STATE BANK OF VIETNAM BANKING ACADEMY FACULTY OF BANKING AND FINANCE ------ Graduation thesis INTERNATIONAL PAYMENT USING LETTER OF CREDIT AT JSC BANK FOR INVESTMENT AND Thesis sup
OVERVIEW OF INTERNATIONAL PAYMENT USING LETTER
International Payment
International payment refers to the monetary obligations and benefits that arise from economic and non-economic interactions between organizations and individuals of different nationalities, as well as between nations and international organizations These transactions are facilitated through the banking systems of the involved countries.
In an era of globalization and economic integration, countries worldwide are focused on developing market economies that emphasize openness and cooperation As a result, international payment systems have emerged as vital services that connect domestic economies with the global market These systems facilitate the import and export of goods and services, attract foreign investment, and support overseas remittances, thereby strengthening various financial relationships Given that foreign economic engagement has become a priority for many nations, the significance of international payments is increasingly apparent in both the national economy and specific foreign economic activities.
International payment is a crucial component of trade between entities of different nationalities, significantly impacting business efficiency To ensure smooth and effective circulation of goods, international payment activities must be executed swiftly, accurately, and efficiently.
International payment activities significantly boost economic exchanges between countries by facilitating quick, safe, and cost-effective transactions for all parties involved Moreover, these activities promote non-cash payments within the economy and attract substantial foreign currency inflows into Vietnam.
1.1.2.2 To the exporter and importer
International payment creates favorable conditions for importers and exporters when engaging in international trade The role of intermediary payment in the international
Commercial banks play a crucial role in facilitating payment activities that ensure transactions are executed quickly, accurately, safely, and conveniently, while maximizing cost savings for customers In instances where customers lack sufficient financial resources, banks offer sponsorship options to assist with payments Additionally, banks utilize the payment process to monitor the financial health of businesses, enabling them to provide tailored advice and strategic adjustments Moreover, international payments are vital for sustaining foreign trade relationships and fostering the growth of international commerce.
International payment activities enable banks to effectively address the diverse financial service needs of customers related to international settlements This, in turn, enhances the bank's sales, boosts its reputation, and fosters customer trust, ultimately allowing for operational expansion and providing a competitive edge in the market.
International payment activities play a crucial role in enhancing a bank's overall business operations Effective management of these activities not only boosts import and export credit services but also fosters the development of foreign exchange transactions and trade finance By facilitating international settlements, banks can improve their liquidity and provide guarantees in foreign trade Additionally, banks can benefit from temporarily idle foreign currency capital held as deposits by enterprises engaged in international relations, further supporting their financial stability and growth.
International payments drive the modernization of banking technology, enabling banks to implement advanced systems that ensure swift, timely, and precise transactions This technological advancement not only mitigates risks but also aids in the expansion of banking networks and scales.
International payment activities strengthen a bank's foreign relations and competitiveness while boosting its reputation globally This enhanced standing allows the bank to leverage funding and capital from foreign banks in international financial markets, effectively addressing its capital requirements.
1.1.3.1 Remittance: Remittance is an international payment method in which the customer (remitter) requests the remitting bank to transfer a certain amount of money to another person (beneficiary) at a certain address and in a certain time (Textbook of commercial banks, statistics publisher)
1.1.3.2 Collection of payment: The collection means the seller (exporter) after completing his delivery duty authorizes his bank to present documents to the Collecting bank (importer’s bank) in order to obtain payment and/or accept B/E of fulfill other terms and conditions
- Clean collection: Collection of financial documents not accompanied by commercial documents
- Documentary collection: Collection of financial documents accompanied with commercial documents, or commercial documents not accompanied with financial documents
1.1.3.3 Letter of credit: The letter of credit is any agreement, in which by requirement of a customer (L/C applicant), a bank (issuing bank) issues a letter, by which the issuing bank undertakes to honor or accept B/E under a complying presentation accompanied by terms and conditions stipulated by L/C.
ACTUAL SITUATION OF INTERNATIONAL PAYMENT USING L/C AT BIDV
Overview of BIDV
2.1.1.1 The formation and development of BIDV
The Bank for Investment and Development of Vietnam (BIDV), originally established as the Bank for Construction of Vietnam on April 26, 1957, underwent a name change to the Bank for Investment and Construction of Vietnam on June 24, 1981, before adopting its current name on November 14, 1990.
BIDV, Vietnam's largest state-owned commercial bank by total financial assets and revenue as of 2016, ranks as the fourth largest enterprise in the country according to a UNDP report from 2007 Organized as a State-owned Corporation, BIDV has established business partnerships with over 800 banks worldwide It is recognized among the Top 2000 largest companies globally and the Top 400 largest banks, as reported by Forbes and Brand Finance in 2017 As a result, BIDV is the preferred choice for financial and banking services among economic organizations, businesses, and individuals.
