LV Thạc sỹ_Improve effectiveness of international payment by letter of credit at VIB

NATIONAL ECONOMICS UNIVERSITY FACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT RECOMMENDATIONS TO IMPROVE THE EFFECTIVENESS OF INTERNATIONAL PAYMENT BY LETTER OF CREDIT AT

NATIONAL ECONOMICS UNIVERSITY FACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT



RECOMMENDATIONS TO IMPROVE THE EFFECTIVENESS

OF INTERNATIONAL PAYMENT BY LETTER OF CREDIT AT VIETNAM INTERNATIONAL COMMERCIAL JOINT STOCK BANK –

HAI BA TRUNG BRANCH

NATIONAL ECONOMICS UNIVERSITY FACULTY OF FOREIGN LANGUAGES ENGLISH FOR BUSINESS DEPARTMENT



RECOMMENDATIONS TO IMPROVE THE EFFECTIVENESS

OF INTERNATIONAL PAYMENT BY LETTER OF CREDIT AT VIETNAM INTERNATIONAL COMMERCIAL JOINT STOCK

BANK – HAI BA TRUNG BRANCH

Secondly, I am grateful to the leaders of VIB branch in Hai Ba Trung districtfor offering an opportunity to do internship there, along with good workingcondition and valuable reference documents Thanks to them, I had chance to learnand exchange professional knowledge and skills for my future career.

Finally, my grateful thanks go to my family and friends, who alwaysencouraged, supported and created the best conditions for me to finish mygraduation report

TABLE OF CONTENT

LIST OF ABBREVIATION i

LIST OF TABLES & CHARTS ii

EXECUTIVE SUMMARY iii

INTRODUCTION 1

1 Introduction of the research topic 1

2 Rationales 1

3 Research questions 2

4 Scope of the research 2

5 Methodology 2

Chapter I: INTRODUCTION 3

1.1 The establishment and development of VIB - Hai Ba Trung 3

1.2 The organizational structure of VIB – Hai Ba Trung 4

1.3 An overview of international payment operations at VIB – Hai Ba Trung .5 1.4 Key terms definition 8

Chapter II: THEORETICAL FRAMEWORK 8

2.1 Definition of L/C 8

2.2 Classification of L/C 8

2.2.1 Basic types of L/C 9

2.2.2 Special types of L/C 9

2.3 Process of L/C 11

2.4 Main contents of L/C 14

2.5 Criteria to evaluate the effectiveness of international payment by L/C 16

2.5.1 Quantitative criteria 16

2.5.2 Qualitative criteria 18

2.6 Factors to influence the efficiency of international payment by L/C 19

2.6.1 Subjective factors 19

2.6.2 Objective factors 21

Chapter 3: ANALYSIS AND FINDINGS 23

3.1 The procedure of L/C payment transaction in VIB – Hai Ba Trung 23

3.2 Analysis of the effectiveness of international payment by documentary credit at VIB – Hai Ba Trung 25

3.2.1 Quantitative criteria 26

3.2.2 Qualitative criteria 31

3.3 Evaluating the efficiency of international payment by L/C at VIB – Hai Ba Trung 32

3.3.1 Advantages 32

3.3.2 Limitations 33

3.4 Factors causing limitations of international payment by L/C at VIB – Hai Ba Trung 34

3.4.1 Objective factors 34

3.4.2 Subjective factors 36

Chapter 4: RECOMMENDATIONS 38

4.1 The orientation for the development and goal of improving the efficiency of international payment by documentary credit at VIB – Hai Ba Trung 38

4.2 Recommendations to improve the efficiency of international payment by documentary credit at VIB – Hai Ba Trung 39

2.1 Managing risks in international payments 39

4.2.2 Diversifying international payment services related to documentary credit .40

4.2.3 Strengthening the marketing activities related to international payment 40

4.2.4 Enhancing the professional skills of staff 42

4.2.5 Improving technology infrastructure 43

4.2.6 Strengthening relationship with foreign banks 43

4.2.7 Increasing the source of the foreign exchange 44

4.3 Some recommendations 44

4.3.1 For Head Office of VIB 44

4.3.2 For the State Bank 45

CONCLUSION 46 APPENDIX

REFERENCE

LIST OF ABBREVIATION

VIB – Hai Ba Trung

Vietnam International Commercial Joint Stock Bank branch in Hai Ba Trung district

