BANKING ACADEMY FACULTY OF COMMERCIAL BANKING GRADUATION THESIS Topic: IMPROVING THE EFFICIENCY OF THE INTERNATIONAL PAYMENT OPERATION BY MEANS OF DOCUMENTARY CREDIT AT JOINT STOCK COMM
THEORETICAL OVERVIEW OF THE INTERNATIONAL PAYMENT
Literature Review
Recently, Vietnam's commercial banks have enhanced their international payment operations through improvements in the payment network system, staff training, and investment in innovative technology These advancements have led to significant outcomes in their international payment services However, banks have primarily concentrated on expanding operations and managing risks, often neglecting the analysis and quantitative assessment of operational efficiency This study not only evaluates and provides solutions to enhance the efficiency of international payment operations using specific criteria but also emphasizes the importance of documentary credit (or letter of credit), a widely used international payment method.
Norman Mugarura (2014) examines the legal and policy challenges associated with Letters of Credit (L/C) in commercial banking, highlighting issues such as fraud, conflicts of law, and document discrepancies Despite the emergence of various international payment mechanisms, the L/C continues to be a robust and viable commercial product This article provides a comprehensive analysis of the legal framework governing L/Cs, emphasizing their resilience in the banking industry over the years Utilizing the UCP 600 (2007) and relevant legislation like the Brussels Convention (2000), along with case law and secondary data, the findings reveal that, despite innovations in payment methods, the L/C remains a crucial tool in international trade, necessitating that parties involved possess adequate knowledge and skills.
5 enough to keep abreast of dynamic changes on law and policy relating to usage and practice of L/Cs
In their 2017 study, Vladimir Anatolevich Ermakov and colleagues examined the use of documentary letters of credit (L/Cs) in foreign trade, aiming to enhance the payment methods for importers and exporters at commercial banks Utilizing empirical research methods and a global survey of international trade financing experts, they found that while commercial L/Cs remain prevalent in foreign trade transactions, their overall volume in international payments has declined due to reduced foreign trade turnover Notably, in Russia, the share of L/C payments is relatively low, accounting for only about 15% of total banking transactions, contrasting sharply with countries that have developed financial markets Despite a twofold increase in the value of L/C payments, the study highlights significant challenges, including limited access for small and medium-sized enterprises, high compliance costs with regulatory frameworks like Basel III, and increasing global risks that hinder the enhancement of L/C payment methods in foreign trade.
Huynh Thi Huong Thao (2017) investigated the influence of international banking services on the operational efficiency of Vietnamese commercial banks, focusing on enhancing services such as international payment methods, trade finance, international credit, and foreign exchange Utilizing financial data from 38 commercial banks over a seven-year period (2008-2014), she first employed the Data Envelope Analysis (DEA) model to assess operational efficiency In the second stage, she analyzed the impact of international banking services on this efficiency using regression models, including Pooled OLS, Fixed Effects Model (FEM), and Random Effects Model (REM) Her findings indicated that banks with assets below 100,000 billion VND should consider increasing their capital in foreign currency to boost operational efficiency.
Banks with assets exceeding 100,000 billion VND should manage and limit foreign currency credit to stabilize the currency market by lending to import-export enterprises with guaranteed foreign currency payments Additionally, these banks must utilize foreign currency funds to diversify international banking services and offer FOREX derivatives (such as Forward, Futures, Swap, and Option) to mitigate foreign exchange risks and manage cash flow Lastly, commercial banks should enhance their international payment services and establish partnerships with financial institutions in various countries, particularly those with bilateral trade agreements.
Chau Nguyen Hop Tran (2018) emphasized the importance of selecting the right payment method for enterprises by considering factors such as the relationship between exporters and importers, compliance with bank regulations, bank charges, and the characteristics of partners and goods Her study analyzed international payment and trade finance reports from twelve Vietnamese commercial banks with significant market shares from 2013 to 2017, supplemented by surveys and interviews with international trade specialists The findings revealed a preference among enterprises for using remittances and collections over letters of credit (L/C), which poses potential risks The article also offers recommendations for companies to mitigate these risks when choosing payment methods in international trade.
The international payment operation by means of documentary credit at commercial
A letter of credit (L/C) is a payment method where a bank, upon a customer's request, issues a commitment to pay a third party upon presentation of specific documents that meet the terms outlined in the L/C These documents typically include both commercial and financial paperwork, making letters of credit a vital and widely used tool in modern commercial transactions.
According to Article 2 of UCP 600, a letter of credit is defined as any arrangement, regardless of its name or description, that represents a definitive commitment by a bank to honor a compliant presentation.
Compared with other payment methods, the L/C has advantages in which:
For exporters: They are ensured to pay if they can present the appropriate export documents
For importers: They are guaranteed by the issuing bank that they will not have to pay as long as they have not received the appropriate import documents
The Letter of Credit (L/C) method effectively balances the interests of both exporters and importers by ensuring that importers are confident that payment will only be made once the exporter delivers the goods and presents the necessary transport documents Similarly, exporters are assured of receiving payment as long as they provide the required documentation in line with the terms outlined in the L/C This mutual assurance of payment and delivery highlights the significant advantages of using the L/C method in international trade.
A Letter of Credit (L/C) operates independently of the sales contract and the goods involved, as it is fundamentally a transaction separate from the foreign trade agreement The bank is not obligated or involved in the sales contract, even if the L/C references it While the L/C is crucially established based on foreign trade contracts, once issued, it stands alone, independent of the original agreement Once the L/C is issued and accepted by the involved parties, its terms are binding regardless of the sales contract.
