TON DUC THANG UNIVERSITY DEPARTMENT OF BUSINESS ADMINISTRATION SOLUTIONS TO IMPROVE THE INTERNATIONAL PAYMENT BY EXPORT LETTER OF CREDIT IN MEKONG HOUSING BANK MHB - CHO LON BRANCH The
Overview of International Payment
Definition of International Payment
Global trade has expanded beyond borders, making international commerce a vital part of the modern economy Today, countries engage in cross-border transactions, generating income and expenses across nations To facilitate smooth international business, countries must establish common rules and standards, including objectives, currencies, and payment methods These agreements and protocols form the foundation of international payments, ensuring secure and efficient global trade.
International payment involves the process of fulfilling financial obligations that facilitate economic and non-economic activities between organizations and individuals of different nations or between countries and international organizations This process is carried out through the banking systems of the involved countries, ensuring seamless cross-border transactions Understanding international payments is essential for global trade, international business, and economic cooperation, highlighting their significance in maintaining smooth financial exchanges worldwide.
The development of modern commercial banks has accelerated international settlements, making transactions faster, more convenient, and highly accurate to protect the rights of all parties involved As financial intermediaries with extensive experience in financial and monetary sectors, banks maintain wide correspondent networks with other banking institutions worldwide Leveraging advanced technological solutions, banks enable swift and precise international payment operations Consequently, most international payment methods rely heavily on the active involvement of banks to ensure efficient and secure transactions.
Characteristics of International Payment
- International payment takes place on worldwide, it serve for trade, investment, international cooperation via global banks system
International payments differ from domestic transactions as they involve currency exchange between countries When drafting a commercial contract, parties should agree on a unified currency to prevent potential losses caused by exchange rate fluctuations Carefully selecting the currency in the contract is essential to mitigate financial risks associated with international transactions.
- Monetary in international payment is usually not cash, it is available under payment form such as remittance, Telegraphic Transfer remittance (T/T), promissory note, cheque
International payments between countries are primarily processed by banks without the use of cash, which is only available in certain specific situations This process, known as international banking, is built upon commercial contracts and international currency exchange systems.
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Roles of International Payment
International payment is the key stage and the final stage to finish the trading process or services exchanges between organizations or individuals from different countries
International payment is the bridge in international business relation, it support the development of international business A fast accurate process will motivate firms to produce and import/export activities
Furthermore, international payment can reduce the risk in international business Because of the distance from countries, it is hard to evaluate the financial ability, payment willing of partners
Summarize, the development of international business is depend on the power of international payment International payment will push the foreign trade, improve the manufacture, motivate firms improve its products
Firstly, international payment helps the bank to attract more international business customers It helps the bank expand the business, gain the income and improve the competitiveness
Secondly, thanks to the international payment, banks can promote the export/import financing as well as increase the mobilization capital from idle funds of firms or individual
Thirdly, banks will get large foreign currencies resource then they can promote the foreign exchange sevice, underwritting and other services
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Moreover, international payment helps the bank satisfy the customer’ needs, it improve the bank brand name and prestige.
International Payment Conditions
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Account currency: mean the currency which used to express the price and calculate the value of contract
Payment currency: mean the currency to make payment in foreign trade Payment currency may be the currency of importing country or exporting country or the third country
Payment location is informed in commercial contract, payment location may be in importing country of exporting country or the third country
In international payment, almost the parties want to choose the payment location in their own country
Payment time condition has close relationship with the cash flow, profit, hedging price fluctuation So, it is the important issue and often disputes between parties in contract negotiations
There are 3 ways to determine the payment time:
- Cash in advances: mean the importer pays a part or whole part of goods after signing the contract or exporter accepted the orders of importer
"Pay at sight" refers to a payment method where the importer makes the payment either after the exporter delivers the cargo to the transporter at a designated location or once the importer receives the cargo at a specified destination This payment term ensures that the exporter is compensated promptly upon the completion of delivery, providing security and clarity for both parties involved in international trade.
- Pay after delivery: mean the importer makes the payment at a specific time after receive the goods
The most critical aspect of international payments is selecting the appropriate payment method, which facilitates the transfer of funds from the importer to the exporter Various payment methods are available, allowing parties to choose the most suitable option based on their specific conditions and agreements, ensuring a secure and efficient transaction process.
International Payment Methods
Remittance is the payment method which customers (buyer, importer ) request the bank to transfer certain of money for beneficiary (seller, exporter ) in a specific place
- Remitter is a person who sent the request for the bank to make the payment overseas, this is usually the importer
- Beneficiary is a person who received the money from the bank, this is usually the exporter
- Remitting bank is the bank which served the remitter
- Paying bank is the bank which paid directly for the beneficiary It is usually the correspondent or the branch of remitting bank in beneficiary’s country
An open account transaction occurs when an exporter ships goods along with all required shipping and commercial documents directly to an importer, who agrees to pay the invoice at a future date This method is commonly used between established and trusted trading partners to facilitate smooth international trade.
- In this method, bank does not open the account or make the payment
- There are two involved parties: seller (exporter), buyer (importer)
Using a documentary collection process involves the exporter shipping the product and creating a negotiable document, such as a bill of exchange These shipping documents and the draft are processed through the importer’s bank (collecting bank) or directly between the exporter’s and importer’s banks Once the documents arrive at the importer’s bank, the exporter is notified to make payment, after which the documents are released The importer then uses these documents to clear the shipment through customs upon arrival, ensuring a secure and efficient international trade transaction.
Two type of processes available:
A Letter of Credit (Documentary Credit) is the most important and widely used payment method in commercial banking, ensuring secure transactions between importers and exporters It helps mitigate risks by guaranteeing payment to the exporter provided they meet the specified documentary requirements, thereby fostering trust and financial security in international trade.
A letter of credit offers a exporter numerous advantages but only if that exporter complies exactly with its terms and conditions of the transaction.
Overview of Documentary Credit and Export L/C
Definition of Documentary Credit
A Documentary Credit is a bank's commitment to pay a specified amount to a supplier or service provider upon receipt of designated documents This financial instrument ensures payment is made within a specified timeframe after verifying that goods have been dispatched or services have been rendered By complying with documentary requirements, sellers can securely receive payment, enhancing international trade security and efficiency.
