Improving the performance of international payment at the Vietnam Joint Stock Commercial Bank for Industry and Trade

Causes reducing performance of IP transactions in Vietinbank...47 CHAPTER 3: SOLUTIONS TO ENHANCE THE PERFORMANCE OF INTERNATIONAL PAYMENT IN VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDU

I would like to thank several people for their help throughout graduate schooland the completion of this thesis.

First of all, I am sincerely grateful for all the help and advice I received from

my supervisor M.S Le Duc Hoang I appreciated all the time and effort M.S Le DucHoang put into helping, guiding and encouraging me during the time of making thisthesis

I would also like to thank the lecturers and tutors in National EconomicsUniversity generally and Advanced Program particularly who have conveyedvaluable knowledge to me during the last school years

Most of all, I sincerely thank all of the staffs in Vietnam Joint StockCommercial Bank for Industry and Trade (Vietinbank) who gave me favorableconditions, helps and guidance in the days of internship at the bank

Lastly, I would especially like to thank all my friends in Advanced Class forall their encouragement and intellectual support that has made this report possible

StudentNguyen Thu Hong

Abbreviation Completed script

SWIFT Society for Worldwide Inter-bank Financial

TelecommunicationVietinBank Vietnam Joint Stock Commercial Bank for Industry and

Trade

TABLE OF CONTENTS

ABBREVIATION

LIST OF TABLES

LIST OF DIAGRAMS

EXECUTIVE SUMMARY

INTRODUCTION

CHAPTER 1: GENERAL DISCUSSION ON PERFORMANCE OF

INTERNATIONAL PAYMENT IN COMMERCIAL BANKS 1

1.1 Overview of the International payment activities in the CBs 1

1.1.1 The concept of international payment 1

1.1.2 The role of international payment 2

1.2 International payment methods 3

1.2.1 Remittance 4

1.2.2 Collection 6

1.2.3 Documentary credit 9

1.3 Performance of international payment of CBs 12

1.3.1 The concept of IP performance of CBs 12

1.3.2 Basic criteria evaluating IP performance in CBs 13

1.3.3 Factors affecting IP performance in CBs 16

CHAPTER 2: CURRENT SITUATION OF INTERNATIONAL

PAYMENT PERFORMANCE IN VIETNAM JOINT STOCK

2.1 Overview of Vietnam Joint Stock Commercial Bank for Industry

and Trade 21

2.1.1 Formation and development 21

2.1.2 Organizational model 23

2.1.3 Business activities of VietinBank (2006 – 2009) 24

2.2 Current situation of international payment performance in VIETINBANK 33

2.2.1 Export and import payment 33

2.2.2 Export Payment 36

2.2.3 Import payment 38

2.3 Evaluate the international payment performance in VIETINBANK 39 2.3.1 Quantitative valuation 39

2.3.2 Qualitative valuation 42

2.3.3 Limitations in IP transactions in Vietinbank 46

2.3.4 Causes reducing performance of IP transactions in Vietinbank 47

CHAPTER 3: SOLUTIONS TO ENHANCE THE PERFORMANCE OF INTERNATIONAL PAYMENT IN VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE (VIETINBANK) 53

3.1 Oriented development of the international payment transactions in VIETINBANK 53

3.1.1 Oriented business development 53

3.1.2 Oriented international payment development 54

3.2 Solutions to improve the performance of international payment transactions in VietinBank 55

3.2.3 Having a flexible currency exchange trading policy associated with IP

and credit services 57

3.2.4 Well performing management 57

3.2.5 Expanding agency relationship 58

3.2.6 Supporting the Import-Export enterprises in IP transactions 59

3.2.7 Modernizing IP business 60

3.2.8 Diversifying products and services and reduce operational costs of IP .60

3.2.9 Perfecting IP networks 62

3.3 Some recommendations to improve efficiency in international payment in VietinBank 63

3.3.1 For Government 63

3.3.2 For State Bank 65

3.3.3 For Vietnamese import and export Enterprises 67

CONCLUSION 69 REFERENCES

Table 2.1: Situation of Payment and Remittance Services in VietinBank

(2006-2009) 30Table 2.2: IP revenue and total revenue in VietinBank 40Table 2.3: IP volume in VietinBank and market share (2006-2009) 41

Diagram 1.1: Remittance payment process 5

Diagram 1.2: Clean collection process 7

Diagram 1.3: Documentary collection process 8

Diagram 2.1: Organization model of VietinBank 22

Diagram 2.2: Executive apparatus of Head Office 23

Diagram 2.3: Executive apparatus of Transaction Centers, Branches 23

Diagram 2.4: Fund mobilization in VietinBank (2006-2009) 24

Diagram 2.5: Structure of funds mobilized by kinds of depositors in VietinBank (2006-2009 26

Diagram 2.6: Loans to the economy in VietinBank (2006-2009) 27

Diagram 2.7 Investments in VietinBank (2006-2009) 28

Diagram 2.8: ATM Card and International credit card Issuance in VietinBank (2006-2009) 31

