Rationale of the study
International trade and global integration are crucial for any economy, offering significant benefits However, Vietnamese businesses face numerous challenges in this competitive landscape, including disparities in financial resources, human resource quality, and capital requirements In response, Vietnamese commercial banks are leveraging their strengths to support local enterprises in enhancing their competitiveness in international trade.
Trade finance is essential for facilitating foreign trade and business transactions, playing a crucial role in every phase between buyers and sellers Commercial banks, equipped with accumulated capital and professional expertise, are increasingly important in international trade The Letter of Credit (L/C) is widely used in these transactions, particularly in developing countries like Vietnam, where it is utilized by 80% of small and medium enterprises for import finance This method not only provides financial support but also enhances trust between exporters and importers, allowing businesses to leverage it for capital expansion and improved production efficiency.
Businesses often require financing to fulfill foreign trade contracts, especially when they lack established relationships, financial capacity, and time to build trust with partners In such challenging circumstances, banking solutions become essential, with the Letter of Credit emerging as a unique payment method that helps enterprises navigate these difficulties effectively.
Vietcombank, one of Vietnam's largest commercial banks, has built its brand over more than fifty years through its expertise in international payment services and trade finance The bank is actively expanding its relationships with central banks globally and diversifying its product offerings to maintain its leadership in these sectors A key focus is on enhancing the quality of its trade finance services, particularly those involving Letters of Credit (L/C), to meet market demands and strengthen its position in the banking industry As an issuing, advising, and confirming bank, Vietcombank faces significant risks, making the development of high-quality international trade financing essential for supporting businesses and improving the bank's operational efficiency.
In the thriving trade environment, enterprises face increasingly complex banking needs, often engaging with multiple banks This allows companies to compare trade financing options across different institutions, putting pressure on banks to continuously innovate and enhance their product offerings.
Realizing that importance, I have chosen the topic "Trade finance under Letter of Credit transaction – Recommendations for Joint Stock Commercial Bank for Foreign Trade of Vietnam".
Research purpose
This thesis is researched for the following purposes:
Trade finance, particularly under Letter of Credit (LC) transactions, operates within a robust legal framework that ensures security and trust between buyers and sellers The criteria for assessing the effectiveness of LCs include the creditworthiness of the parties involved, compliance with international regulations, and the clarity of terms outlined in the credit Successful experiences from commercial banks globally highlight the importance of due diligence, risk management, and the role of technology in streamlining LC processes, ultimately facilitating smoother international trade operations.
- Surveying gives an overview of trade finance under Letter of Credit at Joint Stock Commercial Bank for Foreign Trade of Vietnam, thereby assessing the achievements and limitations
- Proposing recommendations to help apply trade finance under Letter of Credit at Joint Stock Commercial Bank for Foreign Trade of Vietnam effectively.
Research scope and objective
This study examines trade finance under Letter of Credit (L/C) transactions at the Joint Stock Commercial Bank for Foreign Trade of Vietnam It includes a market analysis of various global banks, such as CBE Bank and BRAC Bank, focusing on their trade finance practices The research utilizes data from 2017 to 2020 and aims to provide recommendations for future improvements in this sector.
2030 in which to offer trade finance under L/C transaction for Vietcombank.
Research methodology
To carry out theory research, I have used the statistic method, experimental research, and combined them with reference and comparison to highlight the research concerns
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.
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
LITERATURE REVIEW AND THEORETICAL OF TRADE
LITERATURE REVIEW
Engaging in world trade presents significant opportunities for businesses, particularly small and medium-sized enterprises (SMEs), which rely on banking services to access new markets Trade finance plays a crucial role in reducing the risks of importing and exporting, ensuring a secure and predictable flow of global trade According to the 2018 ICC Global Survey, over 60% of banks are adopting technology solutions to digitalize trade finance operations; however, only 9% have seen a reduction in time and costs for transactions The report emphasizes the need for the industry to establish common standards to fully realize the benefits of trade digitalization.
Trade finance theories have been extensively explored by Mustafa (2010), Ahn & JaeBin (2011), and Grath (2013) Additionally, the importance of trade finance in trading activities is highlighted in research conducted by Wandhửfer (2012) and Prete & Federico.
A study by Prete & Federio (2014) analyzed outstanding loans from Italian banks to a diverse range of manufacturing firms from 2006 to 2010 The findings revealed that trade finance experienced only a minor impact from the funding shock, in contrast to ordinary lending, which was significantly affected.
