LV Thạc sỹ_The letter of credit service in VCB

Among many options, I target Bank of Foreign Trade of Vietnam Vietcombank, one of four largestbanks, which is also specialized in import and export activities, thus has the mostdeveloped

NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM

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BACHELOR’S THESIS IN FINANCETHE LETTER OF CREDIT SERVICE, IN VIETCOMBANK, HAI DUONG BRANCH

Table of Contents

Chapter 1: Literature Review 2

Chapter 2: Research Methodology 9

2.1 Qualitative method: 9

2.2 Quantitative method: 10

2.3 Observation method: 11

Chapter 3: Theoretical Background 15

3.1 Definition: 15

3.2 Legal background: 22

3.3 Vietcombank’s standardized procedures: 25

Chapter 4: Perfor4mance of L/C in Vietcombank – Hai Duong branch 30

4.1 Underwriting performance 30

4.2 Accounting results 36

4.3 Evaluation 44

Chapter 5: Conclusion 48

Chapter 1: Literature Review

International trades and payment for goods sold in international salestransactions have been observed for long, due to the problematic nature of suchtransactions The economic entities which have their business in differentcountries, are therefore subject to different national legal systems Furthermore,the seller will often transport goods across large distances and across nationalborders Under such circumstances, the seller has a great interest in ensuring that

it will receive payment for goods sold once the goods leave its possession andcontrol, and the buyer has a corresponding interest to ensure that the seller hasdispatched conforming goods before making payment in terms of the saleagreement

When goods travel across national borders, they are moved outside thejurisdiction in which the seller resides; thus, any attempts to regain control orpossession of the goods will be significantly more difficult for the seller Similarly,

if the seller does not receive payment once the goods are delivered, it is all themore difficult to pursue the buyer for payment The seller will deliver goods to aforeign jurisdiction where he has little influence, and possibly very littleknowledge of the applicable law Foreign law may govern many aspects of thetransaction including procedures to obtain payment, and the seller may berequired to obtain any court order necessary to enforce such payment, through aforeign forum, where it does not have easy access to the wheels of justice Thismay prove to be inconvenient and expensive Similarly, if the buyer makespayment for the goods prior to receiving delivery, and if the seller fails to makedelivery or delivers nonconforming goods, then the buyer is left facing a similarprospect of pursuing the seller in a foreign jurisdiction

Since Vietnam became a member of World Trade Organization (WTO), theexchange activities between us and other countries have increased dramatically.This kind of trading has brought domestic markets various benefits, thus isstrongly encouraged by government and many economic participants However,

the greater level of import and export transactions are conducted, the moredemand on capital flows must be facilitated in term of many currencies forsettling payments Since Vietnamese Dong (VND) is quite illiquid and rarelyaccepted outside of Vietnam, our international trade calls for a huge amount ofstrong currencies to buy foreign goods and services This puts a great burden ondomestic financial and monetary systems, and demands for considerable fiscalinnovative in an attempt to help Vietnamese companies initialize payments and

be on equal footing with foreign trading partners

Regarding this topic of international payments, the government and manyfinancial institutes face with great dilemma of supporting the flow of strongforeign currencies and maintaining the strength of Vietnam Dong relative to suchcurrencies The harmonic environment must be achieved through resolving manyconflicts between different controversial issues, such as promoting economicgrowth and controlling inflation, encouraging factors of production import andreducing trading deficit, and facilitating international capital flows and ensurethe strength of domestic currency or exchange rate With all such complexobjectivities, the most common and favorable tool for financing internationaltrades is the Letter of Credit or L/C The fact and application have proved thatthis payment channel processes many advantages and effectiveness over otherchoices, to secure payment in an international trade transaction, in a way that takescare of the interests of both the seller and the buyer

For long period of time, Letter of Credit has been originated and viewed asmost reliable channel for import and export activities For many developedcountries, the L/C is not only a payment tool, but also an investment security Theissuing volumes of L/C in primary markets are extremely large, and secondarymarkets which are structured to circulate it are also active with various servicesassociated Data and indicators from these markets become important to presentthe economy as much as CPI or stock indexes Its role of encouraging the capitalflow at global trading scale is critical; and the L/C system is regulated by many

international authorities and regulating systems.