L/C Letter of Credit

AML Examining anti-money launderingETS Economic and Trade sanction

CTF Counter terrorism financing

Vietcombank Joint stock Commercial Bank for

Foreign Trade of Vietnam

Viettinbank Vietnam Joint Stock Commercial

Bank for Industry and Trade

ICC International Chamber of

Commercial

LIST OF TABLES & CHARTSTable 1: The revenue of import and export payment at VIB – Hai Ba Trung from 2010 to 2012 5 Table 2: The revenue of foreign currency trading at VIB – Hai Ba Trung from 2010 to 2012 6 Table 3: The quantity and value of import and export L/Cs 26 Table 4: Revenue according to methods of international payments of VIB – Hai Ba Trung 27 Table 5: Revenue, cost and profit from L/C payment operation at VIB – Hai Ba Trung 28 Table 6: The maximum time of processing L/C transaction 30 Table 7: Number of agent banks and countries in relationship with VIB – Hai Ba Trung 31 Table 8: The growth of foreign currency funds of VIB – Hai Ba Trung from

2010 to 2012 32 Chart 1: The proportion of revenue from L/C method compared to total revenue from international payment from 2010-2012 28

EXECUTIVE SUMMARY

Nowadays, the operation of international payment by Letter of Credit isbecoming increasingly important to every Commercial Bank, including VietnamInternational Bank and Hai Ba Trung branch Studying about the competitiveadvantages and limitations as well as drawing out some solutions andrecommendations to enhance the effectiveness of this activity’s operation will helppromote the profitability and reputation of the bank Therefore, this matter should

be concentrated and studied in detail

The real situation and the contribution of the research are analyzed andconcluded basing on the data and documents offered by the bank during theresearcher’s internship program, her personal observation and study through onlinesearching engines and reference books

The analysis and study of all the data and documents collected would be used

to demonstrate that VIB – Hai Ba Trung has put special effort on developing theactivities of international payment by L/C method However, beside certainachievements, there are also a number of weaknesses resulting from both subjectiveand objective factors

On the basis of these findings, it is suggested that the branch has to take somesteps to improve the efficiency of international payment by L/C, includingmanaging risks, strengthening human resources and technology, diversifying theinternational payment services and relationship with foreign banks In addition, theHead Office of VIB and State Bank should also join hand to create favorablecondition for the branch and the whole banking system to develop the internationalpayment activities

This dissertation is divided into four main chapters:

Chapter 1: Introduction This chapter presents a brief overview of VIB – Hai

Ba Trung branch’s establishment, organizational structure, missions and somebusiness results in particular

Chapter 2: Theoretical framework This chapter will provide readers with theessential background knowledge of the international payment by L/C method

Chapter 3: Analysis and findings In this chapter, the author analyzes andevaluates the current situation about the performance of international payment by L/

C at VIB – Hai Ba Trung from 2010 to 2012 At the same time, the obtained results,limitations and causes will be drawn out

Chapter 4: Recommendations The final chapter is supposed to give somerecommendations to improve the effectiveness of the international paymentoperation by L/C at the branch

1 Introduction of the research topic

Nowadays, globalization and integration is an obvious trend of the age.Accordingly, all countries in the world are immersed in the integration and cooperationflow to achieve the common goal of peace, sustainable development and socialprogress As a result, all aspects of a country have close links with other countries,especially the field of international economic cooperation, in which internationalpayments emerges as a bridge between the domestic economy with the rest of theworld Along with the versatile operation trend of commercial banks at present,

international payments is not the own strength of Joint stock Commercial Bank for Foreign Trade of Vietnam but the Vietnam International Commercial Joint Stock Bank

(VIB) in general and the Hai Ba Trung branch in particular also pay special attention todevelop international payment, especially by Letter of Credit method Therefore, after aperiod of internship at VIB – Hai Ba Trung branch the author decided to choose the

topic: “Recommendations to improve the effectiveness of international payment by

Letter of credit at Vietnam International Commercial Joint Stock Bank – Hai Ba Trung branch.”