In his 2013 research, Henri highlighted a practical process in trade financing from the perspective of corporate banking employees, noting that those with over ten years of experience are the most satisfied with current strategies This satisfaction underscores the need for banks to enhance the quality of their services by providing more comprehensive information, improving accessibility, and offering additional training for employees By doing so, banks can improve the effectiveness of trade finance processes, which in turn fosters their development and boosts the competitive performance of firms Additionally, Henri emphasizes the importance of addressing the concerns of employees with less than ten years of experience.
Several authors, including Clark (2014) and Garralda & Vasishtha (2015), have analyzed the development of trade finance Clark (2014) highlights that trade finance can significantly impact financial stability and the real economy, noting that it remains a relatively safe and liquid asset even during crises, posing minimal risks to banks and overall financial stability Meanwhile, Garralda & Vasishtha (2015) conducted an extensive study on this topic.
The study "What Drives Bank-Intermediated Trade Finance? Evidence from Cross-Country Analysis" reveals that the short-term, self-liquidating characteristics of trade finance may lead to negative externalities for the global economy, particularly during global banking shocks These adverse effects can be exacerbated when numerous banks concurrently deplete their liquidity reserves tied to trade finance portfolios.
Pham Huyen Trang (2016) discusses the evolving landscape of trade finance services in Vietnamese commercial banks in her article "International Trade Finance Business: The New Trend of Commercial Banks," published in Finance magazine She highlights the current trends and offers recommendations to enhance the efficiency of trade finance activities, emphasizing the adoption of a centralization model to improve service quality Additionally, Doan Thi Nuong Nuong (2012) presents solutions for the development of trade finance in these banks, while Pham Thi Thu Hang (2015) focuses on risk management within the trade finance sector.
The Documentary Letter of Credit (L/C) is a widely used payment method in international trade Research by Nguyen Thi Ha (2015) highlights the evolution of trade finance in Vietnamese commercial banks, focusing on modern products such as UPAS L/C, Draft buyback L/C, Trade loans, and L/C Refinancing Hamed Alavi (2016) emphasizes the growing significance of L/Cs in mitigating payment risks for buyers by transferring these risks to the issuing bank, while also acknowledging the various risks faced by all parties involved in L/C transactions Enhancing the L/C payment method is crucial for improving foreign trade transactions.
Ermakov et al (2017) identified challenges such as limited access to Letters of Credit (L/Cs) for small and medium-sized enterprises, the high costs and complexities of regulatory compliance, and increasing global risks They propose that Blockchain technology could enhance the L/C payment method for international transactions Hamed Alavi (2016) explored the legal distinctions among Documentary Letters of Credit, Negotiable Instruments, and Contracts, highlighting their similarities while emphasizing the unique aspects of their Jurisprudence It is crucial for practitioners in international trade law and finance to consider the principles of strict compliance and autonomy in light of the domestic laws of their respective jurisdictions.
Numerous studies have provided valuable insights into trade finance, particularly regarding trade finance instruments However, these studies often lack a practical perspective on the mechanisms of trade finance products For instance, the use of Letters of Credit in international transactions is evolving rapidly In Vietnam, Letters of Credit are widely utilized as a payment method to mitigate trade risks This gap in practical understanding highlights the necessity of further exploration in this dissertation.
"Trade finance under Letter of Credit transaction – Recommendations for Joint Stock Commercial Bank for Foreign Trade of Vietnam" is written.
THEORETICAL OF TRADE FINANCE UNDER LETTER OF CREDIT
1.2.1 Overview of Letter of Credit
1.2.1.1 Definition of Letter of Credit
A Letter of Credit, as defined in UCP 600, article 2, is an irrevocable arrangement that represents a clear commitment from the issuing bank to honor a complying presentation.
A letter of credit (L/C) is defined by Dolan as a commitment from one party, known as the issuer, to provide financial backing for another party, referred to as the applicant This commitment is contingent upon the presentation of a draft or payment request, along with typically required documentation.
The definition can be said to be, in every way, an exact representation of commercial 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 the presentment ofaspecified document The normal LC process flow can be diagrammatically 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 letter of credit (L/C) serves as a vital payment and financing tool in international trade, designed to accommodate diverse trading relationships and contexts By incorporating various features into the L/C terms, it can be customized to meet specific needs, enhancing the efficiency of cross-border transactions.