In Vietnam, the L/C service has just been established for about ten years;and the young age makes it just stay in primary market Moreover, there is onlyone type of financial institutes which are allowed to issue and accept the L/C;which are commercial banks The value of this letter is only meaningful to entitieswhich have titles on it; and secondary usage is prohibited This makesresearchers, whenever want to explore this market sector, must go straight to thebank and examine the current situation of L/C business in Vietnam

During my last year of undergraduate period, the university asks studentsfor certain time of having an internship, to gain practical knowledge in workingenvironment For which, I decide to apply for a commercial bank, the mostimportant entity in the financial system, which produces the majority of services

in Vietnam, and also responsible for the L/C underwriting Among many options,

I target Bank of Foreign Trade of Vietnam (Vietcombank), one of four largestbanks, which is also specialized in import and export activities, thus has the mostdeveloped L/C service

After two months staying with the Vietcombank, I have chance tounderstand much more about international payment methods, and observe howL/C is actually provided in a real situation Once gathering reasonable materialsabout this topic, I decide to write a comprehensive paper about “L/C service inVietcomebank”, to present a general information, analyze the operating results,and suggest some solutions or enhancements

Regarding this L/C topic, there are many dedicating research papers whichhave been conducted to explore various aspects of international payment tool I,

as a follower, have reviewed many reference materials, in an attempt to gatherreasonable, academic information for my study Mostly, I look up from threesources: the Vietcombank’s information storage, the university’s library, and theinternet base From such, there are some significant writings which I enjoy great

knowledge derivation from; they are:

 From the Vietcombank’s information storage:

Tr n H ng Vân (2008), “UCP 600, Nh ng thay đ i c n bi t và ng d ngầ ồ ữ ổ ầ ế ứ ụtrong quy trình thanh toán Th Tín D ng”.ư ụ

This paper was written by a Vietcombank headquarter staff in InternationalPayment Department; and served for purpose of listing significant changes ofUCP 600 in comparison with other previous version, and explaining how theadministrative procedure for Letter of Credit should be adjusted in accordance.Since the Uniform Customs and Practice for Documentary Credits (UCP) is theprimary set of rules on the issuance and use of L/C; it utilizes by Vietcombankand many other commercial banks as the ultimate, comprehensive standard Thewriter, from the standing point of an underwriter with much experience in L/Cservice, had justified this new UCP version and demonstrated in certain caseshow its adjustments would affect the L/C process She stressed that the new rules

in general calling for consolidation among commercial banks, thus suggestedreasonable modifications for Vietcombank in detail However, since Vietcombank

is under much control of State Bank of Vietnam and other authorized units; herrecommendation also took into account many government’s policies during 2008period Most of solutions in this paper have been approved and put into practicefor the bank’s internal procedure; and from that turning point, there has not beenother significant changes

Thus, in order to study the current L/C service of Vietcombank, I have taken

a deep review and audacious reading from this research paper

 From the university’s library:

Đ ng Vặ ương Anh Et Al (2010), “L a ch n c ch t giá h i đoái trong b iự ọ ơ ế ỷ ố ố

c nh ph c h i kinh t c a Vi t Nam, tr ng tâm 2010” ả ụ ồ ế ủ ệ ọ

This research explained the foreign exchange mechanism of Vietnam, givenconsiderable government’s control in order to direct domestic economy towardrecovery after financial crisis of 2008-2009 It started with a firm theoreticalbackground of exchange rate regimes, which have been experienced andrecognized through the history of multinational trading Each regime wasdemonstrated in detail regarding mechanism, development, and effects on anation which applies it For any country, how the government wants to define thedomestic currency relative to others influences internal markets and diplomaticrelationships at macro level This will stream the value of exchange rate acrosspayment tools, including Letter of Credit In addition, this thesis had also drawnout a picture of the exchange rate system in Vietnam during 2008-2010 periodswhich witnessed many great fluctuations and difficulties At that time, the US’sfinancial crisis had spread out, confronted many other countries, and brought insuch destructive effects; thus, to defense Vietnam economy, the government mustintervene with various restrictions Their total effects on exchange rate andpayment systems were illustrated and justified in sophisticated manner