2 Rationales

Among the international payment methods, Letter of credit is the mostpopular one with the benefits for both importers and exporters So far, this methodhave been used and developed at VIB – Hai Ba Trung and it has brought out manypositive results for the branch However, in the current harsh economic condition,the management and development of the performance effectiveness of this servicehas met many difficulties and challenges, resulting from the global financial crisis,the Government, The State Bank and the customers Meanwhile, the requirementfor the quality of international payment by L/C is increasing and thecompetitiveness between commercials banks offering this service become severethan ever Therefore, working out the solutions to control and develop theeffectiveness of international payment using L/C method is really essential.Consequently, my research will focus on helping VIB – Hai Ba Trung enhance this

operation and gain advantages against the rivals through the recommendations andsolutions for raising efficiency of international payment by L/C method.

3 Research questions

This research is analyzed to answer these following questions:

 How important is it to enhance the effectiveness of international paymentoperation by L/C method at VIB – Hai Ba Trung?

 What are the strengths and limitations of international payment operation

by L/C method at VIB – Hai Ba Trung?

 What are the reasons for these existing limitations?

 What should be done to help the branch improve the effectiveness ofinternational payment operation by L/C?

4 Scope of the research

The scope of my research is the real situation of international payment by L/

C at VIB – Hai Ba Trung in the period of 2010 to 2012 The research will analyzethe implementation and performance of this operation, including the obviousmanifestation, the data and the information offered by the leaders and officers ofthe branch Thereby, I will work out on the recommendations to improve theeffectiveness of international payment by L/C activities

5 Methodology

The research is mainly based on various methods including statistics,interpretation, comparison, as well as data analyzing and evaluating Firstly, theprimary data was collected from staff interview and observation After theinformation and data provided by the leaders and officers of the branch were allcollected, they were deeply analyzed Then, the author continued working out onthe Internet and some written documents to study the L/C operation at otherpopular banks in Hanoi and Vietnam to make a comparison and to find out theinfluence of the subjective and objective factors on this operation In addition, theauthor conducted some survey and interview with the customers using this service

at the branch This task plays an important role in helping the author formulate thefinal conclusions and solutions From this foundation, some recommendations for

overcoming the weaknesses to improve the quality of international payment by L/Cwould be brought out

Chapter I: INTRODUCTION

1.1 The establishment and development of VIB - Hai Ba Trung

Vietnam International Commercial Joint Stock Bank (VIB for short) wasofficially established and put into operation on 18.09.1996 under the Decision 2300/GP-UB on 02/08/1995 of Hanoi City People's Committee In 1999 and 2000 VIBwas assessed by State Bank as one in two joint-stock banks in Hanoi graded A bycapital, asset management, capacity management and administration, profitabilityand solvency, based on classification regulation of Vietnam Joint stock creditinstitutions

By 20/10/2012, after 16 years of operation, VIB became one of the leadingbanks in Vietnam with total assets of over 100 trillion VND, capital of 4.250 billionVND, equity of over 8200 billion VND VIB now has 4,300 employees servingcustomers in 160 branches and transaction offices in the biggest 27 provinces /cities throughout the country During the operation, VIB was recognized by manyprestigious domestic and foreign institutions and communities as strong brand name

in Vietnam, Bank with the most satisfying retail services, the International Bank forpayment of outstanding quality, Bank with the best customer services quality…

In 2000, the VIB opened the 2nd transaction office with only 6 employees.However, after 2 years, the office excellently completed assigned tasks andcontributed actively in the development of VIB system According to the Resolution

of the annual General Meeting of Shareholders of Term 3, the Board of Directors,Supervisory Board and the Executive Board agreed upon a policy to upgrade sometransaction offices to Branches and establish some more transaction offices inHanoi and Ho Chi Minh City With the contribution of the Transaction office 2, theBoard decided to upgrade it to Hai Ba Trung Branch in 2003