BIDV operates an extensive network across Vietnam, featuring 1,000 branches and transaction offices, along with 3 affiliated companies, 15 joint ventures, and 6 international representative offices With a workforce of over 24,000 trained professionals, including 57% female employees and a significant portion holding university and postgraduate degrees, BIDV boasts a wealth of expertise accumulated over 60 years The bank maintains relationships with more than 1,700 leading financial institutions across 117 countries, serving nearly 300,000 corporate clients, including many multinational corporations Additionally, BIDV caters to an individual customer base of 9 million, representing nearly 10% of Vietnam's population.
2.1.1.2 Functions, tasks and organization structure
BIDV is a unique state-owned enterprise with legal status, functioning within the framework of the general economic payment system It operates under the regulations governing credit institutions, the Law on State Enterprises, and other applicable legal provisions.
According to the organization charter and operational regulations, BIDV has the following functions and tasks:
- Mobilizing short, medium and long-term capital in Vietnam dong (VND) and foreign currencies from domestic and foreign capital in the following forms:
- Receive savings deposits, demand payment deposits, payment deposits from residents and organizations
- Issuing valuable papers: certificates of deposit, bonds, treasury bills, promissory notes
- Borrowing from the SBV, credit institutions, individuals and domestically
Our lending services encompass a range of options, including short-term, medium-term, and long-term loans in both VND and foreign currencies, aimed at supporting development investments for organizations, individuals, and households across all economic sectors We also engage in co-financing development investment projects and offer discounting services for valuable papers.
- Perform financial leasing including importing and re-exporting rental equipment
- Implementing international payment activities and guaranteeing loans for development investment, bidding guarantees and performing guarantee operations for domestic and foreign enterprises and financial intermediaries
- Investing in buying shares, contributing capital, contributing capital to joint ventures, buying assets and other forms of investment
- Trading in foreign currencies, gold, silver and gems
- Make payments to individual and business customers
- Trading in securities and acting as securities brokers
- Store, preserve and manage valuable paper securities in cash and other valuable assets of customers
- Investing in, repairing and upgrading mortgaged and pledged properties which have been converted into assets of the State Bank and managed by BIDV for business
- Carry out mandate tasks of the Government and the SBV
BIDV's organizational structure includes a Board of Directors and various departments The Board, appointed and dismissed by the Prime Minister, represents the State owner and is accountable to the State The General Director serves as the legal representative of the bank, overseeing its operations and ensuring compliance with the law.
Figure 2.1 - BIDV structure model is shown as the following diagram
2.1.2 Business performance of BIDV in the period of 2017 – 2019
Total mobilized capital from organizations and citizen reached VND 1,187,093 billion, 12.6% higher compared to the previous year and met the capital demand;
BIDV has successfully increased its total mobilized capital to VND 1,374,765 billion, reflecting a 12.1% growth since 2018 Notably, customer deposits have risen to VND 1,114,163 billion, marking a 12.6% increase compared to the previous year and representing 12.8% of the overall money market share within the industry.
BIDV's positive results underscore its strong market position and the trust it has earned from both business and individual customers, especially amid the intense competition among banks to attract savings deposits.
The capital mobilization structure is increasingly favoring stable, low-cost deposit sources to align with capital usage needs Notably, VND deposits rose by 12.8% since 2018, now representing 94.7% of total customer deposits Additionally, non-term deposits increased by 10.2%, with demand deposits making up 16% Retail capital mobilization also saw growth of 9.7% compared to 2018, accounting for nearly 55.5% of total mobilized capital.
BIDV's capital mobilization activities are carried out in many forms, but mainly from customer deposits (in VND and foreign currencies)
Table 2.1 - Capital mobilization activity (VND million)
Money quantity Ratio Money quantity Ratio Money quantity Ratio Demand deposits 235,811 22.91% 217,498 18.62% 197,895 15.23%
(Source BIDV Annual Report from 2017 to 2019)
According to the data, the structure of term deposits accounted for a large proportion and tended to expand In 2017, the proportion of this currency accounted for 68.99%
By 2019, term deposits accounted for 79.38% of BIDV's total mobilized capital, primarily due to the bank's customer base, which consists mainly of economic organizations and some individual clients looking to deposit significant amounts BIDV's adherence to the operating policies and interest rate regulations set by the State Bank, along with its strategic approach to capital mobilization based on supply and demand, further contributes to this trend.