This research provides me the comprehensive insight about internationalpayment system in Vietnam, and helps me to fully understand correspondingactions of Vietcombank for L/C service

 From the internet base:

Ficom S.A v Socialized Cadex, Credit Research Foundation (1980),

“Understanding and using Letters of Credit”

This reference source is a very basic and common writing, which specializes

in terminologies and general structure of Letter of Credit Firstly, the paperexplained many standardized terms which had been internationally accepted,such as: beneficiary, issuing and confirming bank, revocability and negotiability.The paper was among first comprehensive studies about definitions in a Letter ofCredit; thus helped banks in various countries to have a unifying source to look

up Since Vietcombank has just had a short history of providing L/C service, manyunclear issues should be reviewed and check from a reliable work Moreover, theuse of Letter of Credit as a protective tool for international trade was alsoexamined carefully in this research How a L/C can reduce risk, facilitate tradeand accomplish payment purpose through substituting the credit strength of abank for that of economic entities was clarified in a professional manner.Therefore, it had pointed out the mechanism of L/C and the rationale of itspopularity in US, Great British, and many other developed countries.

The paper worked as a starting point, very basic, but reliable ground for me

to explore L/C service and find out modifications for Vietnam market and morespecifically for Vietcombank

From this three main reference sources, I have also associate some otherinformation pools, to derive reasonable support for my study However, there aremany differences in presentations which have been observed from aboveresearches:

Firstly, I concentrate on practical doings in Vietcombank rather thantheoretical knowledge and requirements which are easily noticed andunderstood by externalities The daily work will be demonstrated in detail, andhow accepted standards put influence on my work will be presented with bothpositive and negative sides

Secondly, my time internal is from 2009 to 2011 given uniquemacroeconomic circumstance and governmental direction We all know that thisbank must act strictly in accordance with SBV’s policies; thus, the procedurechanges from time to time in order to comply with external influences Therefore,

my results are different from previous studies, given the same subject

Finally, my scope is not about the whole Vietcombank system in Vietnam,but only the Hai Duong branch where I have the internship For each operationarea, the unit must match regional demand with its foreign currency resources;

thus my work in this branch and the final study are subject to environmentalissues which only happen in Hai Duong.

Keeping these distinctive attributes in mind, I move to the next part of mystudy

Chapter 2: Research Methodology

To derive with this final writing, I have gone through a long process whichrecruited many researching methods:

 Qualitative method:

 Quantitative method:

 Observation method:

These three research methods can be demonstrated in more detail as:

2.1 Qualitative method:

A method of inquiry which employs academic theories and professionaldisciplines, aims to gain an in-depth understanding about the studying object.Most of time, the qualitative method produces information background and well-developed assertions in certain cases It also asks for logical evaluation, rationalconsideration to come up with analytical insight about the subject which will beexamined or problem which will be encountered Specifically, the qualitativeanalysis will search for theoretical background of L/C, relating internationalstandards for this payment channel across countries, and any Vietnameserequirements that Vietcombank must adhere

In my study, I start with understanding about legal and theoreticalknowledge in general; then observe the written policies of Vietcombank whichgovern daily work for issuing a L/C I must be familiar with many Vietnamese andinternational standards regarding commercial trading and payment methods.Some general agreed systems that are widely applied are:

 Uniform Commercial Code (UCC)

 Uniform Customs and Practice for Documentary Credits (UCP)

 International Commercial Law

In addition, I must follow the bank’s procedure which is subject to dailychanges Vietcombank is among the largest commercial bank, thus its system iscarefully designed and tailored in an attempt to meet customers’ needs It alsohas great degree of freedom in packaging financial services; and to some extents,can influence the foreign exchange policies of SBV Therefore, its policies andorientation for each period of time are unique, with many different attributes

from what are provided in small banks I must observe such policies withjudgment and care, so that can have reasonable evaluation.

