The reason why exporters require letter of credits issued by some vietnamese comercial bank solutions improve vietnamese

HOA SEN TRUONG ĐẠI HOC HOA SEN KHOA KINH TE & QUAN TRI END OF TERM REPORT TOPIC: THE REASON WHY EXPORTERS REQUIRE LETTER OF CREDITS ISSUED BY SOME VIETNAMESE COMERCIAL BANK.. BỘ GIÁO

HOA SEN

TRUONG ĐẠI HOC HOA SEN KHOA KINH TE & QUAN TRI

END OF TERM REPORT

TOPIC: THE REASON WHY EXPORTERS REQUIRE LETTER OF CREDITS ISSUED BY SOME VIETNAMESE COMERCIAL BANK SOLUTIONS IMPROVE VIETNAMESE COMMERCIAL BANK’S CREDITWORTHINESS IN L/C PAYMENT ACTIVITIES

Subject : International Payment

Class No : 1483 (Semester 2034)

Student’s Group No : Group 2

Instructor : Lam Thanh Phi Quynh

TP Hé Chi Minh, August 2021

BỘ GIÁO DỤC VÀ ĐÀO TẠO TRƯỜNG ĐẠI HỌC HOA SEN KHOA KINH TE & QUAN TRI

sĩ

END OF TERM REPORT

TOPIC:

THE REASON WHY EXPORTERS REQUIRE LETTER OF CREDITS ISSUED BY SOME VIETNAMESE COMERCIAL BANK SOLUTIONS IMPROVE VIETNAMESE COMMERCIAL BANK’S

CREDITWORTHINESS IN L/C PAYMENT ACTIVITIES

Completation time : From 22/08/2021 to 26/08/2020

Instructor : Lam Thanh Phi Quynh

Student’s Group No : Group 2

TP HCM, August 2021

THANK YOU

First of all, our team would like to express our sincere and deep thanks to the instructor Lam Thanh Phi Quynh for enthusiastically guiding, caring, as well as helping the group in

the past time so that our group can have a successfully complete this report Our team would also like to thank the author for providing useful documents and information for the group

Finally, our team would like to thank Hoa Sen University for giving our students the opportunity to experience useful subjects so that we can accumulate more knowledge for the future After completing the final report, our team also recognized the shortcomings that each individual had In the process of making the report, it is difficult to avoid mistakes, the theoretical level is still limited, the team hopes that you will ignore it and give suggestions to the group so that it can be more and more perfect

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LECTURER’S COMMENTS

Tp.HCM, ./ /2021

(sign and full name)

JOB DISTRIBUTION TABLE DIEM 7

MEMBER’S NAME ID DUTY COMPLETED

2 Word summary

Nguyễn Quốc Hùng 2182522 | 1 Solutions 100%

TABLE OF CONTENTS

THANK YOU 222111211211 1121211121111111121211 11111211111 11 H1 HH HH HH HH 1H LECTURER?S COMMENTS L0 2 2n 0221 212 211111121110111 11111 1x ke IV JOB DISTRIBUTION TABLE Q2 21 1221121211 121211 121 18111112121 1111121111211 1811 1x xe 5

I Overall of Letter of Credit and Creditworthiness - ‹ c n2 vn 8

1 Definition of Letter of CTedlf - c1 211211125111 11111111111111 1111111111101 111 1k ky 8

2 Defmition of Creditworthiness - - c1 2121121211111 1111111111111 111111 1g rreg 8

II Reasons why some exporters require letter of credits issued by some Vietnamese commercial banks to be confirmed - - c6 1121121 1121111 11515111 111511 111111111111 11 111111 re 9

1 Risks for the seller (€XpOT€T) 2 0 122112211121 11221 15111 1115128111 1km 9

2 Risks to the issuing bank of the C - 2c 2 2222221111211 12111 1115125111511 ll III Solutions improve Vietnamese commercial bank’s creditworthiness in letter of credit paymenf aCfIVIẨI€S - 020 0021112112111 1 20115 111 1150115 111111110111 111k key 12