8 content of L/C is true to the foreign trade contract, it does not change the rights and obligations of the parties involved
In a Letter of Credit (L/C) transaction, payment is solely based on the presentation of documents, which serve as crucial evidence of the seller's shipment of goods and their value Banks meticulously evaluate these documents to ensure compliance with specified formats before approving payment The exporter’s financial success hinges on the accurate presentation of these documents, while the bank's obligation to make payment arises only upon receipt of the complete documentation Importantly, banks do not assume responsibility for the actual goods represented by the documents, emphasizing the critical role that documentation plays in facilitating international trade.
The Letter of Credit (L/C) system mandates strict adherence to document requirements, as payment is contingent solely upon these documents To ensure payment, exporters must prepare a precise set of documents that fully align with the L/C's specified terms and conditions, including the type, quantity, and content of each document.
There are various types of letters of credit used in trade transactions:
Commercial L/C: A standard L/C, also called as a documentary credit
A letter of credit can be classified as either an export or import letter of credit, depending on the perspective of the user From the viewpoint of the exporter, it is referred to as an export letter of credit, while the importer designates it as an import letter of credit.
A transferable letter of credit (L/C) enables a beneficiary to transfer all or part of the payment to another supplier or beneficiary, often when the original beneficiary acts as an intermediary This type of L/C allows the beneficiary to present their own documentation while facilitating the transfer of funds to the actual supplier.
A revocable letter of credit (L/C) is a financial instrument that allows the issuing bank or buyer to modify its terms at any time without informing the seller or beneficiary Due to the lack of protection for the beneficiary, revocable L/Cs are not commonly utilized in transactions.
Irrevocable L/C: A letter of credit that does not allow the issuing bank to make any changes without the approval of all the parties
A Standby Letter of Credit (L/C) serves as a financial safety net for sellers, ensuring payment in the event that a buyer defaults If the seller demonstrates that the buyer has failed to make the promised payment and has met all conditions outlined in the Standby L/C, the bank will step in to pay the seller While it does not directly facilitate transactions, it acts as a guarantee of payment, akin to a bank guarantee.
A confirmed letter of credit (L/C) provides sellers or exporters with a payment guarantee from a confirming bank, also known as a second bank This arrangement is primarily established to mitigate the risk of non-payment from the primary bank, ensuring financial security in international transactions.
A revolving letter of credit (L/C) is a financial instrument that allows for a single credit to cover multiple transactions, eliminating the need for separate L/Cs for each transaction This type of L/C can be categorized into two main types: Time Based, which includes Cumulative and Non-Cumulative options, and Value Based.
A Back-To-Back Letter of Credit is a financial instrument frequently utilized in transactions involving intermediaries This arrangement consists of two letters of credit: the first is issued by the buyer's bank to the intermediary, and the second is issued by the intermediary's bank to the seller.
A Red Clause Letter of Credit (L/C) allows for partial payment to the beneficiary prior to the shipment of goods or the performance of services This advance is granted upon the seller's written confirmation and the receipt of relevant documentation.
A Sight Letter of Credit (L/C) is a financial instrument that requires payment upon the presentation of specified documents The issuing bank evaluates these documents and disburses payment to the beneficiary, provided that the documents fulfill the conditions outlined in the letter of credit.
Deferred Payment L/C: A letter of credit that ensures payment after a certain period of time The bank may review the documents early but the payment to the
10 beneficiary is made after the agreed-to time passes It is also known as usance letter of credit d Role:
The efficiency of international payment operation by means of documentary credit at
1.3.1 Definition a Definition of the efficiency of international payment operation:
The efficiency of international payment operations is crucial for enhancing financial transaction effectiveness in the global market Understanding this efficiency involves identifying the key elements that influence it, such as transaction speed, security, and cost Banks must implement strategic measures to improve operational efficiency, including adopting advanced technologies and streamlining processes Ultimately, clarifying the nature of international payments and establishing relevant standards and evaluation criteria are essential for optimizing these transactions.
15 determine the efficiency of the international payment operation, from which methods are designed to enhance the operating efficiency
When assessing the performance efficiency of commercial banks, it is essential to consider three interconnected aspects: the economy, the banks themselves, and their clients.
The efficiency of commercial banks significantly influences the economy, driven by the rapid growth of import and export transactions, rising foreign investment, and the expansion of services like tourism and cross-border cooperation These factors enhance remittances and other financial resources, ultimately improving budgets, balancing payment scales, and contributing to overall economic stability.
The efficiency of commercial banks is enhanced by fostering banking professionalism, promoting international commercialization, and expanding their market beyond Vietnam's borders By diversifying income sources, banks can generate additional revenue, particularly through foreign currency trading and foreign business activities associated with client transactions Moreover, banks can leverage inputs from enterprises during payment operations to maximize their operational effectiveness.
The efficiency of commercial banks is significantly influenced by the total turnover of import and export payments from enterprises Smooth, safe, and accurate transactions not only boost the banks' reputation but also enhance the credibility of the enterprises involved.
The efficiency of banks' international payment operations is evaluated from multiple perspectives, focusing on various objectives This research adheres to economic standards and examines the relationship between the results obtained and the inputs utilized in the process Essentially, it assesses the ability to enhance profitability or reduce input costs while improving competitiveness According to Le Thi Phuong Lien (2006), "The efficiency of international payment reflects the business outcomes of commercial banks in international payment operations, measured by the total profit from cross-border transactions minus the costs incurred for all activities."
16 b Definition of the efficiency of the international payment operation by means of documentary credit:
The efficiency of international payment operations using documentary credit reflects the performance of commercial banks in this area It is quantified by calculating the total turnover from these operations and subtracting the associated expenses.