Diagram 2.9: Overseas Remittance in VietinBank (2006-2009) 32

Diagram 2.10: Correlation between Export and Import Payment activities in VietinBank (2006-2009) 33

Diagram 2.11: Total Import-Export Turnover of Vietnam (2006-2009) 34

Diagram 2.12: Export Payment activities in VietinBank (2006-2009) 35

Diagram 2.13: Import Payment activities in VietinBank (2006-2009) 37

Diagram 2.14: Foreign exchange fund mobilization in VietinBank 43

Diagram 2.15: Situation of foreign exchange trading in VietinBank 44

Diagram 2.16: Agency relationship with foreign banks of VietinBank 45

In the current global economy integration, an International Payment hasbecome an indispensable of every commercial bank In the modern banks, revenuesfrom the IP activities make up more than 5% of total revenues However, inVietinBank, IP revenues only make up a low proportion, namely below 2% of thetotal revenues of the bank These low IP revenues are not commensurate with thereputation, scale and ability of VietinBank

This thesis offers appropriate solutions to improve the IP performance inVietinbank The time period for this research is from 2006 to 2009 After discussingthe basic IP issues in CBs and evaluating the real situation of IP in Vietinbank, thethesis brings out solutions to overcome the limitations and to strengthen theeffectiveness of IP business Particularly, it is recommended that the quality ofMarketing and IP service needs improving Besides, the capacity and qualifications

of IP staffs need enhancing, the inspection and control over IP activities needstrengthening Finally, some recommendations are offered for the Government,State Bank of Vietnam, and Vietnamese import-export enterprises to improve IPperformance in commercial banks generally and Vietinbank particularly

After officially joining the World Trade Organization WTO (from November

7th, 2006), Vietnam's economy has increasingly integrated into the world economy.That has created an equal playing field and brought about many opportunities, butalso held potential risks and great challenges to Vietnam economy In order toovercome the difficulties and challenges, the Vietnamese commercial banks haveactively improved their competitive advantages through measures such as: businessexpansion; management capacity enhancement; financial strength and businessefficiency improvement; modernization and technological innovation Amongthem, International Payment is an important link in the process of developinginternational trade and also poses an urgent problem to be solved

As one of the strongest Government commercial bank in Vietnam's bankingsystem, Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank)has wide business network, diversified and high quality banking products, moderncomputer and communication systems, and advanced banking informationprocessing technology Besides, Vietinbank has gained prestige from its customers

nationally and internationally, and is a member of the Society for Worldwide

Interbank Financial Telecommunication (SWIFT) International payment activities

implemented since 1990 in VietinBank has achieved certain results and met theneeds of customers for the operations relating to the payment of import and export

in a rapid, accurate, safe and effective manner

However, international payment in VietinBank still remains many limitationssuch as an imbalance between payment of import and export, complicated paymentprocedures, limited operational scale Therefore, the research on internationalpayment activities in order to find the basic solutions for VietinBank‘s development

in the future should be considered in terms of both theory and practice So the topic

"

Improving the performance of international payment at the Vietnam Joint Stock Commercial Bank for Industry and Trade" was chosen as the research thesis.

What is international payment?

What are the issues of international payment performance in Vietinbank?

What are solutions and recommendations for improving internationalpayment performance in Vietinbank?

3 Research objectives

- To further clarify the basic theories of economic efficiency of Internationalpayment field, especially during the periods of globalization and internationalintegration

- To assess the reality of international payment performance in Vietinbank and thefactors affecting international payment activities during the international integrationand economic development of Vietnam

- Provides some basic solutions and recommendations to promote internationalpayment activities in Vietinbank

4 Research methodology

Accessing the issues in theory and practice, this subject uses the concepts ofInternational payment, and then combines with statistics, analysis, synthesis, andcomparison methods in Vietinbank in order to clarify matters

5 Research scope

- Object of research: The performance of international payment activities in

Vietinbank

- Scope of research: The real situation and performance improvements of

international payment activities in Vietinbank in recent years

In which the body include three chapters:

Chapter 1: Overview of international payment performance in commercial banks.

This chapter systematically analyzes and synthesizes the basic internationalpayment issues such as: IP concept, IP role, IP methods, IP international norms, andthen IP performance concept, criteria to evaluate IP performance This is animportant basis for the analysis and evaluation and solutions to improve IPefficiency in Vietinbank

Chapter 2: The real situation of international payment performance in Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank).

This chapter analyzes and evaluates the real situation of internationalpayment in Vietinbank It evaluates IP performance through some criteria andclarifies the achievements, limitations and causes in IP activities of Vietinbank

Chapter 3: Solutions to enhance the performance of international payment in Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank).