A revocable letter of credit (L/C) can be canceled or modified at any time by the issuing bank without prior notice In contrast, an irrevocable L/C cannot be changed or canceled unless there is mutual agreement among the issuing bank, the confirming bank, and the seller Notably, the latest version of UCP 600 has removed the option for revocable L/Cs.
A confirmed letter of credit (L/C) involves a second bank, typically located near the exporter, which adds its obligation to the payment guarantee of the issuing bank In contrast, an unconfirmed L/C is simply advised to the beneficiary by the advising bank without any additional confirmation.
Exporters should confirm a letter of credit (L/C) when there are doubts about the issuing bank's creditworthiness or if the buyer is in a country facing political unrest, economic instability, currency devaluation, or exchange controls that could jeopardize payment.
A straight letter of credit (L/C) binds the issuing bank to honor drafts exclusively for the beneficiary, excluding any endorsers, negotiators, or legitimate holders In contrast, a negotiable L/C requires the issuing bank to pay either the beneficiary or any bank designated by the beneficiary.
A restricted letter of credit (L/C) allows only a designated bank, typically the advising bank, to purchase a bill of exchange from the exporter In contrast, an unrestricted L/C does not specify a purchasing bank, enabling the exporter to present the bill of exchange to any bank for payment.
A term or usance letter of credit (L/C) entails a payment commitment set for a future date, as mutually agreed upon by the buyer and seller For instance, a term L/C may stipulate payment 30 days post-shipment or 60 days after the bank reviews and confirms the compliance of the documents In contrast, a sight L/C, or an L/C available at sight, mandates payment upon the presentation of the draft and documents, following verification that they meet the L/C's terms.
1.2.1.3 Parties to Documentary Credit transaction
Letter of Credit is understood better if all the following elements or terms of the Letter of Credit are known:
- Applicant: The buyer in the business transaction
- Beneficiary: The person in whose favour a credit is issued
The issuing bank guarantees payment to the beneficiary, provided that all submitted documents adhere to the terms outlined in the Letter of Credit It is responsible for reviewing these documents and is fully obligated to make the payment once all conditions of the L/C are satisfied.
The advising bank is the financial institution that notifies the beneficiary when a credit has been issued at the request of the issuing bank Its primary responsibility is to verify the apparent authenticity of the credit it is advising, without any further obligations to the beneficiary.
The confirming bank plays a crucial role by validating the Letter of Credit and taking on the same responsibilities as the issuing bank Usually, this bank is the advising bank, which conducts a thorough assessment of both the issuing bank and the country involved before confirming the L/C.
A nominated bank is the financial institution designated by the issuing bank where the beneficiary can present the necessary documents to receive payment This bank is responsible for negotiating or honoring a credit that adheres to the Uniform Customs and Practice for Documentary Credits (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 allows the issuing bank to modify or cancel the terms without prior notice to the beneficiary.
The issuing bank is required to reimburse any nominated or confirming bank that has been provided with a revocable Letter of Credit, provided these banks meet their obligations under the documentary credit terms through compliant presentations, before they receive any notice of amendment or cancellation from the issuing bank.
FACTORS AFFECTING THE DEVELOPMENT OF TRADE
UNDER LETTER OF CREDIT TRANSACTIONS
1.3.1 Subjective factors a Operation scale and bank’s prestige
Larger banks tend to have a longer-standing reputation, superior service quality, and a more positive service attitude, all of which contribute to their brand strength Their extensive efforts in brand building serve as a key factor in attracting customers A larger scale also means more branches and transaction offices, making it convenient for customers to access services Furthermore, a strong reputation facilitates the bank's ability to expand and develop services both domestically and internationally, enhancing its competitive position in the banking sector.
The charter capital and annual revenue of a bank are key indicators of its growth To effectively finance businesses, banks must possess stable financial capacity, which is essential for providing not only prepayment loans and pre-production financing but also comprehensive financial support Ultimately, strong financial capacity is crucial for the development of commercial banks' services, particularly in international trade finance Additionally, having quality human resources in the trade finance department is vital for success in this sector.
Trade finance is an activity that requires careful attention and flexibility in many cases, so the quality of bank staff is always the most vital issue
The trade finance department team excels in document processing and possesses expertise in international treaties and conventions to ensure precise settlements Given the inherent risks in the banking industry, recruitment for trade finance or international payment specialists emphasizes high professionalism, strong character, relevant foreign qualifications, and language skills, alongside technological proficiency in banking.