1.3.2 Criteria assessing the efficiency of international payment operation by means of documentary credit at commercial banks a Qualitative criteria:
The efficiency of international payment operation by means of L/C in meeting customers’ needs in terms of L/C payment time and L/C’s documents checking:
Payment time refers to the duration from when a customer designates payment until all parties involved receive their full payment In the context of letters of credit (L/C), this time frame begins when the exporter submits the required documents to the issuing bank and ends when the exporter receives payment The efficiency of this process is significantly influenced by how quickly the bank reviews the L/C issuance documents A shorter document verification time can lead to savings in both time and money for customers, enhancing the convenience of international trade Thus, the effectiveness of the bank's international payment operations through letters of credit is evident.
The efficiency of international payment operation by means of L/C supports the forex trading activity:
The international payment by means of L/C requires the exchange in foreign currencies when making transactions with international partners through correspondent banks in other countries Therefore, enterprises opening L/C at
Commercial banks frequently enter into contracts to purchase foreign currencies for payments to international partners These banks not only facilitate foreign currency transactions for their customers but also assist in converting foreign currencies into local currency This value-added service benefits both parties: customers secure their business capital, while banks enhance their profitability and fulfill their customer service obligations Additionally, efficient international payment operations through documentary credit can significantly boost the bank's foreign exchange trading activities.
The efficiency of international payment operation by means of L/C supports the import – export credit activity:
The efficiency of international payment operations through Letters of Credit (L/C) significantly enhances export-import credit activities To initiate an L/C, customers must establish an escrow account using their own equity, which typically covers 80-90% of the sales contract value, while the remaining amount is financed by the bank to fulfill the contract's terms Alternatively, banks may provide a credit limit, allowing customers to borrow funds on the due date to settle the L/C amount Additionally, export enterprises often negotiate documents at commercial banks, making the efficiency of L/C payments crucial for optimizing import-export credit operations.
The growth rate of the volume of L/C method:
𝑉𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝐿/𝐶 𝑦𝑒𝑎𝑟 (𝑛 − 1)The volume of L/C method is the sum of L/C amount, which consists of the volume of import L/Cs and export L/Cs This term shows the increase or decrease
18 in the volume of L/C method over the years, reflecting the efficiency in the letter of credit method
The proportion of the volume of L/C:
The volume of international payments made through the Letter of Credit (L/C) method serves as a key indicator of its effectiveness in facilitating global transactions A higher volume signifies greater customer adoption of L/C payments, while a decline suggests that this method may not be fulfilling customer needs, prompting them to explore alternative payment options like collection or telegraphic transfers.
The structure of the volume of import and export L/C:
This article evaluates the effectiveness of international payments through Letters of Credit (L/Cs) by analyzing the volumes of both import and export L/Cs It aims to identify which type of L/C enhances the efficiency of international transactions By understanding these indicators, banks can optimize their import and export L/C payment services for improved operational performance.
The proportion of L/C’s turnover over total international payment’s turnover:
𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑜𝑓 𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡This indicator reflects the contribution of the services fees that the bank can collect from customers who use services related to L/Cs The higher the proportion
19 of L/C’s turnover is, the greater the bank’s operating income will be This shows the efficiency of the international payment by means of documentary credit
The proportion of the L/C’s profit over L/C’s turnover:
The profit-to-turnover ratio from Letters of Credit (L/C) indicates the amount of profit generated per unit of L/C turnover A higher ratio signifies greater efficiency in international payment operations utilizing L/Cs, reflecting better financial performance in these transactions.
The proportion of L/C’s expense over L/C’s turnover:
The ratio indicates the cost incurred by the bank to generate one unit of turnover through the Letter of Credit (L/C) method It serves as a measure of the bank's efficiency in balancing output and input rates A lower ratio signifies greater effectiveness in achieving desired results.
The growth rate of turnover from the Letter of Credit (L/C) method reflects the increase in service fees collected by banks, which include various charges such as L/C issuance commissions, discrepancy fees, payment charges, and others A higher growth rate in these collected fees indicates improved efficiency in international payments through L/C, ultimately boosting the overall turnover of international payment activities and enhancing the bank's business performance.
The growth rate of Profit from L/C method reflects the surplus value and the actual efficiency of the payment method:
THE CURRENT SITUATION OF THE THE EFFICIENCY OF THE
Overview about Vietcombank
The Joint Stock Commercial Bank for Foreign Trade of Vietnam, known as Vietcombank (stock code: VCB), was established on April 1, 1963, evolving from the Foreign Exchange Bureau of the State Bank of Vietnam As the first state commercial bank to undergo pilot privatization, Vietcombank commenced operations on June 2, 2008, following a successful IPO It was officially listed on the Ho Chi Minh Stock Exchange on June 30, 2009 Over its 50-plus years of development, Vietcombank has played a crucial role in stabilizing and growing the national economy, serving as a key foreign trade bank that supports domestic economic growth and significantly impacts the regional and global financial landscape.
Originally established as a specialized bank for foreign trade, Vietcombank has evolved into a leading financial institution, offering a diverse array of services in international trade Its offerings include traditional services such as capital trading, capital mobilization, credit, and project financing, as well as modern banking solutions like forex trading, derivatives, card services, and e-banking.
Vietcombank, a leading commercial bank in Vietnam with over 50 years of experience, has established itself as one of the most profitable banks in the country In 2017, it achieved a remarkable pre-tax profit of VND 18,269 billion, securing the top position in the banking sector, while its total assets reached VND 1,074 trillion The bank employs over 15,000 staff and operates more than 500 branches, transaction offices, and representative offices both domestically and internationally, including its headquarters in Hanoi, 101 branches, and over 395 transaction offices nationwide.
Vietcombank operates 25 subsidiaries in Vietnam, along with a representative office in Singapore and another in Ho Chi Minh City The bank also has two subsidiaries in other countries and four joint ventures Its extensive Autobank system features over 2,300 ATMs and more than 43,000 merchants across the nation Additionally, Vietcombank's operations are bolstered by a network of over 1,726 correspondent banks in 158 countries and territories worldwide.