This chapter offers solutions for Vietinbank and recommendations for theGovernment, State Bank of Vietnam, Vietinbank and Vietnamese import-exportenterprises to improve IP performance in Vietinbank

CHAPTER 1: OVERVIEW OF INTERNATIONAL PAYMENT

PERFORMANCE IN COMMERCIAL BANKS

1.1 International payment activities in the CBs

1.1.1 The concept of international payment

Any country who wants to develop its economy must base not only ondomestic production, but also on trade and economic relations with other countries.Economic relations among different countries are the overall relationship ofexternal economics between countries Along with the process of integration, theexternal economic relations between nations has increasingly broadened, whichleads to a demand for payment between entities of these nations Thenceforth, the IPactivities have been formed and developed; and banks are intermediate bridgebetween the parties

Thus, international payment (IP) is the implementation of the obligations to pay and the rights to receive monetary benefit arising on the basis of economic and non-economic activities between the organizations and individuals of this nation and ones of the other nation, or between a nation and international organizations, through the relationship between the banks of the nations concerned.

Under an economic point, IP consists of two areas: trade payment and trade payment

non-Trade payment is to make a payment for import and export goods andservices supplied for foreigners in the international market price The basis for theparties to conduct a purchase and make a payment to each other is foreign tradecontract, which clearly defines roles and responsibilities of each party, paymentmethod, payment currency, trading conditions The concerned parties will bebound together by the signed contracts or commercial commitments

Non-trade payment is to make a payment for the non-commercial activitieswhich are not related to import and export goods as well as services supplied forforeigners Non-trade payment is the payment for the costs of the diplomatic agency

abroad; the travel and accommodation expenses of overseas delegations,organizations and individuals; the gifts and grants from foreign individuals todomestic individuals; the grants from foreign charity organizations to domesticorganizations and unions.

The common means of payment: Draft, money orders, checks, debit cards

1.1.2 The role of international payment

1.1.2.1 For the economy

In the context of the increasingly internationalized world economy, IPemerged as a bridge between the domestic economies with international economy

IP helps promote the activities such as: import-export goods and services, foreigninvestment, foreign exchange and international finance IP activities areincreasingly appreciated in national economy in general and in foreign trading inparticular Especially in the current context, every country gives top priority toforeign economic activity and considers it as an inevitable path of economicdevelopment strategies

International payment is very important in the process of purchasing goodsand services between organizations, individuals of different nations If IP does notexist, the foreign economic activities are difficult to exist and develop If IPactivities are conducted quickly, safely and accurately, the circulation of goods -money between buyers and sellers will be processed smoothly and efficiently

1.1.2.2 For the Commercial Banks

International payment activities have an important role in the business of acommercial bank High quality of IP activities is increasingly attracting customers,creating efficiency in business as well as increasing the business scope Besides, IPcreate good conditions for banks to improve and diversify business services such as:foreign exchange trading, underwriting business, consulting services therebyimproving the bank's reputation and confidence to customers, and increasingcompetitiveness power

In the process of implementing IP, clients who are incapable of capital willrequire the financial support from the bank The bank will provide funds tocustomers in an active and positive way Thereby, international credit, import &export finance and fund mobilization are promoted because of taking advantage oftemporary deposits of customers participating in IP.

IP activities also help banks raise their prestige in the international arena,thence exploit the funding from foreign banks and capital on international financialmarkets

Thanks to IP, banks can raise the efficiency of business operations Through

IP activities, banks collected fees: underwriting fees, transfer fees, payment fees,announcement charges that contribute to the revenue and profit of the banks

1.1.2.3 For the enterprises with import and export business

For the import-export enterprises, IP is the last step of the foreign tradecontracts It closes a complex and risky process of buying and selling goods andservices Therefore, the requirements set forth for IP is to ensure the safety ofimport & export contracts including the full and right receipt of goods as stated onthe contracts, profit-making business

The implementation of IP with foreign customers creates opportunities forVietnamese enterprises to capture the information in the domestic market as well as

in the foreign market Basing on market information and their economic potentials,the enterprises can devise appropriate business strategies and solutions to preventrisks and improve business efficiency

1.2 International payment methods

Payment methods are indispensable parts that create foreign trade contracts

in international trade Payment methods represent the way by which the buyermakes payment to the seller In international trade, either buyer or seller can choose

different payment methods that suit their business and relationship This is one ofthe factors contributing to limit risks in IP.

At present, there are 3 main payment methods including: Remittance,Collection and Letter of Credit

1.2.1 Remittance

1.2.1.1 Concept:

Remittance is a payment method, in which the client (the remitter) requireshis bank to transfer a certain amount of money to another person (the beneficiary) at

a given address in a given time

Remittance is simple because people who pay money and who receivemoney make payments directly to each other Banks who transfer money only act aspayment authorized intermediary for commission and they are not bound by anyliabilities to remitters or beneficiaries Time of payment in remittance method may

be before, or after the delivery date

There are two forms of remittance: Mail transfer and Telegraphic transfer

Mail Transfer - M/T is the remittance form in which the remittance orders of

the Remitting bank are transferred to the Paying bank by mail

Telegraphic transfer - T/T is the remittance form in which the remittance

orders of the Remitting bank are transferred to the Paying bank by Telex, Swift orE-bank

Telegraphic transfer - T/T is quick so it benefits exporters, but its cost ishigh; while Mail Transfer - M/T is slow but has low cost

The related parties in remittance include: Remitter, Beneficiary, Remittingbank, Paying bank