Involved parties in Documentary Credit
- Applicant is the buyer of the goods or services supplied by the seller Letter of credit is opened by the issuing bank as per applicant's request
In a standard commercial letter of credit transaction, the beneficiary is the seller of the goods or the service provider The letter of credit is issued by the bank in favor of the beneficiary, ensuring payment upon compliance with specified terms This process provides security and facilitates international trade by guaranteeing payment to the beneficiary.
An Issuing Bank is the financial institution that issues a letter of credit either at the request of the applicant or on its own initiative It commits to honoring a compliant presentation made by the beneficiary, ensuring payment without recourse.
An advising bank is a financial institution that informs the beneficiary about the issuance of a letter of credit at the request of the issuing bank It is important to note that an advising bank, when not acting as a confirming bank, only confirms the authenticity of the credit and any amendments without any obligation to honor or pay This role is crucial in international trade transactions, ensuring the beneficiary receives accurate credit information while limiting the advising bank's liabilities Understanding the responsibilities of an advising bank helps traders and exporters navigate letter of credit procedures effectively.
In addition, there are banks with different roles involves in the L/C process such as: Confirming Bank, Paying Bank, Negotiating Bank, Nominated Bank, Reimbursing Bank, Remitting Bank, Transferring Bank
Letter of Credit (L/C)
1.2.3.1 Definition of Letter of Credit (L/C)
Letters of credit are essential in international trade, providing a secure payment mechanism amidst challenges like distance, differing legal systems, and limited personal connections They ensure that the seller receives payment only after the bank verifies that goods have been shipped, offering protection to both parties Acting on behalf of the buyer, banks facilitate smooth cross-border transactions, making letters of credit a crucial tool in global commerce.
1.2.3.2 Types of Letter of Credit
A revocable letter of credit (L/C) can be revoked or canceled at any time without prior notice or consent from the beneficiary, making it less secure for the beneficiary Due to its flexibility for the issuing bank but lack of protection for the beneficiary, revocable L/Cs are uncommon in international trade Therefore, beneficiaries prefer irrevocable L/Cs for better security and assurance in transactions.
- Irrevocable L/C: An irrevocable L/C is one, which cannot be revoked, amendedor modified by the issuing bank without the express consent of all the partiesconcerned
A confirmed irrevocable letter of credit (L/C) involves the addition of a seller's bank endorsement, known as the accepting bank, to the buyer's issuing bank This type of L/C offers the highest level of protection for sellers, as it cannot be unilaterally canceled by the buyer Moreover, both the issuing bank and the accepting bank guarantee the payment on the due date, ensuring secure and reliable transaction settlement.
An irrevocable and without recourse letter of credit (L/C) is issued by an advising bank and may be labeled as "irrevocable and without recourse documentary credit." The term "without recourse" indicates that the advising bank cannot recover the funds paid to the beneficiary if the issuing bank fails to make the payment, ensuring the security of the transaction.
A transferable letter of credit allows the beneficiary to pass on all or part of the credit to a secondary beneficiary, facilitating flexible international trade transactions The initial recipient of the transferable L/C from the bank is known as the first beneficiary, who must obtain the bank's approval before transferring the credit This financial instrument enhances trade efficiency by enabling beneficiaries to designate secondary beneficiaries, thus supporting complex supply-chain arrangements.
A revolving letter of credit is designed to eliminate the need for establishing new credit for each shipment in ongoing transactions It allows the importer to access the credit repeatedly, as the credit is reinstated once they reimburse the issuing bank with the negotiated drafts This type of credit is ideal for continuous trade, providing a convenient and efficient financing solution.
A back-to-back Letter of Credit (L/C) is a secondary credit issued by a bank on behalf of the beneficiary of an original L/C to facilitate local procurement This financial instrument allows the beneficiary to secure funding for purchasing goods from a domestic supplier, with the original L/C backing the secondary credit Back-to-back L/Cs are essential tools in international trade, enabling secure transactions and smooth supply chain operations between international buyers and local suppliers.
A Red Clause Letter of Credit (L/C) allows the beneficiary to draw a predetermined amount, providing automatic authority to the negotiating bank to make advances for purchasing merchandise This advance is contingent upon the conditions outlined within the L/C, facilitating smoother transaction procedures in international trade.
A Standby Letter of Credit (L/C) is a bank-issued guarantee of payment that serves as a "payment of last resort" if a client fails to fulfill contractual obligations with a third party It demonstrates good faith in business transactions and acts as proof of the buyer’s creditworthiness and repayment ability The issuing bank conducts a brief underwriting process to assess the credit quality of the applicant before notifying the designated bank, typically the seller or creditor, about the standby L/C.
There are some several types of L/C, however in this study, I only emphasize on two most popular types of L/C, they are revocable L/C and irrevocable L/C
Step 1: Buyer and seller agree to terms including means of transport, period of credit offered (if any), latest date of shipment acceptable
Step 2: Buyer applies to bank for issue of letter of credit Bank will evaluate buyer's credit standing, and may require cash cover and/or reduction of other lending limits Step 3: Issuing bank issues L/C, sending it to the Advising bank by airmail or electronic means such as telex or SWIFT
Figure 1: The general process of documentary credit
Step 4: Advising bank establishes authenticity of the letter of credit using signature books or test codes, then informs seller (beneficiary)
Step 5: Seller should now check that L/C matches commercial agreement and that all its terms and conditions can be satisfied thenseller ships the goods
Step 6: Seller assembles the payment documents called for in the L/C (invoice, transport document, etc.) then send it to the Advising bank for payment
Step 7: The Advising bank checks the documents against the L/C If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank
Step 8: The Issuing bank now checks the documents itself If they are in order, it reimburses the seller's bank immediately
Step 9: Advising bank informs and credits seller’s account
Step 10: The buyer accept the payment then issuing bank debits the buyer and releases the documents (including transport document), so the buyer can claim the goods from the carrier
Exporter/Seller (Beneficiary) Importer/Buyer
Main contents in a Letter of Credit:
(1) DC Number (Document Credit number)
Each issued Letter of Credit (LC) must have a distinct 'identity' identifiable through its unique LC number This LC number serves as a specific identifier for each document, ensuring that every LC issued by the bank is distinguishable Assigning a unique LC number to each Letter of Credit enhances traceability and security in international trade transactions.