The advancement of technology has accelerated processes and enhanced the security of customer information By developing and refining their information technology systems, banks can boost their competitiveness while utilizing streamlined update systems that save time and costs for both the institution and its clients This fosters trust and prestige, ensuring customers feel completely secure during transactions.
Objective factors are factors from outside the bank such as from the government, consumer market, banking industry, domestic and foreign political and economic context a Tariff policy
Tariff policy significantly influences domestic import and export activities while also impacting international trade financing The primary focus is on import and export taxes, which are regulated by the state and subject to frequent changes Higher tax rates lead to increased prices for both exported and imported goods, thereby restricting cross-border trade.
The government's foreign economic policies evolve over time, significantly affecting import and export activities Notably, Vietnam's accession to the APEC economic forum in 1998 and its official membership in the WTO in 2006 exemplify these changes Each policy and economic-political event serves as a strategic catalyst for altering export policies and influencing indirect trade finance services in commercial banks, including exchange control policies.
The Central Bank will oversee the management of foreign exchange and regulate the inflow and outflow of money within the country Its policies will govern the foreign currency status at credit institutions, particularly commercial banks, ensuring the availability of foreign currency and impacting the overall economy and banking services.
Trade finance involves complexities and risks, necessitating that bank staff possess expertise in relevant laws and practices When determining financing options, banks must evaluate their financial capacity alongside their business plan, which should incorporate business ethics and customer reputation to ensure safety Additionally, considerations of exchange rate volatility are crucial in this decision-making process.
Exchange rate volatility is an uncontrollable factor that significantly impacts both banks and consumers, influencing international trade finance services A decline in exchange rates leads to an increase in the domestic currency's value, resulting in decreased foreign currency earnings from exports and reduced local currency revenue, which discourages exports and diminishes the demand for international trade finance Conversely, when exchange rates rise and the domestic currency depreciates, it stimulates export activities for businesses.
In the current trend of integration, banks are increasingly prioritizing service quality, making it essential for all institutions to enhance their offerings Chapter 1 discusses the development of trade finance through Letter of Credit transactions, covering the relevant theories, assessment criteria, influencing factors, and applicable national and international regulations This service is crucial for commercial banks as it generates significant revenue To maintain competitiveness, banks have improved this product to align with market demands Consequently, Vietcombank can benefit from consulting with other commercial banks to identify effective strategies for advancing trade finance in Letter of Credit transactions by analyzing the current landscape.
EXPERIENCES IN TRADE FINANCE UNDER LETTER OF
EXPERIENCES FROM ASIAN COMMERCIAL BANKS
According to the ICC 2018 report, standby letters of credit (L/C) and commercial L/Cs represented 11% and 49% of global trade finance transactions, respectively The ICC Global Survey on Trade Finance 2020 revealed that the Asia-Pacific region received the highest number of L/Cs, totaling approximately 3.1 million MT700s, significantly surpassing other regions However, the average value of L/Cs in the Asia-Pacific was the lowest at USD 430,000 In contrast, non-Eurozone European countries had the highest average value of import L/Cs, while Africa recorded the lowest Additionally, the countries that utilized L/Cs for exports the most are illustrated in the accompanying figures.
Figure 2.1 The percentage of traditional trade finance used globally
(Source: ICC Global Survey on trade finance 2018)
Collections Standyby letters of credit Guarantees
Figure 2.2 Import traffic vs average value in FY2019, split by region, based on
(Source: ICC Global Survey on trade finance 2020)
Asia - Pacific Europe - Eurozone Middle East Africa Europe - Non Eurozone North America Central and Latin America
Average value of letter of credit sentm by region (USD)
Figure 2.3 SWIFT MT700 export L/C volumes by country/region
(Source: ICC Global Survey on trade finance 2020)
Bangladesh is experiencing a steady increase in L/C volumes, as illustrated in figure 2.3 BRAC Bank, a private commercial bank operated by the BRAC development organization, is dedicated to supporting Small and Medium Enterprises (SMEs) The bank actively collaborates with the Global Trade Finance Program of the International Finance Corporation (IFC), the Asian Development Bank (ADB), and various global partners This strong reputation is a key reason why 1.3 million customers prefer BRAC Bank's services.