Vietcombank staff demonstrate exceptional dedication and wisdom in their commitment to building a more sustainable future for the bank The institution aims to be the leading bank in Vietnam by 2020 and to rank among the top 300 global banking financial groups, adhering to the best international practices.
From 2016 to 2018, Vietcombank's total assets experienced steady growth, rising from VND 788 trillion to VND 1,074 trillion Loans to customers constituted over half of the bank's total assets, increasing from VND 452 trillion (57% of total assets) in 2016 to VND 621 trillion (58% of total assets) by 2018 This indicates a robust annual growth rate of over 15% in loans, while maintaining high asset quality, as evidenced by low provisions for credit losses.
Figure 2.1: Proportion of Loans to customers over Total Assets 2016 - 2018
26 ratio of provision over loans hovered at 2 percent throughout the researched period showing that Vietcombank is managing their credit loans well
During the researched period, Liabilities consistently represented the largest percentage of the Liabilities and Equity (L&E) structure, with figures of 93.9%, 94.9%, and 94.2% across three years This significant proportion of Liabilities is attributed to the unique characteristics of the banking sector Notably, customer deposits accounted for the highest percentage within Liabilities throughout the three years analyzed.
2016, Customer deposits was about VND 590 trillion, accounted for 80 percent of Liabilities In the last year of researched period, Customer deposits rose to VND
801 3 trillion, equal to 79 percent of Liabilities The increase of capital raised from customer reflect the position and prestige of Vietcombank in banking sector
In terms of Equity, Shareholder Equity saw an increase in the figures of VND 48,101 trillion, VND 52,577 trillion and VND 62,179 trillion respectively In
2017, the charter capital increased by VND 3.598 trillion The main objective of this capital increase is to improve the position and competitiveness, ensuring the capital requirement of Basel II
Figure 2.2: Proportion of Customer deposits over Total Liabilities 2016 - 2018
Table 2.1 ROA and ROE of Vietcombank and Mean of Sector
Between 2016 and 2018, Vietcombank demonstrated strong business performance relative to the industry, highlighted by key profit indicators such as Return on Assets (ROA) and Return on Equity (ROE) Notably, the bank's ROA consistently increased over the years, surpassing the industry average, with a significant rise in 2018, where it improved by 0.37% to reach 1.37%.
The bank's Return on Equity (ROE) demonstrated significant growth over the years, particularly in 2018, when it surged from 18.09% to 25.42% This impressive performance consistently exceeded the industry average during that period.
Vietcombank achieved significant growth in profit after tax, becoming the bank with the highest after-tax profit in the system for 2017 and 2018 This success was primarily driven by a substantial increase in Net Interest Income, which accounts for over 70% of the bank's operating income The rise in Net Interest Income can be attributed to effective cost management and a successful strategy in controlling bad debt ratios The bank benefits from low-cost capital mobilization due to economies of scale, as reflected in its financial reports, which show a consistent growth rate of approximately 21% in interest income from 2016 to 2018, while the growth rate of expenses decreased from 26.3%.
2017 (increased from 19 trillion VND to 24 trillion VND) dropped to only 12.5% in
2018 (increased from 24 trillion VND to 27 trillion VND) (Figure 2.3) Secondly,
Between 2016 and 2018, the debt ratio of groups 2-5 at the bank significantly decreased from 3.1% to 1.6%, as illustrated in Figure 2.4 This reduction in bad debt contributed to a decline in the Allowance for credit losses, ultimately boosting the bank's pre-tax profit.
Vietcombank's strategic pillars include Services, Treasury, and Retail, with Services contributing approximately 8.5% to the bank's operating income from 2016 to 2018 During this period, income from services demonstrated a robust growth rate of 20.5%.
The services of VCB are divided into 4 main areas: Settlement services, Cash services, Trusted and agency services and Other services
Interest and similar income Interest and similar expense
Figure 2.4: VCB's ratio of Group 2-5 Debt
Figure 2.5: Proportion of Net fee and Commission income in Total Operating Income of VCB 2016 - 2018
Payment services are the primary contributor to Net fee and commission income, representing over 60% of total earnings Within this sector, International payment and Trade Finance stand out as VCB's key activities, boasting a growth rate exceeding 20% from 2017 to 2018 and capturing more than 16% of Vietnam's market share.
VCB's card services stand out in the banking industry, particularly in international payments In 2018, card payment volume reached 118,315 billion VND, while card usage totaled 38,608 billion VND, reflecting impressive growth rates of 28.1% and 22.2% compared to the previous year Additionally, the number of card-accepting units surged by 11,286, achieving 188.1% of the annual target for 2018.
In summary, the services play a crucial role in VCB's revenue framework, with the bank highlighting their significance as a central pillar in its income structure within the 2019 plan.
2.1.3 The international payment by documentary credit at Vietcombank
Research methodology of the efficiency of the international payment operation by
• Research limitation: Letter of credit in international payment operation at
• Research objective: The efficiency of using letter of credit in international payment at Vietcombank
The thesis uses the combination of four scientific methods:
Methods of collecting the data:
The data is mainly collected from two reliable sources:
- Vietcombank’s website: Vietcombank’s Financial reports, Vietcombank’s Annual reports, Vietcombank’s Financial results
- Vietcombank’s internal documents: Vietcombank’s International Payment – Trade Finance reports
- Books, newspapers, reliable Internet sources, etc
Methods of analyzing and evaluating information:
From the information obtained, the thesis will provide analysis and evaluation to solve the outstanding problem
The current situation of the international payment operation by means of
2.3.1 Qualitative criteria a The efficiency of international payment by means of L/C towards customers:
Meet customer’s needs in terms of the time for documents checking:
A Letter of Credit (L/C) serves as a bank guarantee ensuring that a seller (beneficiary) receives payment from a buyer (applicant) upon presenting compliant documents When Vietcombank (VCB) acts as the advising bank, it primarily serves Vietnamese export enterprises To secure payment, beneficiaries must submit a complete set of documents to VCB for verification and forwarding to the issuing bank abroad However, customers often expect VCB to complete document checks on the same day they are submitted, typically around 3 p.m., despite the bank's closing time of 5 p.m Since a trade finance officer requires approximately one hour to review each set of documents, and given the volume of requests, customers frequently receive their results the following day or later This delay has resulted in negative feedback regarding VCB's service speed, highlighting inefficiencies in its international payment operations via L/C that fail to meet customer expectations.