The place that issuing bank accept to make the payment according to the buyer request
It signifies the date on which the LC is issued by the issuing bank The undertaking to make payment by the issuing bank takes effect from this date
(4) Date and place of expiry
Field 31D: Date and place of expiry
This field specifies the latest date for presentation under the documentary credit and the place where documentsmay be presented
Field 40A: Form of documentary credit
There are 12 types of Documentary Credit, this field show the type of DC
(6) Name, address of involved parties in L/C
Issuing bank: shown in the header of L/C
Advising bank: shown in the header of L/C
This field contains the currency code and amount of the documentary credit
This field specifies the period of time after the date of shipment within which the documents must be presented for payment, acceptance or negotiation
Example:“DOCUMENTS TO BE PRESENTED WITHIN 21 DAYS AFTER DATE OF SHIPMENT BUT NOT LATER THAN THE VALIDITY OF THE CREDIT.”
This field specifies the payment dates of the interest payable
Field 44C: Latest date of shipment
If this field present, the shipment must be made within the date indicated in this field This date should not exceed the expiry date of the L/C
Name of goods, quantities, weight, price, quality, code
Field 45A: Description of Goods and/or Services
This field contains a description of any documents required
(13) Commitment of the issuing bank
If the L/C is sent by Telex or SWIFT, the signature is not present.
Role of bank in Letter of Credit
Establishing strong relationships between importers and exporters is crucial, as exporters often prefer to receive payment before shipping goods, while importers seek assurance before making payments due to potential shipment and financial risks International trade transactions are effectively secured through Letters of Credit (L/C), which leverage bank guarantees to ensure payment The issuing bank collaborates with the importer to create a tailored letter of credit aligned with the terms of the commercial contract, providing a secure and reliable payment method for both parties.
Importers can ensure the quality of goods through original documents and quality inspection reports provided by exporters, while banks verify these documents for compliance with international standards and legal requirements Additionally, strong relationships with banks can lead to benefits such as free deposit allowances when issuing a letter of credit (L/C), leveraging the bank’s prestige to protect the importer’s capital This is one of the key advantages of using documentary credits in international trade.
In documentary credit transactions, bank payments are solely based on the submission of compliant documents Once the exporter ships the goods and provides a complete set of required documents, the bank guarantees payment to the exporter If any issues occur during shipment or the importer is unable to pay, the bank is obligated to make the payment to the exporter, ensuring secure international trade.
In addition, exporter is prevented from the foreign currency management risk in import’s country When the L/C opened, the importer has the right to send foreign currency to other country
Exporter is also able to request for discounting the documents or sell the bill of exchange before the due date, it helps the exporter have capital for investment
The primary advantage of documentary credit is that it establishes a clear agreement between the exporter and importer, facilitating secure international transactions This service offers significant benefits for banks by enabling smoother trade operations and reducing payment risks However, banks must exercise caution when providing documentary credit services, as there are inherent risks involved in the process that need careful management.
Export Letter of Credit
Export L/C settlement includes L/C advise and negotiation
L/C advise involves the bank verifying the apparent authenticity of the letter of credit after receiving it from the overseas issuing bank under agreed trade terms Once verified, the bank notifies the domestic exporter (beneficiary) about the L/C The exporter then prepares the cargo, transportation, insurance, inspection, and other required documents specified in the L/C to ensure compliance and facilitate smooth transaction processing.
Export negotiation involves the domestic exporter preparing the cargos and comprehensive documentation as stipulated by the Letter of Credit (L/C) The exporter submits these documents to the bank, which reviews and forwards them in accordance with the L/C requirements Upon confirmation of payment, the bank disburses the funds to the domestic exporter, completing the export transaction efficiently.
- L/C payable at sight: payment is made upon presentation of the documents requested
- L/C payable on term: payable at a determined future date after presentation of the documents requested.
Evaluation methods of international payment in commercial banks
Qualitative criteria
Efficient processing times for international payment transactions are crucial to enhance customer experience by minimizing waiting periods As an intermediary service for overseas business operations, swift transactions directly impact the movement of international freight, making prompt processing a key factor in overall service evaluation.
Accurate movement and processing of transactions are essential to prevent disputes and litigation among related parties International payments are inherently complex, involving not only economic factors but also cultural, political, and social considerations As a result, the role of commercial entities continues to grow, alongside increasing demands for precision and accuracy in every transaction.
Setting a fair service fee is a crucial factor for commercial banks, as determining a reasonable charge that balances customer acceptance and bank profitability remains a challenging task A well-structured fee should fall within a range that is both acceptable to customers and ensures the bank’s financial sustainability.
A bank must meet all specified criteria to improve its international payment services; however, having only one international payment center limits its capability to enhance quality and efficiency Providing either insufficient or excessive information can confuse customers and reduce the effectiveness of communication To accurately evaluate this criterion, it is essential to gather feedback from foreign trade customers and assess their experiences, ensuring continuous improvement of international payment services.
It brings more choices to customer in international payment, customers can easily select the most suitable method for their business
Improve addition value in international payment
- Improve high technology in international payment such as: information technology to connect related department in international payment, ATM post which able to make the international transactions
- Improve the risk management activities to secure the transactions and minimize the risk of both bank and customers
- Expand the foreign trade exchange to strengthen the reservation of the bank to satisfy the customer need
- Build the suitable marketing plan to provide more information about international payment services of the bank
With the improvement of foreign trade worldwide, lot of international payment methods are invented As a certain result, international payment activities of commercial banks are improving rapidly
Chapter I “THEORETICAL FRAMEWORK”, this chapter include following contents:
- Display fundamental issues of international payment such as: concepts, characteristics, roles, classifications of payment methods in commercial bank, especially the documentary credit method
- Summarize the theory framework in documentary credit in commercial bank, payment process, involved parties in documentary credit, what is a letter of credit and advantages or disadvantages of this method
- The last part of this chapter is theory (both in quantitative and qualitative criteria) for evaluating the effectiveness of international payment in a commercial bank
Issues in chapter I is the basis for the analysis and evaluation the effectiveness of international payment activities in Mekong Housing Bank - Cho Lon branch.