2 Improve the bank”s sysftem - - 1 2 2221212111111 1121 1111111111011 111811119 ru 13 REEERENCES Ăn HT HH HH TH HH HH TH TH HH TH TH HT TH 15

I Overall of Letter of Credit and Creditworthiness

1 Definition of Letter of Credit

A letter of credit, or "credit letter" is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase

A letter of credit is issued against a pledge of securities or cash And it ensures that the seller is paid for presenting the documents totally complying with all terms and conditions

in the L/C

¢ Procedure of L/C

The entire process under LC consists of four primary steps:

Step 1 - Issuance of LC

After the parties to the trade agree on the contract and the use of LC, the importer applies to the issuing bank to issue an LC in favor of the exporter The LC is sent by the issuing bank to the advising bank The latter is generally based in the exporter’s country and may even be the exporter’s bank The advising bank (confirming bank) verifies the authenticity of the LC and forwards it to the exporter

Step 2 - Shipping of goods

After receipt of the LC, the exporter is expected to verify the same to their satisfaction and initiate the goods shipping process

Step 3 - Providing Documents to the confirming bank

After the goods are shipped, the exporter (either on their own or through the freight forwarder) presents the documents to the advising/confirming bank

Step 4 - Settlement of payment from importer and possession of goods

The bank, in turn, sends them to the issuing bank and the amount is paid, accepted, or

negotiated, as the case may be The issuing bank verifies the documents and obtains payment from the importer It sends the documents to the importer, who uses them to get possession of the shipped goods

2 Definition of Creditworthiness

Creditworthiness is a lender's willingness to trust you to pay your debts A borrower deemed creditworthy is one a lender considers willing, able and responsible enough to make loan payments as agreed until a loan is repaid

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Lenders evaluate your creditworthiness—or how worthy you are to receive new credit— when you apply for a debt obligation, such as a personal loan, credit card or line of credit Typically, lenders only extend credit to those they deem as creditworthy borrowers A creditworthy borrower is one who is able and responsible enough to repay their debts in a timely manner If a lender believes you are a risky borrower, it’s unlikely that you will qualify for new credit

For example, Mary has a 700 credit score and has high creditworthiness Mary gets approval for a credit card with an 11% interest rate and a $5,000 credit limit Doug has a

600 credit score and has low creditworthiness Doug gets approval for a credit card with a

23.9% interest rate and a $1,000 credit limit

¢ How to check and improve your creditworthiness

Lenders pay the credit reporting agencies to access credit data on potential or existing customers in addition to using their own credit scoring systems to grant approval for credit Every consumer should keep track of their credit score because it is the factor financial institutions use to decide if an applicant is eligible for credit, preferred interest rates, and specific credit limits

To improve your creditworthiness, there are several ways you can improve your credit score to establish creditworthiness The most obvious way is to pay your bills on time Make sure you get current on any late payments or set up payment plans to pay off past due debt Pay more than the minimum monthly payment to pay down debt faster and reduce the assessment of late fees

Reasons why some exporters require letter of credits issued by some Vietnamese commercial banks to be confirmed

1 Risks for the seller (exporter)

Firstly, in the contract of sale, the agreement of the parties is based on good faith and equality between the seller and the buyer to include in the terms of the contract However, despite coming from equality, the seller is still often the weaker party than the buyer ina contract from which to accept unfavorable agreements on his side That is shown through the fact that the seller accepts extremely complicated documents and documents that the buyer requires, even the seller accepts the documents

It is because of this complicated composition that when the goods arrive, it is not possible to do the paperwork Accordingly, the Bank will not accept payment to the seller due to the lack of documents and the goods must continue to be left at the port and cannot

be retrieved, causing a lot of damage to the seller It can be seen that this is a case where the buyer has installed some unfeasible terms to catch errors in the documents, thereby serving

as a basis to refuse to receive the goods or force the seller to reduce the price of the goods if they do not want to bear additional costs