Meet customer’s needs in terms of the time for the payment of L/C:
The payment process for export letters of credit (L/C) at Vietcombank (VCB) typically takes between 7 to 10 days This timeline begins when VCB receives the complete and accurate documents from the beneficiaries and concludes once the beneficiaries receive their payment The following outlines the payment process and the time required for each stage.
The typical payment duration for Letters of Credit (L/Cs) is usually under 10 days; however, delays in receiving payments can hinder the operational efficiency of export businesses, affecting their production continuity While exporters have the option to negotiate export documents with their bank for early payment, this incurs higher interest rates, highlighting a significant inefficiency in the international payment process via documentary credit Consequently, VCB's inability to meet customer payment timelines underscores the challenges faced in facilitating smooth forex trading activities.
From 2016 to 2018, Vietcombank experienced significant growth in forex trading, driven by a sharp increase in Vietnam's export-import turnover and a surge in overseas remittances In this sector, Vietcombank stands out among domestic competitors, with only established foreign banks like ANZ, HSBC, and Standard Chartered posing a challenge due to their extensive experience Despite facing challenges such as inflation instability, exchange rate risks, and heightened competition in the international payments market, Vietcombank maintains a strong position.
VCB receives and processes documents
Forwarding documents to claim payment through courier service
Importer's bank checks and processes documents with L/C
VCB receives documents and L/C, claims payment for beneficiary
Between 2016 and 2018, Vietcombank experienced a remarkable rise in forex trading volumes, reaching 44.2 billion USD in 2016, 45.1 billion USD in 2017, and 46.5 billion USD in 2018 This growth highlights the significant role of international payments via Letters of Credit (L/C), which have shifted the bank's forex trading focus from individual transactions to those of import-export businesses Import companies require foreign currency for L/C deposits, leading them to purchase foreign currency at Vietcombank branches Conversely, export companies often sell foreign currency to the bank after receiving payments from foreign partners, converting it to VND for operational needs Overall, the efficiency of L/C-based international payments at Vietcombank has been instrumental in enhancing forex trading activities and supporting import-export credit operations.
The bank's credit activities have evolved significantly, driven by its capacity to address the diverse capital needs of the economy This has established the bank as a vital source of funding for import-export operations, particularly in facilitating international payments through Letters of Credit (L/C).
The efficiency of international payment operations in export credit activities is highlighted by the negotiation of export documents through Letters of Credit (L/C) Vietcombank has seen a significant rise in the volume of export L/Cs, indicating a growing preference among customers for their advisory services This trend has led to an increase in export document negotiations, which in turn boosts the bank's collection of negotiation service fees and interest rates Consequently, this growth contributes positively to the bank's overall operating income.
For import credit activities, the efficiency of the international payment operation by L/C is shown through the issuance of L/Cs According to the
Vietcombank has observed a gradual rise in the number of letters of credit (L/Cs) opened, indicating a growing demand from customers for credit limits to facilitate L/C payments This trend has resulted in an increase in credit contracts, which bolsters import credit activities and enhances the bank's operating income through the collection of interest rates on L/Cs.
The growth rate of the volume of L/C:
Table 2.2 The growth rate of the volume of L/C from 2016-2018 at
Source: Vietcombank International payment – Trade Finance Reports
Between 2016 and 2018, the volume of Letters of Credit (L/C) in Vietnam increased significantly from 19.9 billion USD to 29.95 billion USD, reflecting a growth rate of 15.7% during the 2015-2016 period This growth coincided with the launch of Vietnam's 5-year socio-economic development plan and occurred amidst a global economic recession that led to a decline in international trade, reduced market activity, and falling commodity prices These challenges impacted Vietnam's economy and its international payment processes, particularly through L/C Additionally, this period marked the introduction of a centralized international payment model, aimed at enhancing operational efficiency.
Growth rate compared to previous year (%)
Growth rate compared to previous year (%)
Growth rate compared to previous year (%)
38 of international payment and trade finance has not improved significantly compared to 2015
In the period from 2016 to 2017, the volume of Letters of Credit (L/C) experienced a remarkable growth rate of 33.7%, doubling the previous period's rate This growth coincided with the 10th anniversary of Vietnam's membership in the World Trade Organization (WTO), highlighting significant achievements in attracting foreign investment and balancing export-import activities 2017 also marked a transformative year for Vietcombank, which focused on enhancing customer services and developing its international payment service segment The bank organized numerous training conferences and workshops on international payment and trade finance, implementing strategies to stabilize and expand its market share As a result of these initiatives, Vietcombank saw a substantial increase in the volume of international payments via L/C in 2017.
In the most recent analysis, the growth rate of letter of credit (L/C) volume fell to 12.6%, marking the lowest level recorded throughout the survey period This decline indicates that Vietcombank has struggled to deliver efficient L/C payment services.
Proportion of the volume of L/C over total international payment volume:
The chart illustrates the specific distribution of volumes among three international payment methods utilized by Vietcombank: letters of credit (L/C), collections, and remittances, commonly referred to as telegraphic transfers (T/T).