1.2.1.2 Process

Diagram 1.1: Remittance payment process

Notes:

(1) Commercial Transactions (The exporter and importer sign the contract)

(2) Make a remittance order (by M/T or T/T) sending to Remitting bank

(3) Transfer money overseas to agency bank (Paying bank)

(4) Paying bank paid to the Beneficiary

1.2.1.3 Advantages and Disadvantages

a Advantages

- For importers, the ability to get goods is high in spite of the fact that exporters donot want to ship goods for some certain reasons Because of paying in advance, theimporters should negotiate with exporters to be discounted

- For exporters, because the payment is received in advance, the exporters avoid therisk of default from the importers The exporters can save costs of creditmanagement and control The exporter's currency situation is strengthened

purchased inputs, so exporters may incur administrative costs, inventory costs, andinsurance premiums Or if the goods have been sent, the exporters must wait for thegoods’ return and find other customers.

- The sellers must deliver goods after receiving confirmation of their banks formoney transfer payment which has been credited to the account of the sellers Whenthe sellers have received full payment, the sellers are obliged to ensure the goodsequivalent to buyer's orders, and the sellers are also responsible for shipment andinsurance for the goods

1.2.2 Collection

Collection is a payment method, under which the seller (exporter) afterdelivering goods or providing services entrusts their bank to present the documentsthrough the agency bank for the buyer (importer) to be paid The seller can acceptthe draft or other conditions and terms

Based on the characteristics of documents requested, collection methodincludes two types: Clean collection and Documentary collection

1.2.2.1 Clean collection

a Concept

Clean collection is the method of payment, under which collectiondocuments include financial documents only; commercial documents are directlysent to the importers, not through the banks

b Process

Diagram 1.2: Clean collection process

(2) The principal (the exporter) sends the goods and documents directly to the

drawee (the importer)

(3) The exporter sends the request for collection and financial documents forRemitting bank to collect money from the importer

(4) Remitting bank sends the collection order and financial documents to Collectingbank to collect money from the importer

(5) Collecting bank announces collection order and requires the import forimmediate payment or acceptance

(6) The importer pays immediately, or accepts payment

(7) Collecting bank sends money or bills of exchange to Remitting bank

(8) Remitting bank sends money or bills of exchange to the exporter

c Advantages and Disadvantages

- Advantages: Importer guarantees his interests because they only pay for goods in hand.

- Disadvantages: The interests of the exporter cannot be guaranteed because they

have lost control of goods and payment On the other hand, the goods receipt andpayment are not bound to each other The importer can receive goods without

paying for it, or delay in payment The banks only act as intermediaries Theysimply collect money to receive charges They do not take any responsibilities if theimporter fails to pay So the export should only use this method in cases theexporter completely trusts the importer, the value of goods is small, goods is hard toconsume

1.2.2.2 Documentary collection

a Concept

Documentary collection is the method of payment, under which collectiondocuments include commercial documents and financial documents or commercialdocuments only Collecting bank will grant collection documents to the importerafter he makes a payment or performs other obligations specified in the Collectionorder

The related parties include: The export (Drawer), the bank transferringdocuments (Remitting bank), the bank collecting money (Collecting bank), and theimporter (Drawee)

(2) The exporter sends the goods directly to the importer.

(3) The exporter sends collection request and documents to the Remitting bank

(4) The Remitting bank sends collection order and documents to the Collecting bank

(5) The Collecting bank notices collection order and present documents to theimporter

(6) The importer accepts collection order

(7) The Collecting bank gives the importer commercial documents

(8) The Collecting bank sends money, accepted bills of exchange, promissory note

or debenture to the Remitting bank

(9) The Remitting bank sends money, accepted bills of exchange, promissory note

or debenture to the exporter

c Advantages and Disadvantages

- Advantage: The exporter consigns his bank to not only collect money but also

control the documents to require the importer to pay or accept payment Thereforethis method ensures more ability to collect money than remittance or cleancollection method There has been a closely tie between the payment and the goodsreceipt of the importer

- Disadvantages: Whether the importer receives goods and makes payment or not is

still depends on the goodwill of the importer, so the interests of the exporter are notguaranteed Moreover, in the case of late documents, the importer cannot get goods

in time, causing big loss especially agricultural products

1.2.3 Documentary credit

1.2.3.1 Concept

Documentary credit ensures the equality for all involved parties and ensuresthe rights and obligations for both exporter and importer in the process ofimplementing the contract as well as paying for goods Therefore, the documentarycredit method is increasingly dominated and proved its effectiveness, suitability andsecurity in the payment process

In Article 2, UCP 600 (The Uniform Custom and Practice for Documentary

Credits, ICC Publication No 500, issued in 2006), Documentary Credit is defined

as follows:

Documentary credit, no matter how it is named or described, is an agreement demonstrating a firm and irrevocable commitment of the Issuing bank for the payment after presented accordingly.

