional trade finance, the percentage ofstandby L/C and commercial L/C used in global transactions accounted for 11% and49%, respectively (Figure 2.1) ICC Global Survey on trade finance 2020, ICCillustrates that Asia - Pacific received the most L/Cs, around 3.1 million MT700s,much more than any region But the average value of an L/C received in Asia - Pacificwas lowest at USD 430Kv The average weight of import L/Cs was the highest in non-Eurozone European countries, whereas Africa had the lowest value import L/Cs.(Figure 2.2) And the countries that exported the most using L/Cs are shown in Figure2.3

Figure 2.1 The percentage of traditional trade finance used globally

(Source: ICC Global Survey on trade finance 2018)

Figure 2.2 Import traffic vs average value in FY2019, split by region, based on

SWIFT MT700 export L/C volumes by country/region (# messages)

■ 2019

■ 2018

Figure 2.3 SWIFT MT700 export L/C volumes by country/region

(Source: ICC Global Survey on trade finance 2020)

In figure 2.3, it was noted that Bangladesh continues to see growth in L/Cvolumes In Bangladesh, BRAC bank is a private commercial bank Bangladeshoperated by the BRAC development organization, focused on Small and MediumEnterprises (SMEs) Also, BRAC Bank is an active partner of the Global TradeFinance Program of the International Finance Corporation (IFC) and the AsianDevelopment Bank (ADB), and other global correspondents It is a reason that 1,3mncustomers choose to use the services provided by banks due to the bank's prestige

The bank has its head office in Dhaka, Bangladesh It has 187 branches, 456SME unit offices, 301 agent banking outlets, which provide convenience for customers

to easily access the bank's products and meet the customer's needs more quickly;especially transaction time, L/C notice will be faster