These two information sources help me to know what exactly I perform tocustomers, and ensure that my doings are in compliance with standardizedsystems

2.2 Quantitative method:

This analysis technique focuses on the empirical investigation throughstatistical, mathematical or computational means It starts with collectingnumerical information, processing data to derive meaningful outcomes, andtransforming indicators into verbal explanation The process of measurement iscentral to quantitative method because it provides the fundamental connectionbetween empirical observation and mathematical expression of quantitativerelationships Any relevant data in form of absolute numbers, percentage, ratios,etc will be explored using this process

For the L/C service of Vietcombank, I concentrate on operational resultswhich are contain in some common types of data, for example, sale, face amount,fee, or number of transactions

After complying with all written requirements and performing the L/Cservice, I must review the aggregate operating results for every month Thenumbers are run by the electronic system already, and our jobs are to explainsuch data, compare and match the computers records with the documentalevidences If we can perform daily transactions with prudence and care, the twoforms of data should be matched perfectly In addition, the electronic system alsoproduces some indicators for internal usages, which represent L/C performance

in various aspects Therefore, I must comprehend all information and be able toreview and evaluate the conducted performance

2.3 Observation method:

The observation process which allows me to study the target in nativeenvironment, in order to understand it from my perspective Observationrequires me to spend considerable time in the field with the possibility ofadopting various roles in order to gain a more comprehensive understanding.Gaining access to the studying object and experience about practical settings aretwo important factors that need consideration Using this method, I have spentmonths in Vietcombank, worked a L/C underwriter and gather practicalunderstanding about it; this is also the stress of my study

As I enter the Vietcombank, I can see that there are two separate parts inits organizational structure The first provides many financial services as a bank’sduties; and the second works as the back-up unit, dealing with administrativeprocedures just like any other company The International Payment Departmentbelongs to the first part which directly works with customers when they need toconduct transactions in term of foreign currencies From my opinion, the tasksperformed in this department can be categorized into two groups: the billpayments and the money transference Previously, both of jobs used to bemanaged by on International Payment Department However, as the number ofindividual transferences increase, and the amount of each is small, about severalthousands USD or equivalent; most of this business is done by the CustomerService Department The International Department is specialized andconcentrates in institutional users with the face amount of each transaction can

be up to some hundreds million USD The L/C service is also a method ofpayment which is solely used by firms and corporations

Keeping the fact that most of my customers will be companies, I mustunderstand all the procedures and requirements which are set up systematically,and are mutually agrees between Vietcombank and such companies Manydocumental formats are designed for each firm; their representatives are alsoknown in personal by the department’s staffs This requires me to understand the

history and relationship between Vietcombank and each institutional customerbefore I want to conduct any service for it There are certain types of transactionsthat are frequently requested by this company; and there are also some typesthat are restricted.

For newly established company which comes to Vietcombank for the firsttime, there is a long process must be conducted It starts with a detail evaluation

by Credit Department, to justify the nature of the firm’s business When its creditworthiness is acceptable for foreign currency usage, my department will create

an account denominated in specific currency other than Vietnam Dong Most oftime, the company will choose a major foreign currency depending on it tradingpartners This currency will be transacted with large amounts, thus our bank canprepare with reasonable storage in advance For other currencies, it will taketime and more costly for firm to process

The International Payment Department and it customers are also subject

to a great governing and supervision from State Bank of Vietnam, andVietcombank headquarter We must follow the macro foreign exchange policies ofSBV with fairly fluctuating inter-bank exchange rates; the headquarter alsoadjusts exchange rates on daily basis and many other qualitative change forVietcombank system All make the work in International Payment Department isboth standardized and flexible; and I must gather above knowledge in order tounderstand and be able to analyze the L/C service

After a week of pursuing knowledge in written requirements and aboutgeneral working mechanism, I have chance to work on real package of L/Ccontact I expect that this period with help me to fully understand about thisproduct line Firstly, I find out that, Vietcombank divides L/C into two differenttypes; they are L/C for import and L/C for export Each is designed withdistinguish structure and procedure These categories are differentiated basing

on their nature of capital flow

The import L/C is provided for firm with import activities, which are tobuy good and service from external manufacturers, and to pay the commercialbill in term of foreign currency This service is provided for our institutionalcustomers, which have already been known and able to justify their financialstrength Once accepting to issue the import L/C, we guarantee that our domesticbuyers can fulfill the contract obligations in term of paying money with fullamount, right currency, and on time If they are not possible, we must pay sellers

in advance and accept to lend importers whole or partial value of bills Thus,import L/C is more complicate, associates with credit strength of our partners,and also affects bank foreign currency reserves Some transactions with largebill’s face value, denominated in uncommon currency, and the credibility of thebuyer is not met; we must refuse to issue the L/C