Letter of credit (L/C) is an important tool of documentary credit paymentmethod Based on common properties, letter of credit is classified into many types.The basic types include Revocable L/C, Irrevocable L/C and Confirmed IrrevocableL/C; the special types include Back to back L/C, Revolving L/C, Standby L/C Related parties in the documentary credit method are very diverse, including: TheApplicant, the Beneficiary, the Issuing bank, the Advising bank, the Reimbursingbank, the Confirming bank, the Negotiating bank, the Presenting bank…

1.2.3.2 Process

Diagram 1.4: Documentary credit payment process

Notes:

(1) The importer bases on commercial contract to send request to the Issuing bank

to open letter of credit

(2) The Issuing bank bases on the L/C open request fully meeting the requirements

to issue L/C

(3) The Advising bank notices and delivers L/C to the beneficiary

(4) The export delivers goods to if he accepts the contents of the L/C

(5) Upon completion of delivery, the exporter makes the payment documentsaccording to L/C, sends these documents to the Advising bank for payment

(6) After examination of documents, the Advising bank will make the payment forthe exporter (pay immediately, or accept, or negotiate)

(7) The Advising bank transfer documents to the Issuing bank and demands money.(8) The Issuing bank checks the documents If they fully meet the conditionsspecified in the L/C, the Issuing bank will pay

(9) The Issuing bank notifies the current status of the documents to the importer,asks the importer to make the payment

(10) The importer checks documents and pays (or accepts) if they are appropriate.The Issuing bank will not give the documents for the importer in case they do notmake the payment

1.2.3.3 Advantages and disadvantages:

a Advantages

- For the importer: L/C payment method can help the buyer expand the supply of

goods without wasting time and effort in finding reputable and reliable partners.Because most of the documents are inspected by the banks and the banks will takefull responsibility for the mistakes The buyer is assured their interests because theybuyer only make the payment after the seller delivers goods In addition, account toopen L/C also creates interests to the importer

- For the exporter: Seller is fully guaranteed payment with valid documents The

payment does not depend on the importer After delivery, the seller shall make the

documents consistent with the terms of the L/C and will be paid no matter if thebuyer cannot afford the payment Thus, the exporter will quickly recover capital.

- For the bank: Carrying out the payment, the banks collect fees At the same time,

banks also perform some other operations such as export loans, guarantees,certification, and foreign currency trading Moreover, through this operation, theprestige of the banks in international financial markets is consolidated andexpanded

Each payment method has its own advantages and disadvantages, expressed

in the conflict of interest between buyer and seller The disadvantages can cause IPrisks

1.3 Performance of international payment of CBs

1.3.1 The concept of IP performance of CBs

In the market economy, requirements for IP operation of CBs are efficiencyand risk minimum An effective IP system is the foundation for the development ofthe banking payment sector High IP performance of CBs is a necessaryrequirement to attract participants IP efficiency is reflected in the payment time,reliability and transaction costs

- Payment time is the time since the payment order is presented until thebeneficiaries receive the full payment in the account Length of payment timeaffects production, trading and efficiency in using capital

- Transaction costs consider the costs paid and the benefits received by thepayer Transaction costs include costs of the transaction time and transactionprocedures The banks need to be interested in reducing transaction costs orincreasing service quality.

- Risk minimum in IP: In IP, the risks include legal risks, operational risks,safety risks, economic risks

When studying the performance of IP in CBs, there are many diverse viewsaccording to different research purposes However, in this thesis, the IPperformance is studied basing on economic efficiency evaluation criteria IPperformance represents the optimal relationship between the results obtained andthe costs to obtain such results It is the ability to transform inputs into outputs orreduce costs to increase revenues, profitability and competitiveness Commercialbank is a business unit, so the purpose of banking operations is to maximize profitswith an allowed risk level

From the above analysis, we can generally understand that the IPperformance of CBs reflects the bank's results in IP business

1.3.2 Basic criteria evaluating IP performance in CBs

IP performance is expressed through a system of criteria, each criterionreflects a certain extent in the banking business and they have a certain economicsignificance

revenue from lending for IP A constant and steady increase of IP revenue is thefundamental objectives of all banks To maximize IP revenue, the bank needs tofind way to increase productivity by applying new technologies and improving IPstaffs’ skills Besides increasing IP revenue, the bank also needs to cut down IPoperating costs to maximize IP profits.

- IP revenue / Total revenue

This indicator reflects the proportion between the revenue from IP activityand the total revenues from other business activities of the banks Basing on the rate

of IP revenue/Total revenue of a commercial bank, we can see the importance of the

IP business in that bank

b Market share valuation

Market share of a business is the market which is dominated by thatbusiness’s products Market share represents the quantity of a business’s productsconsumed compared to total product consumed in the market To grab market sharefrom the competitors, the business needs to have a suitable price policy throughprice discounts needed especially when starting to penetrate new markets

With the above concept, we found that the bank is a special type of businesswith special products which are currency and services on currency IP business isone of the types of services provide by banks or in other words, it is the product of

the bank Thus,”The market share of IP business in a commercial bank is a

proportion in which IP services of that bank dominate the market.”