Over the years, the mobilization of demand deposits at BIDV has declined, dropping from VND 160,200 billion in 2017 to VND 197,895 billion in 2019, leading to a decreased proportion of these deposits relative to the bank's total deposits This trend may be attributed to BIDV's promotional strategies, which primarily focus on attracting term deposits to support its long-term business activities Additionally, BIDV maintains a specialized capital deposit ratio of approximately 0.9%, ensuring that customers can utilize their capital for its intended purposes.
Figure 2.2 - BIDV Credit Growth from 2017 to 2019 (VND billion)
(Source BIDV Annual Report from 2017 to 2019)
Total outstanding loans and investments reached VND 1,325,737 billion In particular, outstanding loans to organizations, residents and corporate bonds reached VND 1,134,503 billion, up 12.2%, accounting for 13.8% of the sector's total credit
The target customer segments have demonstrated significant growth, with the retail sector maintaining a leading market share as outstanding loans increased by 21.5% since 2018, now representing 34.5% of total outstanding loans Meanwhile, the wholesale sector experienced an 8.3% growth since the start of the year, with SME loan outstanding rising by 21%, surpassing overall credit growth.
Short-term outstanding debt has increased by 15.2% since the beginning of the year, indicating positive growth Meanwhile, medium and long-term loans are being effectively balanced and expanded to cater to retail, FDI, and SME customers Key projects and programs are yielding positive results, with medium and long-term debt constituting only 37.9% of the total debt balance, significantly lower than the established control target.
Outstanding loans have shown positive growth, with VND loans increasing by 14% since the start of the year In contrast, foreign currency loans have been effectively managed, decreasing by 10% in alignment with government directives and guidance from the State Bank of Vietnam (SBV) This strategic shift from borrowing in foreign currencies to trading them is helping to alleviate pressure on the foreign currency balance.
Table 2.2 - BIDV Loans from 2017 to 2019 (VND billion)
Money quantity Ratio Money quantity Ratio Money quantity Ratio Standard loan 822,297 94.86% 946,912 95,76% 1,072,557 96.02% Watch loan 30,523 3.52% 23,024 2,33% 24,943 2.23% Substandard loan 3,749 0.43% 5,449 0.55% 3,835 0.34%
Doubtful loan 5,084 0.59% 6,182 0.63% 4,305 0.39% Irrecover loan 5,230 0.60% 7,170 0.73% 11,356 1.02% Total loan 866,885 100% 988,738 100% 1,116,997 100%
(Source BIDV Annual Report from 2017 to 2019)
BIDV successfully maintained its non-performing loan ratio below 2%, with a ratio of 1.91% in 2018 as total debt rose by VND 121,853 billion, marking a 14% increase from 2017 In 2019, total outstanding debt further increased by 13% to exceed VND 128,259 billion, while the non-performing loan ratio improved to 1.75%, reflecting a slight decrease from the previous year.
IMPLICATIONS AND RECOMMENDATIONS
Implications
The research explores key characteristics of letters of credit (L/C) and evaluates their performance in international payments at BIDV It offers insights into risk mitigation and enhancing the effectiveness of L/C for commercial banks in Vietnam, particularly BIDV For readers new to the L/C method, the article provides a comprehensive overview of its significance in trade finance and outlines potential risks that banks may encounter when utilizing this payment method.
Despite achieving its objectives, the research encountered several limitations The sample size was relatively small, and a longer analysis period could have provided deeper insights, as the data was collected over three consecutive years Additionally, since the study focused solely on BIDV, its findings may not be applicable to other banks.
Recommendations
To reduce payment risks, international payment professionals must consistently enhance their understanding of both national and international regulations It is essential to have a thorough grasp of the State Bank's guidelines regarding the payment evidence for import documentation.
Dealers always master the business processes of import payment method, processing operations and their role in each transaction, strictly comply with the steps in the business process
Organize seminars regularly, coordinate with agencies to organize professional training courses related to international payment, send staff to professional training at major banks in the world
Standardize officials in charge of international payment: arranging qualified officials with professional qualifications and foreign languages to suit their jobs
Regularly update international information to enable officers to catch up with the fluctuations of the world
Establishing clear and specific criteria for evaluating employee performance is essential, especially in the challenging area of international payments To effectively assess employee competency, the human resources department must implement clear indicators that measure employees' work abilities.
There is an incentive mechanism in the form of material or reward for international payment officers to self-study to improve their qualifications in accordance with the assigned position
BIDV is modernizing its banking technology to align with leading financial groups in the region, significantly improving the quality of its international payment services This advancement also equips the bank with an efficient tool for managing international payment activities across its entire system.
Modernizing banks significantly boosts departmental security, enhances transaction accuracy, and reduces the risk of hacking, thereby protecting the institution from potentially damaging fraudulent activities.
BIDV is exploring the use of robots in the letter of credit (L/C) issuance process to alleviate employee workload and enhance process consistency.