The bank, headquartered in Dhaka, Bangladesh, operates 187 branches, 456 SME unit offices, and 301 agent banking outlets, ensuring convenient access to its products for customers This extensive network allows for quicker service, particularly in reducing transaction times and expediting L/C notices.
SWIFT MT700 export L/C volumes by country/region (# messages)
In 2019, BRAC Bank conducted 814 training programs aimed at enhancing employee expertise These courses are designed to equip employees with essential skills, enabling the organization to stand out in the competitive banking marketplace.
The 2019 Annual Report highlights that trade finance is a crucial competitive advantage for BRAC Bank, particularly in the area of Irrevocable Letters of Credit, which include Acceptances and endorsements In 2018, the total value of Letters of Credit and Acceptances reached 47,565,505,859 BDT, while in 2019, it decreased to 39,896,528,217 BDT Notably, the 2018 figures represented over half of the total non-derivative financial instruments.
2.1.2 Experiences from Hong Kong & Shanghai Banking Corporation Bank
HSBC consistently ranks among the top banks globally for service delivery, driven by a commitment to enhancing service quality The bank offers a diverse range of commercial products tailored to five key customer needs: optimizing working capital, fostering international trade growth, managing risks in international trade, and overseeing supplier and sales financial management HSBC supports clients throughout the entire process, from pre-delivery finance for raw materials to post-delivery financial assistance, including service negotiation and factoring Additionally, HSBC implements industry-leading measures to combat financial crime and mitigate international business risks Its core strength lies in international trade finance, leveraging a global presence with branches in over 60 countries, sharing market insights, and connecting buyers and sellers to effectively manage risks and liquidity costs The extensive network of correspondent banks further enhances HSBC's competitive advantage.
Cross-border trade finance often faces challenges such as manual paperwork, delayed payments, and slow shipments To address these issues, HSBC successfully piloted a blockchain Letter of Credit transaction in Malaysia and Bangladesh This digitized approach significantly reduced processing time from the traditional average of 5 to 10 days to under 24 hours In 2019, HSBC also utilized the Voltron platform for a Letter of Credit transaction, further demonstrating the efficiency of blockchain technology in trade finance.
Australia and China The bank also completed a pilot blockchain LC in India in collaboration with ING
The bill of lading is essential for securing payment, and electronic signatures significantly reduce the risk of fraud However, challenges such as non-delivery of goods and non-compliance with letter of credit (L/C) terms persist Blockchain technology mitigates these risks by allowing all parties to conduct trade on a unified platform, ensuring transaction transparency and securing documentation through cryptographic methods.
EXPERIENCE FROM EUROPEAN COMMERCIAL BANKS
In Russia, in the field of trade finance, there are large banks such as Vnesheconombank, Sberbank, Investtorgbank, Promsvyazbank, Roseximbank, etc., which finance the exports of Russian companies by L/C
Vnesheconombank operates a letter of credit (L/C) network spanning approximately 30 countries across Europe, Asia, the Middle East, Africa, and Latin America The bank facilitates trade finance by issuing reimbursement obligations, confirming L/Cs, and processing settlements within established document limits It publishes L/Cs for payments to suppliers based on customer applications Additionally, Vnesheconombank manages settlement L/Cs in foreign currency under intergovernmental and inter-bank agreements, which include the repayment of national debts owed to Russia by India and Vietnam from the era of the former Soviet Union.
Roseximbank is a leading Russian bank specializing in documentary services and trade finance, offering comprehensive support for commercial contracts in both Russian and international markets The bank facilitates export-import operations by providing payment services and managing currency for foreign trade transactions Additionally, Roseximbank offers financial support and guarantees for exports through confirmed letters of credit (L/C), enabling foreign buyers of Russian products to access financing for their export contracts via L/C issued by foreign banks and confirmed by Roseximbank.
Sberbank also offers API (Application Programming Interface) services to enable financial institutions and customers to integrate their IT systems and direct virtual access to financial services
L/C in real estate transactions can be automatically generated from a developer's internal CRM system and quickly issued by the buyer through the Sberbank app Sellers can receive payments by submitting transaction documents online, eliminating the need for direct delivery Additionally, an API solution for escrow accounts is being developed, which significantly reduces risks for both parties and shortens the transaction guarantee time from several days to just a few clicks.