IP market share of a commercial bank will show the fact that in an export turnover of a nation, how much the rate of IP volume of that bank is

import-1.3.2.2 Qualitative valuation

a Relationship between IP activities and the growth of funds

mobilized in foreign currency

For this valuation, we should refer to the relationship between IP volume andthe balance of foreign currency deposits in banks When conducting the IP business,all banks must take foreign exchange income from abroad or foreign currencyexpenditure for payment to abroad through NOSTRO account - an account of theirforeign currency deposits abroad The more IP business improves, the moretransaction volume through NOSTRO accounts grows In particular, large exportpayment volume will result in high foreign exchange earnings in NOSTRO accountand large balances of foreign currency deposits at foreign banks These are thevaluable effect of IP on banking business

b Relationship between IP activities and foreign exchange trading

Foreign exchange trading operations is generally executed through thesebusinesses: foreign exchange trading, foreign exchange conversions, foreigncurrency deposits trading in nation or abroad In the process of conducting the IPbusiness, banks sell foreign currency to customers wishing to pay for imports andbuy foreign currency from customers receiving payment for exports The growth ofexport and import payment services through banks will create favorable conditionsfor foreign currency trading activities to raise the volume So, thanks to IP, bankscan develop its foreign exchange trading operation and raise efficiency in thebanking business

d Relationship between IP activities and the development of agency banks network

To make the foreign business operations in the areas of payment, guarantee

in a fast, safe and convenient way, the domestic banks must have the agency banks

in foreign countries Through these businesses, the banks will create the relationshipwith other domestic banks and foreign banks And this relationship must be based

on cooperation and mutual benefits With the long time of doing business, theserelationships are expanded and the bank's reputation in the international arena israised

1.3.3 Factors affecting IP performance in CBs

International payment performance is a goal that any commercial bank aims

at Therefore, improving the IP operational efficiency of CBs is strengthening thefinancial capacity, competitiveness and management capacity This will earnoperating profits, generate the accumulation, expand the business activities andimprove the reputation of banks in the domestic and foreign market However, toimprove IP operational efficiency, CBs are required to determine what factors affecttheir performance from which to find solutions to limit the risk during operation.The factors affecting the IP performance of CBs can be divided into two groups:Objective factors and Subjective factors

1.3.3.1 Objective factors

a Economic, political, and social environment

Commercial bank is a financial intermediary - a bridge between the domesticeconomies and global economy Therefore, any changes in domestic and foreigneconomy, politics, and society will affect the performance of the bank In the stableeconomic, political and social environment, the bank has good conditions todevelop their activities, make high profits and contribute to economic growth Andvice versa, in the instable economic, political and social environment, the bank willhardly work well and promote their role

Economic, political, and social environment here has related tomacroeconomic management policies of the State and the stability in politics andsociety Each change in regulating macro-economic policy of the State will directly

or indirectly affect the business environment of banks, enterprises and investors Astable political environment will create a high level of investment safety This willmake domestic and foreign investors feel secure to use their capital in the business.Opportunity to expand IP activities entails an increase in the payment through bank,thereby promoting IP activities of the CBs All the political risks such as war, economy

embargo have affects on international trade, and the payment for goods in IP.

b Legal environment

In the current trend of economic integration, the legal environmental issuesfor the banking business in general and the IP business in particular have a veryimportant role They strongly impact to banking performance in general and IPperformance of CBs in particular The role of the legal environment for IP activities

is shown in that: it creates a legal basis to reduce risks and resolve disputes in IP; itenables CBs to implement IP activities The legal environment relates internationallaws and practices, their limitations and loopholes as well as the conflict betweennational law and international legislations, practices Any business operationbeyond national borders must be governed by national laws and the laws of hostcountries - where production and business activities are conducted IP activity ofCBs is also an economic activity It is not only governed by the domestic andinternational laws but also abided by the international rules and standards

One of the most important factors affecting the IP performance of CBs is theimport and export enterprises They include the import-export enterprises’ level ofknowledge about IP, business qualifications, foreign language skills, anunderstanding about customs and laws of host countries, international law, theability to obtain information about market demand and price If import-exportenterprises have good knowledge of international trade, they will contribute tohigher IP efficiency and vice versa

1.3.3.2 Subjective factors

Subjective factors are the internal factors of each commercial bank such asfinancial capacity, executive capacity, risk management capability, technologicallevel, qualifications of staff, reputation and banking network, and the success ofmarketing activities

a Financial capacity

Financial capacity is often expressed through the potentials of the bank's

capital If bank has large capital, it will have opportunities to expand its operations,

to equip the most modern machines and technology for the payment process, and toattract high quality human resources

b Executive capacity

Executive capacity of CBs is reflected by business thoughts to reduceoperating costs and use available resources to achieve optimal results Executivecapacity is also expressed through the development of management regulations,operating procedures consistent with international standards and in accordance witheach stage of development (such as risk management, credit management, capitalmanagement, internal audit checking processes )