The export L/C, in contrast, is served for export activities Thus, thecustomers that our bank represents are sellers, and we just have to wait formoney being delivered to their account For this type of L/C, the monetaryresources can not be harmed, and we also do not have to perform any financialservice; this is only about the administrative works We will receive the importL/C from the bank of foreign buyers, and have duty to justify its rightness Wealso need to understand to content of relating documents, such as commercialcontact, bill of trading, bill of lading, for management purpose When thepayment is in due, we contact the importers’ banks, remind them about theirduty, and make sure that the money arrives on time If the payment is notsatisfied, and our customers need immediate cash, we will transfer this exportL/C to Credit Department so that they can evaluate and underwrite suitablelending for our domestic sellers

From both of the import and export L/C, we receive unwaivable in advance,compensate for administrative costs; if any lending or borrowing is derived, therewill be interest cost on such

I only have chance to confront these knowledge in Vietcombank office, butnot in any international trading book that I have learned so far For only oneobject as L/C, the points of view are different from a real providing bank to atheoretical writer Thus, to have a complete perspective about the L/C productline, I must associate theoretical background with the working practical inVietcombank,.

Using these three researching methods, I can develop a concrete procedurewhich smoothly goes through many stages and helps me to come up with finalreport They have proved their effectiveness and suitability with my targetingtopic The whole described process makes me complete with a formal writing andrepresent it to concerning readers in the following section

Chapter 3: Theoretical Background

3.1 Definition:

3.1.1 Letter of Credit:

(L/C) is a document that a financial institution or similar party issues to aseller of goods or services which provides that the issuer will pay the seller forgoods or services the seller delivers to a third-party buyer, The issuer then seeksreimbursement from the buyer or from the buyer's bank The document servesessentially as a guarantee to the seller that it will be paid by the issuer of theletter of credit regardless of whether the buyer ultimately fails to pay In this way,the risk that the buyer will fail to pay is transferred from the seller to the letter ofcredit's issuer

Letters of credit are used primarily in international trade for largetransactions between a supplier in one country and a customer in another Insuch cases, the International Chamber of Commerce Uniform Customs andPractice for Documentary Credits applies (UCP 600) They are also used in theland development process to ensure that approved public facilities (streets,sidewalks, storm water ponds, etc.) will be built The parties to a letter of credit

are the supplier, usually called the beneficiary, 'the issuing bank,' of whom the

buyer is a client, and sometimes an advising bank, of whom the beneficiary is aclient Almost all letters of credit are irrevocable, i.e., cannot be amended orcanceled without the consent of the beneficiary, issuing bank, and confirmingbank, if any In executing a transaction, letters of credit incorporate functionscommon to giros and Traveler's cheques

3.1.2 The Mechanics of Letters of Credit

The system of documentary credits that is in use in current internationaltrade has largely alleviated these problems relating to payment The partiesestablish a letter of credit, which enables the seller to obtain payment from abank within his jurisdiction The buyer establishes the letter of credit in such amanner, that payment is promised on presentation of certain documents, thecontents of which confirm that the goods being delivered to the buyer are goodsthat conform to the terms and conditions of the underlying sales agreement Theseller need only comply with the documentary conditions as specified in thecredit, and is thereafter assured of payment

The commercial practice of documentary credits entails that the buyermakes an application to a bank to issue an undertaking to make payment to theseller, once the bank receives certain documentation on behalf of the buyer fromthe seller, indicating that the seller has dispatched conforming goods Thisundertaking, if issued, is known as a letter of credit or a documentary credit Thebuyer, as applicant, will inform the bank of the documentary requirements that

he wishes to have inserted into the letter of credit These requirements are

essentially designed to ensure that the seller submits documentation that recordshis compliance with its obligations in terms of the underlying sales agreement