Secondly, the L/C payment method is a safe and reputable payment method through the bank, but it is for this reason that many people believe in the role of L/C without

understanding that the L/C payment method is a conditional payment method This resulted in the seller failing to thoroughly check the terms and conditions of the L/C which resulted in a failure to carefully examine the difficult requirements of the L/C Therefore, the seller will have to bear the costs

In addition, even though the L/C payment method has been made, the payment is still based on the goodwill of the buyer in the performance of the contract As mentioned, the form of payment by L/C is based on the transaction of written documents and the bank must carefully check the accuracy of the documents little by little and even from the payment smallest errors Therefore, although the goods have been delivered in full, in the correct quantity and quality, but because of minor errors in the documents, the seller has not The third is breach of “strict compliance” The importer applies the letter of credit from

an issuing bank without strict compliance with the contract The terms and conditions of credit should be in compliance with the contract In many cases, however, the importer do not open/issue the credit based on the sales contract because kinds of reasons This

behavior makes difficult for the performance of contract difficult, or leads the added loss on

exporters The most frequent situations are: importers do not open the credit on time or do not apply the credit from banks at all For example, in the case of concerning market change, strict restriction for the foreign currency, the importer will alter the time or delay the time to open the letter of credit The importer adds some accessional clauses in the credit, for example, the importer may upgrade the kind of insurance; increase the amount of insurance; change the port of destination; change the packing, in order to get the purpose of changing the contract Or the importer may make many restrictions on the credit, which is considered as the “flexible clauses”

The fouth is setting barriers in malice By using the crucial principle of letters of credit -“strict compliance” of documents and credit, the importer adds some conditions that are hard to achieve, or sets some business trap on purpose Such as unconfirmed clauses; credit with words mistakes and conflicted clauses on content It is not only a piece

of cake that there are some words mistakes on letters of credit Those mistakes can be the typing mistakes of the beneficiary’s name, address, shipment, the expiry time, and so on The mistakes may affect directly the documents that must submit, and sometimes it will be the excuse for rejection of payment by the issuing bank

The fifth is bogus letter of credit If importers use the bogus letter of credit, or steal the

bank that has been or is going to be bankruptcy, the exporters may face the calamity of losing both goods and money

The sixth is requests of especial documents The importer asks for the documents that are hard to achieve Some importers regulate the requests that cannot be fulfilled or controlled by the exporters Such requests may be: under the terms of FOB42 & CFR43, the exporter can ask the payment only within the return receipt of insurance; or the documents with some specific signature

The seventh is conflict between clauses of credit and related law The clauses of credit are not accordant with the law of related country In the real practice of international trade, some clauses in the credit are advantage to the exporter on the appearance The noticeable point is that if the clauses are allowed according to the law of importer’s country The exporter should know the law in related country, and negotiated the clauses that cannot be implemented in the importer’s country Otherwise, the exporter will not only loss the

advantage in contract, but also involves in the restriction of another national law For

example, the accrual and final discount fee is responsible by the importer according to the letter of credit The reasons are: citizens should turn in the income tax of the interest based

on the national or state law

The final is fraud by altering letter of credit Importers alter the overdue letters of credit purposely The exporter may be cheated for their goods by this altered credit Importers change the amount, the date of shipment, and beneficiary’s name of the overdue credit With the purpose of finance the money by a credit from the bank, importers may prevail the exporters on issuing the credit

The group have not told about the creditworthiness of the issuing banks this is the main reason why L/C issued by Vietnamese commercial banks are needed to be confirmed

2 Risks to the issuing bank of the LC

The first is credit risk That is, the bank can advance an amount of money, but it is

unlikely that it will be recovered For example, the issuing bank of the LC upon receipt of a complete set of valid documents is obliged to pay the exporters to the beneficiaries However, in this case, if the importer is no longer able to pay, or goes bankrupt, then the issuing bank will have a loss associated with the credit risk

Next is the risk related to document errors For example, for an issuing bank, there are several types of errors as follows: First, the set of documents is incomplete, but the issuing bank does not detect it and still makes payments to the exporter

The second case is that the LC payment documents are complete, but the issuing bank thinks that there is an error, so failing to pay the exporter will bear the risk of being sued by the exporter

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