Introduction of Mekong Housing Bank
History and development
Mekong Housing Bank (MHB), a state-owned commercial bank established in 1997 with Prime Minister Vo Van Kiet's approval, officially commenced operations in 1998 Headquartered at 09 Vo Van Tan Street, Ward 6, District 3, Ho Chi Minh City, MHB has been serving customers with reliable banking services for over two decades.
Mekong Housing Bank (MHB) was established to support the development of affordable housing in the Mekong Delta region The bank offers comprehensive financial products, primarily focusing on providing loans to small and medium-sized enterprises (SMEs), individuals, and households Its loan portfolio includes agricultural and rural loans, export-import financing, and asset-secured loans for construction companies working on infrastructure projects in rural areas MHB’s mission centers on fostering sustainable development and improving living standards in the Mekong Housing region through targeted financial solutions.
MHB was uniquely established from the ground up, starting entirely from scratch with new facilities and a dedicated labor force, unlike most other state-owned commercial banks that were primarily formed by reorganizing existing units, systems, and resources.
MHB operates with a centralized structure, including a main Head Office, a Transaction Center, and a Joint Stock Securities Company (MHBR) The bank also manages a Card Center located in Ho Chi Minh City, along with a Representative Office in Hanoi Additionally, MHB has an extensive network of hundreds of branches and sub-branches nationwide to serve its customers across Vietnam.
Operation
MHB network is 8 th ranked among Vietnamese Banking System with approximately 230 branches and sub-branches in most provinces nationwide
MHB has maintained and expanded its correspondent relationships with approximately 300 foreign banks in 50 nations worldwide
Since its inception, MHB’s staff has expanded from 84 to over 3,300 employees by 2012, with an average age of 29, reflecting dynamic growth The bank employs experienced and enthusiastic professionals specialized in finance and banking, ensuring a stable and skilled workforce Additionally, MHB emphasizes recruiting university graduates who excel in computer and foreign language skills, often selecting candidates with high academic achievements and extracurricular accomplishments.
MHB has implemented advanced banking technologies to meet the growing demand for high-quality services, including electronic transactions through ATMs and Point-of-Sale (POS) terminals Additionally, the bank offers convenient digital banking options such as SMS banking and Internet banking, along with a comprehensive range of retail banking products and services to enhance customer experience and accessibility.
In 2010, MHB successfully transitioned to the Intellect online banking application, transforming its core banking operations and enhancing technological efficiency This advanced Core Banking System has significantly improved MHB’s operational procedures and service delivery Looking ahead, the bank’s core project management aims to introduce innovative products utilizing modern technologies, including mobile banking services and customer relationship management (CRM) systems, to better serve customers and stay competitive in the digital banking landscape.
BI, HRMS management system…to serve customers better with a centralized customers’ database
MHB is committed to reaching international standards by developing a comprehensive Management Information System (MIS) with support from the World Bank Under the Banking Modernization Project, this system aims to enhance operational efficiency and ensure full compliance with statutory reporting requirements In addition to adopting modern technologies, MHB's efforts focus on aligning with global banking benchmarks to improve transparency and service quality.
MHB successfully conducted the SECO Technical Assistance Project (2006-
The 2008 Swiss Government initiative aims to restructure Vietnamese financial institutions, with a focus on strengthening stability and efficiency As part of this program, the project supports MHB in developing a comprehensive restructuring strategy aligned with international banking standards and best practices This effort ensures that MHB enhances its management practices to meet global benchmarks, fostering long-term growth and resilience in Vietnam’s banking sector.
Achievement
Overcome initial challenges, after 16 year of operation, up to the end of year
2011, total MHB’s asset reaches approximately VND 47,000 billion, an increase of
160 times compared to the commencing day, including equity and fund VND 3,178 billion
Figure 2.1: MHB assets in several years (Source: MHB annual report: http://mhb.com.vn/vi/?ptn.asp)
On the 20th of July, 2011, MHB successfully offered its shares for the first time to the public (IPO) with 17.74 million shares offered to 3,744 individual and institutional investors
In 2012, the State Bank of Vietnam ranked MHB among the top financial institutions operating soundly, stably, and safely in Group 1, recognizing its strong financial health and stability MHB has consistently demonstrated exceptional growth, having been awarded the highest credit growth rate, reflecting its expanding market presence Over the past five years, MHB has garnered multiple honors, highlighting its continuous commitment to financial excellence and sustainable development.
“Strong brand name” award in Vietnam
The bank has been recognized for its outstanding contribution to Global Payments and Cash Management systems, receiving the Certificate of Appreciation from HSBC Bank USA, N.A., and HSBC Holdings for the fifth consecutive year.
Global auditing firm Ernst & Young evaluate MHB is a bank with the fasted growth in Vietnam and secure operation
MHB is the youngest yet fastest-growing state-owned commercial bank, demonstrating impressive development in a competitive industry Its success is driven by strong leadership from the Board of Directors and the dedicated efforts of MHB’s staff These factors collectively contribute to the bank’s rapid growth and market presence, highlighting its strategic focus on leadership and team commitment.
MHB also focuses on imaging, branding the MHB to create an unique
“business culture”, it is an intangible assets of the bank in the trade market.
Toward the future
In the near term, Increasing profitability and sustainability shall be the focus of MHB’s management with plans to diversify its activities as follows:
- Research and development of new credit products and services, while ensuring the enhancement of the traditional one;
- Offering a new range of saving products;
- Development of innovative products and services for Small and Medium-size Enterprises (SMEs);
- Improving technological development to support new product launched and to meet the growing demands of its customers
During the inaugural shareholder’s meeting on June 8th, 2012, MHB reaffirmed its mission as a diversified commercial joint-stock bank committed to delivering comprehensive financial banking services The bank emphasizes adherence to international banking standards, maintaining strong operational efficiency, and seamlessly integrating into the global financial market to enhance its competitive edge.