The buyer will normally request the seller to submit clean shippingdocuments proving that the goods have been delivered to a carrier for carriage,and the sellers commercial invoice listing the goods, the quantities, and the price

of the goods The buyer may also request the seller to submit insurancedocumentation, certificates to prove quantity or quality, packing lists, and anyother documentation required to show that the seller has complied with theterms of the underlying sales agreement The seller will then submit all thestipulated documents to the issuing bank or to the bank nominated to receivedocuments and to make payment If the submitted documents comply strictlywith the terms of the credit, then the paying bank is obliged to make payment interms of the credit, to the seller

Figure 3.1: the mechanism of Letter of Credit

The whole process, thus, surrounds two economic parties operating indifferent countries, which wish to exchange physical goods or products Whenthey agree on commercial trading, they sign a contract and other commercial

documents However, the value of contract is usually large, and thus, the moneypayment cannot be settled immediately The buyer, in order to pay the bill, mustapply for credit service from a bank This bank will issue the Letter of Credit todefer and guarantee future payment It also works with parallel entity-the seller’sbank to facilitate and promote payment afterward The process can be depicted inthe above figure.

3.1.3 The Principle of Strict Compliance, and the Independence Principle

It is trite that every letter of credit involves at least three separate andindependent transactions, between three different parties Two distinct doctrinesuphold the sanctity of the letter of credit, secure the payment transaction, andthus promote the efficiency of international trade The doctrine of strictcompliance is not the focus of this dissertation, but it is a vital component of thestructure of credits It gives rise to the doctrine of independence and therefore tothe fraud exception, which in essence allows a piercing of the doctrine ofindependence It therefore merits brief discussion for the purposes of a widerdiscussion of the fraud exception

 Strict Compliance:

The doctrine of strict compliance protects the interests of the buyer and ofthe paying bank When submitting the required documents, the law expects theseller to comply strictly with the requirements stated in the letter of credit Thisassures the buyer that the bank will not pay the seller, unless the seller presentsdocuments that satisfy the requirements of the buyer The bank is protected inthat it is not required to make any judgement calls as to the relevance of therequirements contained in the letter of credit The bank is not called upon tomake any decisions as to substantial compliance by the seller

The banker is not concerned whether the documents for which the buyerhas stipulated serve any useful commercial purpose or as to why the customer

called for the tender of a document of a particular description Both the issuingbanker and his correspondent bank has to make quick decisions as to whether adocument which has been tendered by the seller complies with the requirements

of a credit

In terms of the doctrine, the beneficiary's performance has to complyprecisely with the terms and conditions as contained in the letter of credit Thebank is not required to make any judgment as to the adequacy of theperformance of the beneficiary, nor as to the importance of any particular term ofthe letter of credit If performance were not made in strict accordance with theletter of credit, the bank would then be contractually obliged to the applicant, torefuse payment on the credit

American law also upholds and applies the doctrine of strict compliance,and need not be specifically referred to, due to the fact the approach of theAmerican courts is identical to that of the English Courts as referred to above

 Independence

The corollary to this doctrine is that the seller will always receive paymentfrom the bank if he submits documents that strictly comply with the credit,regardless of any developments in the underlying sales agreement, or in therelationship between the seller and the buyer The seller will be paid regardless

of any disputes that may arise in respect of the underlying sale

The independence principle safeguards the position of the seller, andthereby promotes the efficiency of international trade It holds that therelationship between the seller and the issuing bank in respect of the letter ofcredit is completely independent from any ancillary agreements between theseller, the buyer, and the issuing bank

In reality, there are at least three separate agreements in such transactions.These are the contract of sale between the seller and the buyer and the contract

between the buyer and the issuing bank pertaining to the issue of the letter ofcredit to the seller There is also the contract between the issuing bank and theseller regarding the issuing bank's undertaking to make payment of a certain sum

of money to the seller, as soon as the seller has complied with certaindocumentary conditions It is this latter agreement that is independent of theother two International commercial law strongly recognises and confirms theindependence of the agreement between the issuing bank and the beneficiary asevidenced in the letter of credit, from all the other underlying and ancillaryagreements

The principle underlying documentary credits is that the person takingbills on the faith of it is to have the absolute benefit of the undertakings in theletter, and to have it in order to obtain the acceptance of his bills, withoutreference to any collateral or cross claims The whole rationale of the letter ofcredit in international trade is that it is used to provide the beneficiary with asecure and swiftly-operating instrument to provide payment, to the exclusion ofany disputes that may arise with respect to the underlying contract of sale.Essentially, the buyer must first pay the seller, and can thereafter refer anydisputes in relation to the underlying agreement for litigation