Figure 2.7 The proportion of the L/C over total international payment volume of Vietcombank from 2016 – 2018
Source: Vietcombank International payment – Trade Finance Reports
The letter of credit (L/C) method emerged as the second most significant payment method in international transactions, with Vietcombank experiencing substantial growth in L/C payments over the past three years, particularly in 2017 and 2018, where the volume reached 19.9.
40 billion USD in 2016, then it increased significantly by 33.7% to reach 26.6 billion USD in 2017 By 2018, the volume of L/C had increased by 12.6% compared to
In 2017, international payment revenues reached 29.95 billion USD, demonstrating significant growth rates of 36.9%, 38.3%, and 38.2% from 2016 to 2018 The increasing volume of Letters of Credit (L/C) highlights the popularity of this payment method, which is favored for its strict payment processes and ability to mitigate risks for trading parties.
In 2016, T/T emerged as the dominant international payment method at Vietcombank, representing nearly 55% of the total transaction volume In contrast, the collection volume reached 4.5 billion USD, making up only 8.3% of the overall volume The following years, 2017 and 2018, saw a slight increase in the proportion of T/T transactions, with contributions of 7.5% and 7.1%, respectively.
Evaluation of the efficiency of international payments operation by means of
of documentary credit at Vietcombank
Vietcombank's international payment operations through documentary credit have achieved significant success To enhance product quality, attract more clients, and improve overall operational efficiency, it is essential to recognize both the strengths and weaknesses, as well as the bank's responsibilities in managing import and export payments via letters of credit.
Through the current status of the above analysis, we can see that the efficiency of the international payment operation by L/C of Vietcombank has some notable outcomes
In the realm of international payments, the turnover from Letters of Credit (L/C) represents the largest share, accounting for approximately 65% of total transactions Over a three-year period, the fees generated from L/C operations have shown a steady increase, significantly contributing to the overall operating income of the bank Vietcombank's L/C payment services are designed to prioritize high profitability while ensuring security, legal compliance, and adherence to state budget responsibilities This underscores the effectiveness and significance of documentary credit in facilitating international payment operations at Vietcombank.
The international payment operations facilitated by Letters of Credit (L/C) play a crucial role in enhancing a bank's overall income, particularly through supporting import-export credit activities and forex trading These operations not only address the needs of international parties engaged in trade but also contribute significantly to the bank's total operating income, which is derived from various sources beyond just L/C payment commissions Additionally, Vietcombank benefits from forex trading, as import enterprises utilizing L/C often purchase foreign currencies from the bank to pay their exporters Conversely, export customers sell foreign currencies back to Vietcombank after receiving payments from foreign importers, further solidifying the bank's position in forex trading Thus, L/C transactions are instrumental in boosting both forex activities and profitability for the bank.
Vietcombank has effectively managed the costs associated with international payments through letters of credit (L/C), achieving a maximization of profits while minimizing expenses during the analyzed period.
Vietcombank has established strong correspondent relationships with nearly 2,000 banks across more than 150 countries and territories, significantly enhancing its capacity to facilitate export letters of credit (L/C) This extensive network positions Vietcombank as a preferred advising bank for beneficiaries seeking reliable L/C advisory services.
Despite the lower volume of Letters of Credit (L/C) compared to remittances, L/C transactions represented the largest share of turnover in international payment operations Analysis indicates that Vietcombank experienced a decline in the percentage of L/C volume starting in 2016.
Since 2018, Vietcombank has struggled to increase its Letter of Credit (L/C) volume in comparison to other international payment methods, particularly Telegraphic Transfer (T/T), which remains the dominant form of international payment.
Customers continue to express dissatisfaction with the centralized processing time for L/C document checks at Vietcombank, indicating that their needs are not being met The implementation of a centralized international payment and trade finance model has enhanced overall international payment operations, particularly for letters of credit, by allowing for greater specialization among bank employees This specialization reduces technical errors and mitigates potential risks However, the centralized model also leads to inactivity and challenges for branch officers in managing transaction processing times, ultimately diminishing the efficiency of international payment operations, especially in L/C transactions.
The bank has fallen short in meeting customer needs regarding the L/C payment timeline, which typically takes around 10 days This duration is considered lengthy compared to other commercial banks and can lead to delays in the supply chain and shipments for import and export businesses Consequently, customers, particularly exporters, are highly concerned about the payment timeline after submitting the necessary documents for L/C claims The efficiency of international payments via L/C is significantly impacted by the payment processing time.
The analysis reveals several shortcomings in the efficiency of international payment operations via documentary credits at Vietcombank These issues stem from both objective and subjective factors that impact the bank's letter of credit (L/C) operations.
Remittances play a crucial role in Vietcombank's international payment operations due to their cost-effectiveness and simplicity compared to traditional methods like letters of credit (L/C) The Vietnamese government's trade liberalization policies and Vietcombank's extensive network of correspondent relationships with global banks enhance the convenience of remittance payments for customers As assessed by the ICC, the ongoing trends of integration and globalization facilitate faster access to information between countries, driving import-export enterprises to prefer simple, efficient, and affordable international payment methods.
In today's global economy, Vietnamese enterprises are increasingly streamlining payment processes to enhance efficiency and reduce costs As they gain a deeper understanding of their partners, there is a noticeable shift towards using remittances for transactions instead of traditional letters of credit This trend reflects their commitment to simplifying procedures and saving time in financial dealings.
Vietcombank has struggled to adhere to Service Level Agreements (SLAs), which are essential for regulating the maximum processing time for L/C transactions, particularly in the verification of export L/C documents Upholding SLAs is crucial for maintaining customer loyalty and safeguarding the bank's reputation in international trade Furthermore, effective management of SLAs is vital for enhancing labor productivity, especially in today's competitive landscape.