Overview of Mekong Housing Bank – Cho Lon Branch
History and development
Mekong Housing Bank (MHB) – Cho Lon Branch was established on June
10 th , 2005 and official came to operation on July 11st, 2005 MHB – Cho Lon has gradually become more stable and sustainable development
Cho Lon branch Head Office located at 32A Nguyen Chi Thanh, Ward 2, District 8,
Organizational structure and human resources
By the end of 2012, Cho Lon branch network including 9 transaction points:
- Cho Lon branch Head Office: 32A Nguyen Chi Thanh St., Dist 10, HCMC
- Sub-branch Cho Lon: 716 Tran Hung Dao St., Dist 5, HCMC
- Sub-branch Tan Phu: 258 HoaBinh, Tan Phu Dist., HCMC
- Sub-branch District 8: 314 Quoc lo 50, Dist 8, HCMC
- Sub-branch District 6: 18 Hau Giang, Dist 6, HCMC
- Sub-branch District 11: 385A Le Dai Hanh, Dist 11, HCMC
- Sub-branch CachMangThang Tam: 471A CachMangThang Tam, Dist 10, HCMC
- Sub-branch Hai Thuong LanOng: 144 Hai Thuong LanOng, Dist 5, HCMC
- Sub-branch Thuan Kieu: 439 Hong Bang, Dist 5, HCMC
Figure 2.2: Organization structure of MHB – Cho Lon branch
There are 1 Director and 2 Deputy Directors in management board 111 members are working in Cho Lon branch and sub-branches
- Average working years in MHB – Cho Lon: 7 years
- Education: PhD 1/111, Master 2/111, University: 86/111, Undergraduated: 10/111, Others: 12/111
Business report – MHB Cho Lon Branch
of credit) in Mekong Housing Bank – Cho Lon
- Analysis and evaluate the current situation of international payment operation by documentary credit
- Propose solutions to expand and improve the international payment operation by document credit
- International payment operation in MHB – Cho Lon branch from 2010 to 2012
- Limitation of study: focus on documentary credit (L/C) instrument
There are 2 stages in this study, preliminary research and official research
During the preliminary research phase, the author gathers comprehensive information on international settlements and letters of credit from various sources, including newspapers, magazines, online platforms, and banking experts This process provides a clear overview of the current state of international settlement practices in Vietnam, enabling a deeper understanding of industry trends and key issues.
In official research, data is gathered from reports and documents from the branch, which are then observed, analyzed, combined, and evaluated to understand the current situation By integrating both quantitative and qualitative criteria, this approach effectively assesses the international payment process, particularly focusing on export letters of credit (L/C).
CHAPTERII: OVERVIEW OF MEKONG HOUSING BANK (MHB)
THE CURRENT SITUATION OF EXPORT L/C
Export L/C process in MHB – Cho Lon Branch
When receiving the L/C from issuing bank, MHB will inspect the authenticity of the L/C then forward the original L/C to the customer (exporter)
The flow of this stage:
- Receipt and check the veracity of the L/C
- Examine the contents of the L/C
3.1.1.1 Receipt and check the veracity of the L/C
Advising bank receives the L/C from following bank:
- Advising bank in domestic country
After receiving L/C under form of mail, Telex, Swift the bank must write the receipt date and timethen stamped RECEIVED
After that, the bank will check the veracity of the L/C a L/C opened by mail
The letter of credit must bear the authorized signature of the issuing bank to ensure authenticity MHB verifies this signature by comparing it with the reference signature previously provided by the issuing bank This process guarantees the authenticity of the document, ensuring it is legitimate and properly authorized.
If the signature on the L/C is match with the registered signature of issuing bank, MHB will check the L/C contents and advise the exporter
If the signature on the Letter of Credit (L/C) does not match the registered signature of the issuing bank, MHB will contact the issuing bank to verify the authenticity of the L/C and subsequently inform the exporter Once signature verification is confirmed, MHB will check the testkey and notify the exporter of the valid L/C For L/Cs opened by telex, the same verification process applies to ensure transaction security and authenticity.
Once MHB receives the L/C, they verify the testkey to ensure its accuracy If the testkey is correct, MHB proceeds with the next steps in the process However, if the testkey is incorrect, MHB must notify the issuing bank to request the correct testkey, ensuring the integrity of the transaction For L/Cs opened via SWIFT, this verification process remains crucial to maintain secure and smooth communication between all parties involved.
If a L/C opened by SWIFT, it is the authenticated L/C because SWIFT automatically decoded when it receives information from issuing bank overseas
SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a secure, standardized communication platform that enables the efficient transmission of financial transaction information between banks and financial institutions It primarily facilitates the secure exchange of payment instructions and related data, ensuring reliable and swift international financial communication.
Members conduct international money transfers securely through SWIFT messages, utilizing standardized data fields and signals that enable automated processing by computer systems Only authorized banks within the SWIFT network can utilize this method, which has become the global standard for international settlements Each participating bank is assigned a unique SWIFT code, ensuring accurate identification and efficient transaction processing across the network.
Figure 3.1: Announcing and payment process of export L/C in MHB Cho Lon
Modify information/Cancel transaction (if any) Unchangable mistakes (If any)
Do not make the payment
Send the voucher for Collection Send the voucher for L/C
Send the voucher and make payment request
Announce to customer Charge fee
3.1.1.2 Examine the contents of the L/C
Examining the contents of the Letter of Credit (L/C) is essential for advising banks to identify any special conditions, errors, or invalid clauses, allowing them to notify exporters to request amendments from importers before executing the L/C MHB assists exporters in detecting potential disadvantages that may arise if the importer modifies the terms or agreement of the L/C, which could conflict with the original signed contract To effectively review the L/C, banks must adhere to two key requirements: meticulously analyze all terms and conditions and ensure compliance with the contractual and regulatory standards.
- The contents of the L/C must be clear, complete and accurate
- The contents of the L/C will not be detrimental to exporter
Banks usually check following information:
Issuing bank is the bank that confirmed for payment, so MHB should consider about the prestige and financial ability of issuing bank
Documentary Number and type of L/C
Name and address of involved parties
Total value of L/C: Do the L/C value suitable with the contract value? The amount of L/C is not absolute value, it should be accompanied by more or less
Date and place of expiry
L/C terms specify the place of expiry, which can be in the exporter's country, importer's country, or a third country Typically, the expiry location is in the exporter's country for added convenience in presenting documents for payment Understanding the place of expiry is essential for smooth international trade transactions and ensuring compliance with the letter of credit conditions.