It is well recognised that the system of documentary credits which hasbeen established over centuries, provides security for both buyer and seller Itforms the basis upon which banking institutions extend credit facilities to thevarious parties in such transactions Ignoring these principles would seriouslyjeopardize and undermine the confidence of international traders, because thesecurity of the payment obligations of the bank would be eroded

3.1.4. Types of L/C:

There are some common types of L/C which will be mentioned in thispaper, they are:

 Irrevocable or revocable L/C: An irrevocable LC cannot be changed

unless both buyer and seller agree With a revocable LC, changes can

be made without the consent of the beneficiary

 Sight and time L/C: A sight L/C means that payment is made

immediately to the beneficiary/seller/exporter upon presentation

of the correct documents in the required time frame A time or date

L/C will specify when payment will be made at a future date andupon presentation of the required documents

 Standby L/C: If the beneficiary does not get paid from its customer it

can then demand payment from the Bank by forwarding the copy ofthe invoice that was not paid and supporting documentation

 Negotiation means the giving of value for draft(s) and/or

document(s) by the bank authorized to negotiate, viz the nominatedbank Mere examination of the documents and forwarding the same

to the letter of credit issuing bank for reimbursement, withoutgiving of value / agreed to give, does not constitute a negotiation

3.1.5 Other relating terms:

 SWIFT address: from Bank Identifier Code (BIC) is a universal bankidentifier that is unique to each institution The BIC for SWIFTmember banks is their SWIFT address For instance Citibank NA,New York’s SWIFT/BIC is CITIUS33 Digits from 1 to 4 represent thebank; the two digits following (positions 5-6) represent the country

or residential nation Positions 7-8 represent a location (city orregion) in that country

Banks that are not SWIFT members are assigned unique identifiers thatcontain a 1 in the eighth position of their SWIFT/BIC address For example, theBIC for any international bank in Paris, France- a non-SWIFT member would be

ANYBFRP1 BIC should be used whenever possible in funds transfer messages tofacilitate automated processing

 TELEX: An electronic method of transferring funds TelegraphicTransfers are used primarily for overseas wire transactions Thesetransfers are used most commonly in reference to CHAPS, ClearingHouse Automated Payment System, transfers in the U.K bankingsystem Telegraphic Transfers are also known as Telex Transfers,abbreviated TT TTs can also refer to other types of transfers.Telegraphic Transfers are usually fairly expensive, due to the fastnature of the transaction

 Nostro-vostro account: A Notro account is held in a foreigncountry by a domestic bank, denominated in the currency of thatcountry Nostro accounts are used to facilitate settlement of foreignexchange and trade transactions The term is derived from the Latinword for "ours." Conversely, accounts that are held by the domesticbank in its home country for foreign banks are called Vostroaccounts, derived from the Latin word for "yours."

3.2 Legal background:

As I have mentioned previously, my study focus on Vietcombank’s L/Cbusiness; thus in this section, I only explain some legitimate requirements whichhave great influence on my department and must be regularly reviewed by ourstaff Aside from following legal articles, there are many other internationalstandard which we must comply with; yet, they are very common and can beeasily read from other writings For instance, Uniform Commercial Code 600,Uniform Customs and Practice for Documentary Credits (UCP) Therefore, Iassume that concerning readers have already had knowledge about them, and gostraight to other details

3.2.1 Vietnamese legal documents for L/C:

To begin with, I must say that the law and regulation for commercial andinternational trading in Vietnam are complicated with many details and articles.The L/C service is a branch of such ground, which is subject to the governingfrom SBV, Ministry of International Trade Some important legal documents thathave been drafted and applied, only for L/C business are:

Circular No.07/1997 by SBV: in conjunction with Decision September 24, 1997, to instruct bank handle the issued, yet, unpaid L/C Thisdocument specifies the due obligation of company which has import L/C andguarantee from bank

802/TTg-Decision No.711/2001 by SBV: to set a standardized mechanism of issuingtime Letter of Credit In it, the company which is allowed, and the requirementsfor it which must be met are addressed in a comprehensive manner Some follow-

up decisions and settlement methods are also demonstrated in details, in order toensure that payment will be received by foreign trading entities