c Risk management capability

IP activities of CBs always contain potential risks caused by many reasons.They may be objective reasons (the macroeconomic policies of the State, the lack ofknowledge about international trade or the deliberately deceptive behavior ofcustomers), or subjective reasons from banks (the lack of synchronization in IPmechanisms, policies, business processes, the bad ethics or the lack ofunderstanding about IP of banking officials ) Its consequences will worsen thefinancial situation and affect the brand as well as reputation of banks Thus, goodrisk management will ensure that IP activities of CBs will be safer and moreeffective Improving risk management in banks is a very important task for all CBs

d Payment technology

Before the continuous development of scientific and technical progress andthe fierce competition among banks, application of the new achievements of scienceand technology in banking business operations is one of the success determinants.The modern banking technology will help banks collect information quickly andaccurately and help banks make decisions promptly and properly Banking

technology creates competitiveness of banks shown on the following aspects: costsavings, payment and cash flow speed up, centralized management and effective use

of capital for business

e Qualified human resources

Qualification, competence and quality of staffs are important factorsdetermining the quantity and quality of products and services and the success of thebanking operation Because banking staffs directly implement the businessstrategies of CBs With their knowledge and expertise, banking staffs can createvalue-added services, or reduce or even damage the value of the services Most ofthe ideas to improve services are offered by banking staffs Banking staffs mainlyconvey the information from the market, customers and competitors to bankingpolicy makers Therefore, qualified banking staff will reduce risks in IP operationsand well perform advisory role to assist clients in taking IP activities through banks.And a bank who wants to develop and expand operations, it must have highlyqualified staffs to manage and operate Moreover, the investment in newtechnologies in the CBs will become wasteful and inefficient if banks do not havehighly qualified staffs to manage and exploit new technologies This is especiallymore true in the knowledge economy which influences current managementthinking, economic thinking and method of production

f Credibility and agency network of CBs

Any bank that wants to provide its customers with its products and services

is required to have an agency network in places where that bank does not havebranches Agency relationship between banks is service relations In thisrelationship, both sides can give each other needed services or merely one bank isanother’s agent in handling a transaction Besides, a good reputation of the bank inthe market will be the first criterion for customers to purchase products and services

of the bank The bank's reputation is reflected in these aspects: solvency, business

processing techniques, time of payment, payment methods, diversity of productsand services.

g Banking Marketing activities

The increasingly fierce competition in the banking area has forced banks topay more attention to the marketing in their operations Banking Marketingactivities which have the functions of researching market and developing newproducts will be the bridge between banks and market Basic tasks of Marketing are

to attract customers and create conditions to stimulate customers to use the productsand services of banks

CHAPTER 2: CURRENT SITUATION OF INTERNATIONAL PAYMENT PERFORMANCE IN VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE (VIETINBANK)

2.1. Overview of Vietnam Joint Stock Commercial Bank for

Industry and Trade

2.1.1. Formation and development

Established in 1988 after being separated from State Bank of Vietnam,

Vietnam Joint Stock Commercial Bank for Industry and Trade - VietinBank

(former known as Incombank) is one of the four largest state-owned commercialbanks in Vietnam with total assets account for over 20% of the market share of thewhole Vietnamese banking system VietinBank’s capital resources keep onincreasing over the years and have been substantially rising since 1996 with theannual average growth of 20 percent, especially up 35 percent a year against that oflast year

Since April 15th 2008, the new brand - “VietinBank” has officially replaced theold brand - "Incombank", which had been used for 20 years The new brand -

“VietinBank” brings about a new look of youth, consistence and robustness and it

directs towards a goal of "Reliability, Efficiency, Modernization, and Growth" with the brand-positioning statement, "Raising the value of life" The new brand -

VietinBank also marks an inevitable step in the process of:

- Renovation and international economic integration to become one of thelargest commercial bank in Asia

- Development into a Financial Group with multi-sector businesses andsustainable growth

- Contribution to the industrialization - modernization and internationaleconomic integration of Vietnam

VietinBank has developed an operations network comprising of 01 TransactionCenters, 149 branches, 527 transaction offices, 166 savings offices, 02Representative offices, 04 Subsidiaries, 03 administrative units and 1042 AutomaticTelling Machines (ATMs) It also has established correspondent relationship withmore than 850 banks, financial institutions of 100 countries and territories all overthe world.

VietinBank is the owner of 04 independent accounting subsidiaries: VietinBankLeasing Company, VietinBank Securities Company, Ltd., VietinBank AssetManagement Company, VietinBank Insurance Company and 03 non-profit makingunits: VietinBank Information Technology Center, VietinBank Card Center andVietinBank Training Center

VietinBank’s financial products and services: Account Services, Guarantee,Overseas Remittance Services, Import-Export Payment and Derivative Products

Other collaborations of VietinBank include:

Being the founder of Being the official member of

Saigon Bank for Commerce Vietnam’s Banker Association

Indovina Bank (1st joint-venture bank in

Vietnam)

Asian Banker’s Association

Vietnam International Leasing Company –

VILC

Society for Worldwide Inter-bankFinancial Telecommunication (SWIFT) VietinBank-Asia Insurance Company VISA international services Association

Vietnam Chamber of Commerce andIndustry (VCCI)