Date of expiry is after the date of issuing date and delivery date a reasonable time The expiry time is approximately sum of:
- Days of exporter to ships the goods and collects the requirement documents
- Days for transferring the documents to the banks
- Days of storing the documents at the banks
The "Latest shipment date" displayed on the L/C is crucial for ensuring the customer has sufficient time to collect and prepare necessary documents It is important that this date occurs well before the expiry date to give the exporter ample time for document preparation Ideally, the L/C should be opened well in advance of the shipment date, providing the exporter with a comfortable timeframe to prepare goods and deliver them on time, thus minimizing shipment and documentation risks.
MHB must examine and compare the total amount in the goods description with the value of L/C Name, specifications, quantity, quality, weight, packages must match with the commercial contract
MHB should check whether the L/C allows for partial shipment and transshipment or not
MHB must inform exporter to meet full sets of required documents of the L/C, both in quantity and type of documents
When the issuing bank acts as the paying bank, the article DRAWEE must clearly specify "ISSUING BANK." If the issuing bank authorizes another bank to make the payment, the article DRAWEE should identify the specific name of the designated paying bank Properly specifying the paying bank in the article DRAWEE ensures compliance with banking regulations and facilitates smooth payment processing.
Payment confirmation from the issuing bank
Conditions: L/C must mention about the applied UCP
MHB issues a comprehensive announcement after thoroughly examining the Letter of Credit (L/C) and note factors that could potentially harm the customer’s interests The bank contacts the customer via mail or telephone to notify them to submit the L/C Once the customer submits the L/C, MHB forwards the original document, after charging applicable fees, ensuring the client receives the necessary documentation for their transaction.
When an L/C or amendment L/C states “Full detail to follow” or similar language, MHB is required to issue a preliminary announcement (BM-13) and send it to the customer or the corresponding announcing bank This announcement must clearly communicate that full details will be provided later, ensuring transparency and compliance with banking protocols Including this step is essential to keep all parties informed and aligned with the transaction's status, which is vital for seamless processing and adherence to international trade regulations.
“this is the preliminary, not effective yet”
Following the issuing bank until receive the official L/C If the bank receives the official L/C or amendment L/C, it must announce to customer or other announcing bank
After 5 working days since the preliminary announcement has issued, if the bank has not receive the official L/C, it must check with the issuing bank b Announcing L/C
When receiving an official L/C or amended L/C, specialists should note the receipt date and stamp it as "RECEIVED." For L/Cs transferred via SWIFT, transaction data is automatically stored in the system Before submitting an approval request to the leader, specialists carefully examine the L/C to ensure accuracy and compliance.
- Announce directly to the beneficiary
Delivery the L/C or amendment L/C for customer, include: 1 announcement of MHB (BM-14a/14b), 1 official L/C or amendment L/C (stamp by MHB), receipt MHB requires for receipt confirmation from customer
- Announce to the second announcing bank
If L/C requires the announcement through another bank, MHB Cho Lon sends the official L/C and announcement (BM-15) to that bank c Announcement rejection
MHB will reject annoucement by following reason:
- L/C or amendments are not qualified the examination round
- Benificiary rejects to receive the L/C or MHB cannot contact to the benificiary within 5 working days
- Amendment L/C includes conditions which influent to the right of MHB
- Amendment L/C which the official L/C is annouced by another announcing bank d Announcing L/C with confirmation
To ensure clarity in Letter of Credit (L/C) conditions, it must explicitly state that MHB is the confirming bank and the nominated bank, with field 41a of MT700 confirming MHB’s availability The payment conditions should allow payment via telex, from the paying bank, or by issuing bank debt in MHB Fees are to be charged to the issuing bank or beneficiary, and the transaction should involve a reasonable price of goods, high liquidity in the international market, and an export allowance to facilitate smooth processing.
To issue a bank, the issuing bank must deposit or have granted the confirmed limitation, which covers 100% of the L/C value including tolerance The bank is also responsible for paying the confirmation fee if the L/C specifies that the applicant is in charge Additionally, the issuing bank must agree to modify the L/C if requested by MHB.
+ Conditions for customer: i/ Customer/benificiary has prestige and good relationship with MHB ii/ Customer agree to pay for confirmation fee if mentioned in L/C
MHB Cho Lon submits a confirmation proposal to the Head Office's international department for approval after announcing the L/C The L/C will only be confirmed once the Head Office approves the proposal, ensuring proper authorization and compliance.
- MHB informs to issuing bank about the confirmation and states the exactly ammount
- MHB informs to customer (BM-16) and charge the confirmation fee
- Accounting the amount f Cancelling the Confirmation
MHB will cancel the confirmation L/C by following reasons:
- Customer presents the wrong documents or do not meet the conditions of L/C, UCP or international practices which L/C applied
- Issuing bank makes the amendment and request for cancelation or the amendment conflict with the rights of MHB
MHB informs and explains to the issuing bank as well as benificiary about this cancelation g Fee charging
Depend on the conditions of L/C, MHB informs to the parties whose repsonsibility in fee charging h Cancel/Close the L/C
- MHB cancel/close the L/C by following reason: o Related parties agree to cancel o L/C do not used all of the balance, or o L/C is expired
- Do not cancel the L/C in case: o L/C which have document sent for payment request o L/C is disputed
MHB automatically debits the deposit account of customer, fees include the current fees (announcing fee, confirming fee, telex ) and 10% of VAT
Content Fee charged Minimum fee
Advising L/C directly (MHB receives L/C from overseas bank and advise it directly to customer)
MHB is the first advising bank
(MHB receive L/C from overseas bank then advise it to another domestic nominated bank)
MHB is the second advising bank
(MHB receive L/C from another domestic nominated bank)
MHB is the first advising bank 15 USD + postage (if any)
MHB is the second advising bank
Payment 0,15% in total value of the documents
Discount Negotiated interest rate at the current
Transfer the L/C 0,1% of the transfer value
Table 3.1: Fee schedule in L/C method in MHB Cho Lon Branch
Analysis of current situation of export L/C in MHB – Cho Lon
MHB Cho Lon branch is a new established branch of a young commercial bank, MHB Cho Lon is always careful in its business activities, especially in challenge field as international payment
International payments at the Cho Lon branch primarily utilize three popular methods: documentary credit, documentary collection, and remittance Among these, documentary credit is the most preferred method by many customers due to its security and reliability This approach ensures secure transactions and is widely favored for international trade, making it a key service offered at the branch.