51 integration and volatility trend, the processing speed and professionalism of each bank employee is the driving force of the bank that makes the difference
Vietcombank currently utilizes Key Performance Indicators (KPIs) to evaluate employee performance solely for salary determination In the context of international payment and trade finance, trade finance officers focus primarily on completing the required tasks within specified processing times, as there are no bonuses or rewards for exceeding these expectations Consequently, Vietcombank lacks policies that incentivize employees to go beyond their basic responsibilities By implementing a system that rewards overtime or additional effort, the bank could potentially reduce customer wait times for processed documents.
The Letter of Credit (L/C) payment process is complex and involves various parties, including importers, exporters, banks, insurers, and export credit agencies This process is often time-consuming and labor-intensive, as it requires thorough verification of multiple documents to mitigate risks and ensure security for sellers, buyers, and their financial institutions.
SOLUTIONS TO IMPROVE THE EFFICIENCY OF
Development orientation for the international payment operation by means of
Increasing the market share of international payment – trade finance and collecting service fees from the L/C payment operation
To enhance foreign currency income and ensure a steady supply for import and export activities, it is essential to boost the volume of import and export payments This strategy focuses on attracting high-turnover import-export customers in Vietnam, thereby generating significant revenue and facilitating their foreign debt repayments.
Diversifying types of letters of credit, actively participating in the consultancy for customers on selecting L/C types that are suitable to import and export business forms of enterprises
To enhance product utility, it is essential to leverage advancements in technology and align with global development trends This involves offering online services and improving traditional products while also researching innovative solutions that deliver significant breakthroughs to meet customer demands effectively.
To enhance export payment support, we offer a variety of short-term financing solutions for import and export clients, including credit with preferential interest rates and negotiated credit limits Additionally, we provide ongoing consultancy services to assist customers in navigating import and export processes effectively.
Expanding foreign relations in a selective way to maintain relationships with existing correspondent banks, while developing new correspondent banks in areas that occur a great deal of transactions
Providing intensive courses, seminars and workshops on the update of international trade knowledge, international law and practice, as well as improving
53 foreign language skills for international payment officers to develop trade finance professions, especially on documentary credit method.
Solutions to improve the efficiency of international payment operation by means of
3.2.1 Promoting marketing strategy a Customizing the L/C products
To enhance its market presence, Vietcombank should evaluate the effectiveness of its traditional products and develop customized or innovative L/C products that align with customer needs Introducing new products and services must prioritize simplicity and convenience while adhering to international standards By diversifying its L/C payment offerings, the bank can better satisfy the growing demands of its clients and increase its market share in international payment activities Additionally, implementing more discount policies and promotions for L/C products will further attract customers and drive sales.
Vietcombank should enhance its customer appeal by offering more discount policies and promotions for international payment services utilizing Letters of Credit (L/Cs) Additionally, the bank should focus on developing interest rate and exchange rate incentive programs for customers committed to using its international trade finance products This approach will improve the efficiency of international payment operations through documentary credit, aligning with a robust trade promotion strategy in L/C operations.
The trade promotion strategy focuses on enhancing the bank's brand, products, and services through various mass media channels, including social media, newspapers, and television Advertisements should be brief and engaging, designed to capture customer attention and inspire a desire to utilize the bank's offerings Effectively promoting the bank's image not only benefits its overall activities but also enhances international payment services, such as Letters of Credit (L/Cs).
3.2.2 Improving the technology a Sticking to the Service-level Agreements in trade finance activities
Vietcombank should ensure that the Trade Finance Center at the Head Office adheres strictly to Service-Level Agreements (SLAs) to minimize the processing time for L/C transactions, particularly for high-value transactions that significantly benefit the bank This approach will not only meet customer expectations for timely document delivery but also streamline transaction processing at branches, thereby enhancing the bank's reputation by fulfilling commitments related to L/C processing times Additionally, incorporating Blockchain technology in international payments can further innovate and improve the L/C payment process.
Organizations are increasingly recognizing trade finance as a critical sector where blockchain technology can enhance current systems A recent report from the World Economic Forum (WEF) highlights the potential of blockchains and distributed ledger technology (DLT) to securely store financial information, expedite real-time approval of financial documents, develop innovative financing structures, mitigate counterparty risk, and accelerate settlement processes.
The Letter of Credit (L/C) payment process is often complex and involves multiple parties, requiring extensive document verification to mitigate risks and ensure security for sellers, buyers, and their banks An L/C serves as a bank's guarantee that the seller will receive payment once specific conditions are fulfilled By leveraging blockchain technology, all participants in an L/C transaction can access real-time updates, such as the shipment status of goods This process utilizes a permissioned distributed ledger to capture each action in the workflow, providing transparency to authorized users while safeguarding sensitive information through encryption.
3.2.3 Strategies related to human resources a Providing bonus policy for employees who exceed the KPIs
Vietcombank should enhance its employee reward assessment to boost the efficiency of international payment operations through Letters of Credit (L/Cs) Implementing Key Performance Indicators (KPIs) across the system, along with establishing regular or random inspection teams, will help evaluate employee capabilities and make necessary reward adjustments Additionally, creating incentive policies for outstanding employees who demonstrate responsibility and commitment to the development of L/C services is essential for cultivating a skilled workforce and fostering a positive work environment Furthermore, improving the recruitment process for new hires in international payment and trade finance is crucial for sustaining growth and efficiency.
To enhance the qualifications of its officials and employees in international payments via letters of credit, Vietcombank should refine its recruitment process Currently, the bank employs a centralized recruitment strategy that requires all candidates to take a general writing test, which assesses their overall knowledge but fails to address the specific needs of different positions Given the specialized nature of international payment, which demands advanced knowledge, foreign language proficiency, and an understanding of relevant regulations, it is essential for the Trade Finance division and Human Resources department to collaborate in developing tailored criteria and assessments This targeted approach will enable Vietcombank to attract qualified candidates who are well-suited for roles in international payment and trade finance.