In Chapter 2, it is highlighted that banks globally recognize the significance of enhancing trade finance through Letters of Credit, which plays a crucial role in the banking sector and the economy, ultimately leading to increased profitability for financial institutions.
Vietcombank has gained valuable insights from global commercial banks, enabling them to enhance their trade finance solutions related to Letter of Credit transactions Chapter 3 of the thesis focuses on a comprehensive analysis of the current state of trade finance under Letter of Credit transactions at the Joint Stock Commercial Bank for Foreign Trade of Vietnam, utilizing both quantitative and qualitative criteria.
ANALYZE ON THE REAL SITUATION OF TRADE FINANCE
OVERVIEW OF JOINT STOCK COMMERCIAL BANK FOR
Joint Stock Commercial Bank for Foreign Trade of Vietnam, commonly known as Vietcombank, is recognized as one of the most prestigious banks in Vietnam It boasts a substantial customer base, thanks to its user-centric services and exceptional customer care This commitment to meeting customer needs has positioned Vietcombank as a leading choice among banking institutions in the country.
The Joint Stock Commercial Bank for Foreign Trade of Vietnam, originally known as the Bank for Foreign Trade of Vietnam, was established on April 1, 1963, from the Foreign Exchange Bureau of the State Bank of Vietnam As the first state-owned commercial bank chosen by the Government for equitization, it officially commenced operations on June 2, 2008, following a successful IPO Vietcombank, with the stock code VCB, was subsequently listed on the Ho Chi Minh City Stock Exchange (HOSE) on June 30, 2009.
During 58 years of growth and development, Vietcombank has made an essential contribution to the stability and growth of the national economy, maintaining its role as a significant foreign trade bank in promoting domestic economic growth effectively and having a substantial influence on the regional global financial community
Vietcombank, originally a foreign trade bank, has evolved into a multi-industry financial institution, offering a wide range of premier services in international trade Its offerings include traditional services like capital trading, mobilization, credit, and project financing, alongside modern banking solutions such as foreign exchange, derivatives trading, card services, and e-banking.
Vietcombank leverages advanced technologies in its automated banking systems, offering a range of high-tech electronic banking services Products like VCB Internet Banking, VCB Mobile Banking, VCB Pay, VCB – SMS Banking, VCB – Phone Banking, and VCB Money are popular among customers due to their convenience, speed, safety, and efficiency, fostering a culture of cashless payments.
As of December 31, 2019, Vietcombank, one of Vietnam's largest commercial banks, operates approximately 600 branches and offices both domestically and internationally, including its Head Office in Hanoi, 111 branches, and 472 transaction offices across the country The bank has four subsidiaries in Vietnam and three abroad, with representative offices in Singapore, Ho Chi Minh City, and the US Employing over 18,000 staff, Vietcombank has established an Autobank system featuring more than 2,536 ATMs and over 60,000 merchants/POS nationwide Its operations are further enhanced by a network of over 1,316 correspondent banks in 102 countries and territories worldwide.
Vietcombank, a financially robust institution, excels in navigating the modern business landscape and fostering integration Their professional team plays a crucial role in maintaining the bank's status as the preferred choice for large corporations, both domestic and international, as well as millions of individual customers.
Vietcombank has consistently been recognized as the "Best Bank in Vietnam" by esteemed global organizations, reflecting its commitment to international standards It is the only bank in Vietnam to be included in The Banker's Top 500 world-leading banks In 2019, Vietcombank was ranked first in the banking sector and second overall in Vietnam's "100 Best Places to Work," as published by Anphabe and Intage, highlighting its status as one of the Top 50 most exciting employer brands in the country.
The Joint Stock Commercial Bank for Foreign Trade of Vietnam is enhancing its organizational model by implementing a comprehensive restructuring process This includes the creation of a business department aimed at centralizing management capabilities for business operations, aligning with global best practices of modern commercial banks.
Figure 3.1 Management structure of Joint Stock Commercial Bank for
CEO and Board of Management
Internal Audit, Operational Supervisory Risk Management
Department at the Head Office and Branches
3.1.3 Business Operations of Joint Stock Commercial Bank for Foreign Trade of
Table 3.1 Key financial ratios of Joint Stock Commercial Bank for Foreign Trade of Vietnam from 2016 to 2020
Net operating income before loan loss provision
(Source: Annual report 2019 – 2020 of Vietcombank and KB Securities Vietnam)
In 2020, Vietcombank reported an increase in total operating income and profits before and after tax compared to 2019 The return on equity (ROE) rose to 25.90% in 2019 but experienced a significant decline of 5.4% thereafter.