Total value of international payment recent years
Pro- portion (%) Remittance 3,358,252.78 39.92% 5,062,676.12 40.23% 8,104,346.09 49.29% Collection 85,884.98 1.02% 768,929.89 6.11% 286,948.25 1.75% L/C 4,968,839.94 59.06% 6,753,514.44 53.66% 8,052,412.56 48.97% Total 8,412,977.70 100.00% 12,585,120.45 100.00% 16,443,706.90 100.00%
Table 3.2: International Payment value from 2010 to 2012 in MHB Cho Lon (Source: International Payment report from2010 to 2012 in MHB Cho Lon)
According to the business report of international payment department, we can recognize that the revenue increased steadily from 2010 to 2012, revenue in
2011 increased 49.6% in comparison with 2010 and revenue in 2012 increased 30% in comparison with 2011
Despite steady revenue growth in documentary credit over the years, the proportion of L/C transactions has declined from 59.06% in 2010 to 48.97% in 2012 This shift can be attributed to the loyalty of large customers at MHB Cho Lon, who maintain long-term relationships with their partners Customers with strong partnerships often prefer remittance methods over documentary credit due to the simpler process and lower costs associated with remittance transactions.
Effective business partnerships built on trust and confidence foster positive collaboration; however, trading risks must also be carefully managed In 2012, remittance remained the most widely used payment method, yet documentary credit continued to play an essential and irreplaceable role for both exporters and importers.
Figure 3.2: Proportion of 3 main international methods in MHB Cho Lon
(Source: International Payment report from2010 to 2012 in MHB Cho Lon)
MHB Cho Lon primarily serves state-owned enterprises and small to medium-sized businesses, with Viet Tien Garment Joint Stock Corporation being one of its most loyal clients Do Thai Pharmaceutical Company Limited is also a key customer, highlighting the branch's strong presence in the pharmaceutical sector Recently, several companies including Binh An Food Co., Ltd., Thien Thanh Loc Import and Export Company, Yteco, and Vinamilk Corporation have emerged as promising potential clients, indicating growth opportunities for MHB Cho Lon Branch.
Total value of documentary credit service
Over the past three years, business reports indicate that international payments via export Letters of Credit (L/C) dominate, accounting for the highest proportion compared to other methods This payment method remains the most popular choice at MHB Cho Lon branch, reflecting its significance in facilitating secure and reliable international trade transactions.
Table 3.3: Documentary credit service value and proportion in MHB Cho Lon (Source: International Payment report from2010 to 2012 in MHB Cho Lon)
Figure 3.3: Value of documentary credit from 2010 to 2012 in MHB Cho Lon (Source: International Payment report from 2010 to 2012 in MHB Cho Lon)
Value Pro- portion Value Pro- portion Value Pro- portion Export L/C 2,626,937.44 52.87% 4,878,144.16 72.23% 6,881,467.14 85.46%
In 2010, total amount value of export L/C is only USD 2.6 mil, reach 52.87% in total L/C value then increased rapidly to reach USD 4.9 mil in 2011 and USD 6.9 mil in 2012 (85.48% in total L/C value)
The growth of documentary creditrecent years
Table 3.4: Changes of documentary credit service value in MHB Cho Lon (Source: International Payment report from2010 to 2012 in MHB Cho Lon)
The value of the L/C method increased significantly in 2011, with a 35.92% growth compared to 2010, demonstrating strong expansion In contrast, the growth in 2012 slowed to only 19.23% compared to 2011, reflecting a less impressive rise This decline in growth rate can be attributed to economic instability and high-interest rates in 2012, which led many domestic manufacturers to downsize their operations.
The decline in the value of import L/C over the past year has widened the gap between export and import L/C, leading to an imbalance in international payment methods at MHB Cho Lon This significant discrepancy highlights the need for MHB Cho Lon to address and resolve payment method imbalances to ensure smoother international trade operations and enhance financial stability.
Table 3.5: Amount and total value of L/C in several years (Source: International Payment report from2010 to 2012 in MHB Cho Lon)
The international payment sector at MHB Cho Lon has experienced notable changes in recent years, reflecting both global and Vietnam’s economic trends The economic crisis significantly impacted the industry, leading to a sharp decline in the total transaction values and the use of the Letters of Credit (L/C) method Specifically, in 2008 and 2009, the number of L/C transactions dropped from 183 in 2007 to around USD 3 million, down from nearly USD 5 million.
In 2010, despite the ongoing global economic crisis, positive economic signals emerged, driving a rapid increase in international payment transactions in the following years This growth also demonstrated Vietnam's growing economic integration with the global market, highlighting its expanding role in international trade and finance.
Although the payment volume increased continuously, the number of L/C decreased in comparison with previous stage, there are 183 L/C in 2007 and 131 in
2010 That means the value of each L/C is increased by the time
Export L/C fee 64,014,262.31 125,476,599.71 186,322,297.00 Totalfee 428,169,318.63 637,496,143.13 746,343,650.00 Proportion of export L/C fee
Table 3.6: Total revenue from the export L/C and international payment
(Source: International Payment report from2010 to 2012 in MHB Cho Lon)
Export L/C fee 64,014,262.31 125,476,599.71 186,322,297.00 Gain/loss (with previous year)
Table 3.7: Growth of export L/C revenue in recent years (Source: International Payment report from2010 to 2012 in MHB Cho Lon)
Revenue from export L/C fee have increased in recent years, especially in
2011 fee from the export L/C reach VND 125 million, nearly double in comparison with previous year In 2012, income from export L/C also highly increased with 48.49% in comparison with 2011
Export L/C has played an important role in international settlements by increasing in proportion over the years With only about VND 64 million revenue in
In 2010, international payment income accounted for 14.95% of total revenue, with export L/C income reaching VND 186 million over two years, representing a quarter of total revenue This is a significant achievement, particularly considering the impressive growth observed in other methods, especially remittance channels.