2.1.2. Organizational model

Diagram 2.1: Organization model of VietinBank

Diagram 2.4: Fund mobilization in VietinBank (2006-2009)

Unit: VND billion

(Sources: Annual Report of VietinBank)

In 2007, the total mobilized fund was VND 151,459 billion, increased byVND 24,835 billion as compared to 2006, with the increasing rate of 19.6%,accounting for 10.5% market share in banking sector In 2008, despite a severecompetition among commercial banks on attracting deposits from customers,VietinBank still remained good growth of funds Mobilized funds in 2008 wereVND 174,905 billion, 15.6% up on 2007 In 2009, total funds mobilized reached thehighest level in the period 2006-2009, the total mobilized fund was VND 221,700billion, rising up 26.8% (equivalent to VND 46,795 billion) as compared with 2008

To give a more specific view, the chart below will show the structure offunds mobilized by kinds of depositors

Diagram 2.5: Structure of funds mobilized by kinds of depositors in VietinBank

(2006-2009)

Unit: VND billion

(Sources: Annual Report of VietinBank)

In 2006, Deposits from individuals made up the highest proportion in Totalfunds mobilized (41.68%) However, in 2007, Deposits from economic institutionsreached VND 55,083 billion, accounting for 36.4% of total mobilized funds.Deposits from businesses and enterprises increased due to the fact that state-ownedenterprises gained a comparatively large surplus fund from equitization, which werenot yet invested in business but deposited temporarily in banks Especially in 2009,because of the strong development of the economic organizations, Deposits fromeconomic institutions made a rapid leap into VND 120,856 billion, rising up158.01% over 2008 and hold the highest proportion in Total funds mobilized(54.51%)

From what has been analyzed above, a conclusion can be drawn thatVietinBank funds mobilization activities in recent years gained achievements with ahigh level of growth To achieve this result, VietinBank has developed andimplemented a range of solutions such as: expanding transaction network,implementing flexible interest rate policy, diversifying funds mobilization products,making an issue of valuable papers with a total estimated amount of VND 10,000

billion These are effective solutions to increase the funds mobilized at reasonablecosts.

2.1.3.2 Loans and investments

2.1.3.2.1 Loans

In recent years, VietinBank’s annual growth of credit is from 17% to 18%and is lower than an average level of the whole industry because the target of thebank in recent years is the safe credit policy and credit risk management However,the total outstanding loans are still at an increasing rate over the years

Diagram 2.6: Loans to the economy in VietinBank (2006-2009)

Unit: VND billion

Total outstanding loans 80,152 102,191 120,752 162,300

(Sources: Annual Report of VietinBank)

We can see the growth of lending activity in the period of 2006-2009 inVietinBank Total outstanding loans in 2007 were VND 102,191 billion; growing

up 27.5% as compared with 2006, and occupied 10.5% credit market share in

banking industry In 2008, despite the impact of the global economic crisis,VietinBank’s loans still increased 18.2% up on 2007

In 2009, total outstanding loans were VND 162,300 billion, rising up 35.2%,equivalent to VND 41,548 billion, as compared with 2008 This rapid increase wascontributed by the expansion of network and the execution of macroeconomicpolicies to encourage the borrowings from customers Particularly, in the early

2009, the government has launched some economic stimulus packages, in which thepackages having the biggest impacts are 4% interest rate support package and taxexemption and reducing policies for enterprises

In 2009, VietinBank supplied more funds to strategic customers andimportant economic sectors such as: Electricity, Post and Telecommunications,Minerals, aquatic products processing and export, Transportation, and Infrastructureconstruction Typically great projects in 2009 are Son La Hydropower Plant,Dung Quat Oil Refinery, Ca Mau Fertilizer Plant, Cong Thanh Cement Plant, LamDong Aluminum Bauxite project, Cai Mep and Hon La Seaport

2.1.3.2.2 Investments

Business investment activities are always updated, supplemented andadjusted in conformity with the model of a modern commercial bank Businessinvestment activities mainly include investments in interbank market, investments

in securities, and investments in Capital Contribution Activities

Diagram 2.7: Investments in VietinBank (2006-2009)

Unit: VND billion

2006 2007 2008 2009 Total investments

(Sources: Annual Report of VietinBank)

In 2006, investments grew both in size and quality compared with 2005,contributing significantly to overall business results of VietinBank Investmentportfolio in money market and capital market reached VND 44,936 billion,accounting for 33.2% of total assets

In 2007, the investment portfolio had a total balance of 51,669 billion, 15%

up on 2006 and accounting for 31.1% of total assets Short-term investments ininterbank money market reached 12,841 billion, accounting for 24.85% of totalinvestment Especially, investments in securities market increased 2.2 times against

2006 (from VND 17,394 billion to VND 38,144 billion)

In 2008, investments in the interbank market were VND 18,274 billion,increasing by 42.3% compared to 2007, of which term deposits and loans to othercredit institutions totaled VND 12,235 billion, demand deposits and loans to othercredit institutions were VND 6,039 billion

Not strongly growing as the previous year, total investments in securities