56 c Fostering trainings for trade finance officers
Vietcombank should prioritize employee training by implementing comprehensive programs focused on both technical and customer service skills Regular short-term training sessions and exchange programs on international payment operations, particularly concerning documentary credits, are essential for enhancing employees' knowledge and fostering experience sharing The bank must invest in intensive training related to international payments, including letters of credit, maritime transportation, and insurance Additionally, sending trade finance officers to domestic and international training courses hosted by foreign banks, as well as participating in CDCS certification competitions for document checking and processing, will help them adapt to the evolving industry landscape.
3.2.4 Solutions for Vietcombank’s Head Office a Improving the procedures of import and export payment by L/Cs
Vietcombank must enhance its import and export payment procedures using Letters of Credit (L/Cs) to meet customer expectations for timely service This improvement involves streamlining processes by fostering collaboration among relevant departments and divisions across branches and trade finance centers, while eliminating unnecessary steps and overly complicated forms Additionally, a stronger focus on competitor analysis is essential for maintaining a competitive edge in the market.
Analyzing competitors in the international payment services sector, particularly those offering Letters of Credit (L/Cs), is crucial for effective policy implementation Vietcombank must prioritize timely and proactive competitor analysis, rather than relying on passive information collection Regular monitoring of both domestic and international competitors will help identify newly established banks and financial institutions, enabling Vietcombank to make informed assessments and strategic decisions.
Vietcombank's analysis of its business policies and financial positions, along with an assessment of its advantages and disadvantages, is crucial for enhancing its product offerings This ongoing evaluation enables the bank to implement targeted strategies to attract more customers and develop effective operational plans for growth.
Proposals for improvement of international payment operation by means of
of documentary credit at Vietcombank
3.3.1 Towards the State Bank of Vietnam
To enhance the legal framework for international payments through documentary credit, it is essential to refine the banking legal system, aligning it with the State Bank of Vietnam’s Law and the Law on Credit Institutions, in accordance with socio-economic development policies and international trade standards A thorough review of documents related to international payment operations using letters of credit (L/Cs) is necessary to ensure they meet Vietnam's international commitments The State Bank of Vietnam must clearly implement legal frameworks governing international payments via letters of credit.
To optimize foreign exchange management, the State Bank of Vietnam should continue to implement a flexible exchange rate regime, gradually reducing administrative intervention and enhancing its management capacity The SBV should also expand its coverage in overseeing foreign exchange transactions and reform exchange rate management mechanisms By allowing short-term exchange rates to fluctuate based on market prices and utilizing macro-financial measures to stabilize long-term rates, the SBV can foster trust among enterprises and commercial banks engaged in foreign trade.
The interbank foreign exchange market facilitates the exchange of foreign currencies among banks, playing a crucial role in managing their foreign currency relations Consequently, enhancing and developing this market is a key focus for the State Bank of Vietnam.
58 most important conditions for commercial banks to expand foreign currency trading operations as well as the basis for the formation of a complete exchange market in Vietnam
The State Bank must enhance foreign currency reserves to align with the growth of national import and export turnover, while also establishing a reserve structure that reflects a diversified basket of strong foreign currencies.
Improving foreign trade and international payment qualifications
To enhance foreign trade skills, Vietnam's import-export businesses must invest in employee training, ensuring that staff are well-versed in UCP600 terms and international practices Additionally, proficiency in preparing documents and meticulously reviewing the contents of Letters of Credit (L/Cs) is essential for successful operations in global trade.
Every business should establish a legal advisory division to prevent potential disagreements and disputes, particularly regarding payments It is essential for enterprises to thoroughly review procedures and payment terms before finalizing contracts A well-defined sales contract with clear and precise terms and conditions facilitates smoother payment processes, especially when utilizing letters of credit.
Choosing the appropriate foreign partners
Businesses can identify trustworthy partners through various reliable sources, despite the potential for contract violations by foreign partners with ill intentions To mitigate risks, companies can request banks to assess partners via overseas correspondent banking systems Additionally, the Vietnam Chamber of Commerce and Industry (VCCI) and the Credit Information Center (CIC) of the State Bank of Vietnam offer valuable information to help businesses find dependable partners.
When doing business with foreign import and export enterprises, it is not advisable to seek for immediate/short-term profit, which affects the reputation of
59 not only the enterprise itself but also all of the Vietnamese import – export enterprises, resulting in the damages to the country’s long-term benefits
This thesis, titled “Improving the Efficiency of International Payments through Documentary Credit at Vietcombank,” utilizes a qualitative research approach to analyze the effectiveness of the bank's international payment operations It serves as a valuable reference for administrators seeking to enhance the efficiency of international transactions using letters of credit, providing insights that can guide strategic improvements in the bank's operational practices.
The thesis addresses key issues regarding the growth rate and volume of Letters of Credit (L/C) from 2016 to 2018, highlighting customer satisfaction during the document checking and payment processes Vietcombank has effectively managed L/C operational expenses while maximizing profits from international payment activities, enhancing the bank's overall operating income Additionally, the use of documentary credit at Vietcombank demonstrates its efficiency in supporting foreign exchange trading and import-export financing activities.
To conclude, the graduation thesis has:
Firstly, assessed the efficiency of the international payment operation by means of documentary credit through qualitative criteria of customer’s satisfaction, its supportive role in other activities of Vietcombank
Secondly, assessed the efficiency of the international payment operation by means of documentary credit in terms of the growth rate and the proportion of some quantitative criteria
This thesis presents solutions and proposals aimed at enhancing the international payment operations through documentary credit at Vietcombank, grounded in theoretical research and practical insights into the realities of international payments.
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