The article highlights that the total revenue generated from export Letter of Credit (L/C) activities is compared with the branch’s total income from service provisions, as detailed in Table 3.7 This comparison is based on data from the International Payment Report 2012, the MHB Cho Lon Annual Report 2012, and the Development Orientation 2013 by MHB The findings emphasize the significance of export L/C operations as a key component of the branch’s overall revenue, reflecting its impact on financial performance and growth strategies.
The role of export L/C has significantly improved, doubling its income ratio despite a decrease in overall service revenue at the Cho Lon branch last year Export L/C and international payment services are now key contributors to the branch's financial performance, highlighting their growing importance in its operations.
Total other methods 578 9,608,804.76 559,121,263 Total international payment
Table 3.8: Total revenue from the export L/C comparison with the total income in service provisions in MHB Cho Lon(Source: International Payment report 2012 in
Last year, MHB processed a total of 21 international payment transactions Notably, Viet Tien Garment Corporation accounted for 100% of export L/C transactions and 74.65% of all international payments, demonstrating its significant role in the bank's international business Revenue generated from Viet Tien Garment Corporation amounted to VND 473 million, representing 63.42% of the total international payment revenue.
The data reveals significant imbalance in MHB Cho Lon’s international service operations, heavily reliant on a few major clients like Viet Tien Garment Corporation This dependency poses a notable business risk that should be carefully assessed and managed.
Evaluation of export L/C service in MHB – Cho Lon Branch
Over the past five years, MHB Cho Lon branch has achieved significant progress in international settlements, particularly in international payments via letters of credit This growth has contributed to the branch's role in expanding business opportunities and supporting the overall success of MHB Additionally, these achievements have enhanced the branch's competitiveness in the banking sector, positioning it favorably against other financial institutions.
The development of international payment has contributed to the expansion and diversification of products and services in MHB Cho Lon to satisfy the need of export/import customers
International payment has promoted and supported other related activities in MHB such as discount of exporting L/C documents, foreign exchange trading, remittance, correspondent bank
MHB Cho Lon has established itself as a major subsidiary of MHB through dedicated effort and excellent performance The branch attracts a diverse range of domestic and international customers, enhancing the bank’s reputation and market presence.
International export L/C payments have significantly boosted revenue for the Cho Lon branch The increase in international payment fees has led to a higher proportion of service fees, supporting the branch's overall financial growth.
For several years, MHB Cho Lon branch has steadily enhanced its business activities, with international payments and export L/C operations functioning reliably The branch's export L/C sales consistently outperform import L/C, highlighting its strength and expertise in international trade finance.
Although the proportion of export L/C has decreased because of the rise of remittance method, value of export L/C has increased steadily over the years
The growth of international payments and export Letters of Credit (L/C) has significantly boosted MHB Cho Lon’s foreign trade activities Foreign currency is vital for the international payment processes of financial institutions, enabling seamless cross-border transactions and supporting global trade growth.
International payment specialists are highly trained professionals with extensive knowledge of foreign trade, ensuring the safety and benefits of their customers Their expertise helps minimize risks associated with international transactions.
At MHB Cho Lon, the friendly environment fosters strong interdepartmental collaboration, particularly between the International Payment Department and other key teams The International Payment Department maintains close relationships and receives enthusiastic support from the Treasury, Sales, Risk Management, and Accounting Departments, forming essential connections for smooth international procedures This seamless cooperation ensures efficient operations and enhances MHB Cho Lon’s global financial services.
MHB has gradually established stability as a branch; however, due to its relatively recent founding, it still faces certain disadvantages Its international payment results and the volume of foreign currency transactions are not yet as impressive as those of more established branches, highlighting areas for future growth.
Foreign exchange trading plays a crucial role in international payments, but at MHB Cho Lon, the international payment department cannot independently manage foreign currency resources, as these are controlled by the treasury department Additionally, the branch's foreign currency supply is limited, which sometimes leads to a shortage of foreign funds available for customers.
The foreign currency exchange rates at MHB Cho Lon branch are often higher than those of other commercial banks due to the bank's limited access to competitive foreign exchange resources Customers frequently compare MHB Cho Lon's foreign currency prices with those of other banks, which puts the branch at a disadvantage in a competitive market.
Despite having experienced and well-trained specialists, the international department comprises only two employees, leading to a heavy workload and high-pressure environment These dedicated team members often work against the clock to meet tight deadlines, highlighting the need for additional support to improve efficiency and workload management.
MHB's import and export customers primarily consist of large, long-term clients, with Viet Tien Garment Corporation accounting for nearly 75% of the company's total international payments This heavy reliance on a few major customers creates a dependency risk and shifts focus away from acquiring new clients or expanding the customer network Consequently, any business difficulties faced by these large customers could significantly impact MHB’s international payment activities, posing a high level of financial risk.
New small customers initially joining international payments often lack experience with the processes and regulatory requirements, leading to potential mistakes and risks These issues can result in significant time consumption and increased effort for both customers and banks, impacting overall transaction efficiency and security.
The international payment department shows a passive approach to business development, with most customer relationships relying on employees' personal networks within the branch and existing sales department clients Currently, there are no strategic plans to expand the international payment network widely, limiting growth opportunities in this area.
3.3.4 Limited of MHB Cho Lon branch
- International payment service in MHB Cho Lon has not had the high competitiveness There are no classification criteria for customers, so it cannot serve groups of customers effectively
- MHB Cho Lon only performs traditional services instead of improve new service such as “Export-import package service” (co-operation with forwarder, insurance company )
International payment methods are facilitated through advanced computer systems, such as SWIFT, which serve as modern transaction processing networks These systems operate around the clock, maintaining a direct, 24/7 connection with the Head Office's information systems However, any connection issues or system incidents can lead to delays and interruptions in transaction processing, impacting timely payment execution.