LC issuance However, the application still faces a number of difficulties and errors
In order to officially put the robot into use, TFC needs to continue to work closely with the senior technical team in the future
As technology modernizes, BIDV must explore and expand international payment methods in Vietnam to boost its competitiveness among local banks While the Letter of Credit (LC) method is popular due to its advantages, it still carries inherent risks and limitations.
To address existing payment method limitations, countries like Hong Kong, China, and Cuba are adopting the Bilateral Guarantee (B/G) system This innovative approach merges the benefits of irrevocable Letters of Credit (L/C) and Documents Against Acceptance (D/A), ensuring that the importer can verify the goods meet their requirements prior to payment Consequently, this method minimizes risks for both sellers and buyers.
61 because they must follow the commitment This is a payment method that BIDV may consider and apply in the future
Many foreign banks are increasingly utilizing online document checking software, which offers a cost-effective solution to attract remote customers This technology streamlines the document verification process, minimizing manual labor for payers and enhancing both speed and accuracy In the context of ongoing integration and modernization, BIDV has the opportunity to explore and implement this innovative approach.
Study international payment activities at major banks in the world to learn and improve the things that BIDV is still weak in operations and management
Study the competitive strategies that other banks are applying to have suitable strategies - firstly, domestic banks and long-term foreign banks
Establishing a comprehensive and efficient customer relationship department is essential for bridging the gap between BIDV and its clients With international payment staff often occupied with daily operations, there is limited opportunity to provide personalized guidance and insight into customer needs Many clients require varying degrees of support and assistance, highlighting the critical role of the customer relations department in fostering understanding and engagement with customers.
In today's competitive banking landscape, the strategic incorporation of additional services into a bank's product policy is crucial for customer retention and attraction While these services may not be directly profitable, their effective implementation can serve as a significant competitive advantage, setting the bank apart from its rivals and enhancing overall customer satisfaction.
The customer relations department gathers valuable feedback through regular interactions with clients, enabling them to provide informed recommendations to management and the international payment department This process helps develop effective customer policies, enhancing BIDV's capability to meet the demands for international payment services.
Building a methodical and professional Marketing strategy, contributing to enhancing the reputation and brand of BIDV in the region and internationally
To enhance professionalism and position BIDV as a leading financial corporation, a strategic approach involves systematically establishing relationships and opening representative offices in regional countries This initiative aims to explore and penetrate the global financial and monetary markets effectively.
Chapter 3 described the orientation of international payment activities at the Bank for Investment and Development of Vietnam and some solutions to develop international payment activities in the context of the world economy is facing difficulties
Economic integration has opened numerous opportunities for Vietnamese banks, yet challenges remain in expanding their business activities To effectively serve as a bridge for capital, investment, and financial services in support of the national economy, Vietnamese commercial banks, especially BIDV, must enhance their efforts, particularly in improving the efficiency of international payment systems.
The Letter of Credit method plays a crucial role in enhancing the success of international payment activities at BIDV, showcasing its strengths in import and export transactions However, there are instances where this method falls short, exhibiting notable limitations In the context of a thesis, the author examines key criteria and proposes ideas and solutions aimed at improving the efficiency of international payment operations through documentary credit at BIDV's Head Office.
Edward G, H (2009), A short course in International Payments – 3rd Edition, USA
BIDV, Financial Report 2017, Hanoi, Vietnam
BIDV, Financial Report 2018, Hanoi, Vietnam
BIDV, Financial Report 2019, Hanoi, Vietnam
BIDV Annual Report 2017, Hanoi, Vietnam
BIDV Annual Report 2018, Hanoi, Vietnam
BIDV Annual Report 2019, Hanoi, Vietnam
Bui, M (2007) , “Improve the quality of letter of credit method and collection method at Bangkok Bank PLC in Ho Chi Minh City”, Master’s thesis in economics,
Ho Chi Minh City University of Economics, Ho Chi Minh, Vietnam
Cao, Q (2007), “Law on Letter of Credit in Vietnam for international economic integration”, Master's thesis in jurisprudence, Hanoi National University, Hanoi, Vietnam
Nguyen, H (2011), ‘Solutions to improve the efficiency of international payment activities at the office of the Bank for Investment and Development of Vietnam’, Graduation thesis, Thanh Long University, Hanoi, Vietnam
Nguyen, T (2014), “Improving the efficiency of international payment activities at Jsc Bank for Investment and Development of Vietnam – Dong Do branch”,
Graduation thesis, Thang Long University, Hanoi, Vietnam
Nguyen, L (2012), “Solutions for developing international payment methods of document credits at Lien Viet Post Commercial Joint Stock Bank, Graduation thesis, Thang Long University, Hanoi, Vietnam