In 2019, Vietcombank's return on assets (ROA) rose to 1.61%, but it saw a decline of 0.21% in 2020 Additionally, the capital adequacy ratio remained stable at 10%, reflecting the bank's consistent financial health.
Over a five-year period, banks are required to maintain a capital adequacy ratio exceeding the minimum threshold of 8% This higher ratio enhances the bank's ability to endure financial stress during economic downturns, ensuring greater stability Additionally, it is essential to consider both liabilities and shareholders' equity in assessing a bank's financial health.
Table 3.2 Liabilities and shareholders’ equity of Vietcombank from 2018 to 2020
Amounts due to the Government and the State
Deposits and borrowings from other credit institutions
Funds for finance, entrusted investments and entrusted loans
Derivative financial instruments and other financial liabilities
(Source: Annual report 2019 - 2020 of Vietcombank)
In a highly competitive banking environment, Vietcombank experienced significant growth in total liabilities, reaching 1,011,847,187 VND billion in 2018 and escalating to 1,232,135,120 VND billion by 2020 This period also saw a notable increase in customer deposits, which amounted to 1,032,113,568 VND billion in 2020 However, there were minor declines in other liability items and shareholders' equity during this time.
Table 3.3 Loan portfolio by term of Vietcombank from 2018 to 2020
(Source: Annual report 2019 - 2020 of Vietcombank)
In 2020, Vietcombank's total loan portfolio reached a peak of 839,788,261 VND billion, with short-term debt comprising the majority at 54.15% in 2018 and slightly increasing to 54.17% in 2020 Conversely, customers opted for long-term debt in smaller amounts compared to short-term debt.
Table 3.4 Loan portfolio by debt group and proportion of Vietcombank from 2018 to 2020
(Source: Annual report 2019 - 2020 of Vietcombank)
In Table 3.4, the current debt ratio remains stable at over 95%, reflecting the high standards of reputable banks in the sector Vietcombank has successfully maintained a strong credit portfolio, effectively managing non-performing loans, which consistently stay below 3% as per State Bank regulations Notably, this ratio has decreased from 0.97% to 0.62% over the past two years.
THE REAL SITUATION OF TRADE FINANCE UNDER LETTER OF
CREDIT TRANSACTION AT JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM
3.2.1 Trade finance under Letter of Credit transaction at Joint Stock
Commercial Bank for Foreign Trade of Vietnam
3.2.1.1 Import financing a For import enterprises
Vietcombank issues letters of credit (L/C) at the request of the applicant, ensuring payment to the beneficiary upon presentation of compliant documents The issuance of the L/C, whether for imports or domestic transactions, may require a deposit based on the customer's credit history.
Vietcombank offers a service to amend letters of credit (L/C) at the request of customers, ensuring a quick and convenient process The bank carefully reviews all amendments and provides advice when necessary to safeguard your interests.
* Bill of lading endorsement/ Delivery authorization/Shipping guarantee
Vietcombank provides essential services such as endorsing a Bill of Lading, issuing Delivery Authorizations, and offering Shipping Guarantees, allowing customers to retrieve goods from transporters even in the absence of complete documentation Customers can receive their goods by presenting either the original or a copy of the Bill of Lading or the original Airway Bill.
Vietcombank facilitates payments to beneficiaries upon receipt of documents that meet the terms of the Letter of Credit (L/C) or when the buyer agrees to pay for any discrepancies This service offers advantages such as helping customers review documents to reduce payment risks, ensuring prompt payments, and providing competitive fees.
Vietcombank offers a usance Letter of Credit with early payment options to accommodate exporters' needs for immediate payment (L/C UPAS) or payment on a predetermined date before the due date (L/C UPAS PLUS) Meanwhile, the importer, who is a customer of VCB, is required to make payment only on the maturity date of the draft or documents.
Vietcombank offers import financing services for financial institutions, including B/L Endorsement, Usance LC Payment, At Sight LC Payment, and LC Issuance
3.2.1.2 Export financing a For export enterprises
When receiving the L/C or L/C amendment, Vietcombank checks its apparent authenticity and advises you
Vietcombank commits to pay or accept to pay at maturity to the Beneficiary if the presented documents conform with terms and conditions of L/Cs issued by the issuing bank
Vietcombank verifies that the documents meet the terms of the Letter of Credit (L/C) and international standards If any discrepancies are found, the bank will guide the customer in correcting the documents to facilitate payment Once the documents are in order, Vietcombank forwards them to a foreign bank for payment and credits your account upon receipt of funds.