CV No.4941/NHNN-QLNH by SBV: to regulate the foregin exchangebetween commercial bank and domestic company SBV demands that bank is notallowed, in all circumstances or purposes, to buy or sell the US Dollar in exchangefor Vietnam Dong with the exchange rate that is higher than the SBV’s ceiling rate

Decision No.1233/2001 by SBV: to direct commercial bank how to chargetime L/C fees

3.2.2 Vietcombank’s guidelines for L/C:

Aside from general regulation, Vietcombank has also developed its internalsystem with many policies and mechanisms, which are distributed amongbranches and offices Such policies can be divided into some main topics whichare:

 L/C mechanism:

“Guidance for international payment using L/C”: the most comprehensivedocument which instruct International Payment Department to perform L/Cservice

Decision No 228/QĐ-NHNT.HĐQT on December 02, 2006: to addresscertain types of L/C customers, their level of credit line, and the greatest amountthat they can borrow from bank to settle commercial activity This document askfor cooperation between both International Payment and Credit Departments.More information about level of credit line can also be found in DecisionNo.39/QĐ-NHNT.CSTD on March 08, 2007.

CV No.795/CV-NHNT.CSTD on July 26, 2007: to explain in more detial theDecision No.711/2001/QĐ-NHNN on May 25, 2001 by SBV In which, someacceptable methods of guarantee for time L/C are instructed Vietcombank alsoverifies duties and obligations of relative parties in L/C and guarantee contracts,

as civil contract drafted in Civil Law and Degree No.163/2006/NĐ-CP For moreinformation about guarantee service, there is also Decision No 285/QĐ-NHNT.HĐQT on August 15, 2008

The absolute level of credit line and the relative level in relation withVietcombank’s foreign reserve are set for each kind of company and the L/Ccontract Details are found in Decision No.36/QĐ-NHNT.CSTD on January 28,

2008 for Small and Medium Enterprises; and in Decision No.246/QĐ-NHNT.CSTD

on July 22, 2008: for all institutional customers having commercial finance fromVietcombank

 Foreign exchange rate:

In order to buy or sell foreign currencies between Vietcombank and theinstitutional customers, we must comply with some documents:

CV No.1286/NHNT-QLKDV: to list certain types of goods and services arefavored to import, thus have priority over other types For such products, theimport company is allowed to by foreign currencies with many beneficial favors;and the mechanism for it is explained in CV No.1196/NHNT-QLKDV

CV No.1093/NHNT-QLKDV: to limit the L/C service only for companieswith self foreign currency resources, and prohibit all Vietcombank’s branchesand offices to lend or sell foreign currencies for institutetional customers thisdocument also restraint the import L/C underwriting for commodity products,despite the financial strength of the domestic importers

In CV No.1047/NHNT-QLKDV: Vietcombank depicts the mechanism which

is used to sell foreign currencies for importing certain types of goods; alsodemonstrates a serious reporting procedure for all of L/C contracts whichimporters need to buy foreign currencies from Vietcombank The list of thesefavored importing products is in CV No.993/NHNT-QLKDV; CV No.4941/NHNN-QLNH, and CV No 690/NHNT-KDNT Some common products are: energy, oil,fuel, gas, medicine, agricultural machine

CV No.590/NHNT-KDNT: depict the internal foreign currency flows within

a branch and among branches and offices The document allows Vietcombank’ssubsidiaries to buy and sell foreign currencies with each other, given a internalexchange rate Thus, each office can convert Vietnam Dong into US Dollar to meetthe demand of its responsible customers This helps Vietcombank;s brancheswhich cannot balance their foreign reserve with regional demand for L/C creditline can contact nearby office to replenish this reserve

3.3 Vietcombank’s standardized procedures:

From all above laws and regulations, Vietcombank has designed acomplete procedure to provide L/C service for customers

b (1) Deposit the full amount of the bill face value associated with the L/C;

or (2) deposit partial amount and have the unused credit line with totalamount equal the bill face value associated with the L/C; or (3) depositpartial amount and be accepted and granted a loan by Credit Departmentthe remaining amount