* L/C export bills negotiation with recourse
Vietcombank facilitates the negotiation of customer export bills under sight or usance letters of credit (L/C) with a maximum duration of 360 days from the request date Repayment is anticipated from the foreign bank; however, if the foreign bank fails to make payment by the due date, the customer is responsible for repaying the advanced amount to Vietcombank.
* L/C export bills negotiation without recourse
Vietcombank facilitates the negotiation of customer export bills under sight L/C or usance L/C with a maximum duration of 360 days, as accepted by the Issuing or Confirming bank In the event that the foreign bank fails to make payment by the due date, the customer is relieved from the obligation of repayment.
* Fast negotiations of L/C export bills
Vietcombank negotiates with recourse the export bills under sight L/C or usance L/C not exceeding 360 days from customer's request within 60 minutes of valid request
* Early payment Letter of Credit (EPLC)
EPLC indeed is a product of VCB internal Letter of Credit (VILC), in which:
- All participating banks are VCB's branch(es);
- Applicant and Beneficiary are VCB's customers;
- EPLC has a particular condition that allows VCB to make early payment upon Beneficiary's request before the maturity date of the document presented under L/C b For financial institutions
Vietcombank offers export financing services for financial institutions, including LC Advice, LC Amendment Notification, and LC Confirmation and Negotiation c For Small and medium – sized enterprises
* Post–shipment financing: Vietcombank negotiates with or without recourse your export bills under sight L/C or usance L/C not exceeding 360 days
Vietcombank offers L/C export bills negotiation with recourse, allowing you to receive advances upon request Repayment is anticipated from a foreign bank; however, if the foreign bank fails to make payment by the due date, you will be responsible for repaying the advanced amount to Vietcombank.
Vietcombank offers L/C export bills negotiation without recourse, allowing you to sell your invoices under mutually agreed terms If the foreign bank fails to make payment by the due date, you are not obligated to repay the amount.
3.2.1.3 Financing under special credits a For export enterprises
Customers can request Vietcombank to transfer all or part of the L/C value and notify the second beneficiary Subsequently, Vietcombank will receive the necessary documents and process the payment.
Vietcombank offering export financing services for financial is Standby L/C c For Small and medium-sized enterprises
A red clause letter of credit (L/C) is a specialized payment instrument designed to provide financing to the seller, known as the beneficiary In this arrangement, the issuing or nominated bank advances a percentage of the total L/C value to the beneficiary Historically, red clause L/Cs were primarily utilized in industries like wool and cotton, where sellers required pre-shipment financing to procure goods.
Nowadays, this instrument is used in some industries where the buyers’ position is lower than that of the sellers; or the buyers, because of the relationship, want to support the sellers with advances
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
3.2.2.1 Achievement in trade finance under Letter of Credit transaction of
In recent years, international trade finance, particularly transactions involving Letters of Credit, has experienced significant changes, including an increase in customer numbers and transaction volumes The use of Letters of Credit in trade finance has notably risen, leading to specific successes, such as a growing customer base utilizing this service.
Table 3.5: The number of customers using trade finance at Joint Stock
Commercial Bank for Foreign Trade of Vietnam
The number of customers using trade finance service 95,730 97,380 105,982
The number of customers using trade finance under Letter of Credit transaction service
(Source: International payment reporting of Vietcombank 2019 – 2020)
Table 3.5 shows a substantial rise in the number of customers using trade finance at Vietcombank from 95,730 customers in 2018 to 105,982 customers in 2020
Between 2019 and 2020, the number of customers utilizing trade finance through Letter of Credit transactions surged by 2,299, largely due to Vietcombank's improvements in trade finance services The bank implemented strategies to attract clients, including the launch of the Online Trade Finance service in 2019, which facilitates digital transaction requests and processing results via the Vietcombank Corporate Channel (VCCBCC) This innovation enhances connectivity between customers and the bank, eliminating geographical barriers and reducing transaction times.
Table 3.6: Categorize customers using trade finance under Letter of Credit transaction in 2020
(Source: International payment reporting of Vietcombank 2019 – 2020)