Until now, after 10 years of operation, the VIB - Hai Ba Trung Branch hasasserted itself, ceaselessly strived, overcome many difficulties and challenges Thebranch's activities have been expanded and diversified to adapt to the changingbusiness environment So far, the branch has 34 employees at office and 5transaction offices directly under, include:

- Cho Mo transaction office

- Lo Duc transaction office

- Kim Dong transaction office

- Dai Kim transaction office

- Minh Khai transaction office

1.2 The organizational structure of VIB – Hai Ba Trung

In terms of organizational structure, the VIB - Hai Ba Trung branch is

organized according to the following models:

Retail customer manager

Branch Director

Wholesale banking director

Manager assistant

Treasurer Tellers Controller

1.3 An overview of international payment operations at VIB – Hai Ba Trung

International payment is an activity that offers the largest service revenues forVIB - Hai Ba Trung branch in recent years As being affected by the domestic andforeign economic crisis, sales of funding activities of VIB - Hai Ba Trung branchstill stayed stable in 2010 Although sales of import payment have increased quiteslightly, the quality of transaction payment was improved as the Bank has effectivecontrol over the quality of the credits in the import-export business

VIB ceaselessly support the import and export enterprises through thefavorable credit policy to service policy, including electronic banking services such

as e-teller, e-lending, e L/C; free advice for transactions and flexible chargespolicies from the bank

Table 1: The revenue of import and export payment at VIB – Hai Ba

Trung from 2010 to 2012

Unit: USD

Year

Total revenue of import

and export payment Export revenue Import revenueRevenue Growth Revenue Growth Revenue Growth

at once However, at time of payment, import market was bigger than exportmarket, causing the shortage of USD in a long term.

In 2011, the import and export payments situation of the branch experienced aslight decline Annual payment revenue reached 233,063,097.83 USD, a decrease of7.6% compared with 2009

In 2012, the import and export payment revenue fell 56,105,211.2 USD,equivalent to 24% compared to 2011 In particular, export sales increased by 50%while import sales fell 30%, as a result of foreign currency scarcity, especially U.S.dollars

Table 2: The revenue of foreign currency trading at VIB – Hai Ba Trung

from 2010 to 2012

Unit: USD

Purchasevalue Sale value

Total revenueRevenue Growth

2010 233.095.408 233.022.250 466.117.658 _

2011 211.151.625 211.049.774 422.201.399 - 9.42%

2012 157.447.110 156.119.764 313.566.874 -25.7%

(Source: Speech report of 2010 to 2012 of International Payment Division

of VIB – Hai Ba Trung from 2010 to 2012)

Although the total revenue of foreign currency trading of VIB – Hai Ba Trung

in 2011 decreased by 9.42% compared to 2010 and continued to significantly

decreased by 25.7% in 2012, it has met almost all demands of corporate customers Foreign currency status of VIB – Hai Ba Trung is maintaining balanced Purchase value and Sale value are approximately equal This represents VIB – Hai

Ba Trung has maintained a safe foreign currency status and still served the needs ofbuying and selling foreign currencies of customers by a quick and timely manner

1.4 Key terms definition

Advising bank: “the bank that advises the credit at the request of the issuing

bank.” (ICC,2007.UCP 600)

Applicant: “the party on whose request the credit is issued.” (ICC,2007.UCP 600) Beneficiary: “the party in whose favour a credit is issued.” (ICC,2007.UCP 600) Commercial bank: “Bank that offers a broad range of deposit accounts, including checking, savings and time deposits and extends loans to individuals and business Commercial banks can be contrasted with investment banking firms, such

as brokerage firms, which generally are involved in arranging for the sale of

corporate or municipal securities.” ( Gretchen Morgenson & Campbell R.Harvey,

2002)

Confirming bank: “the bank that adds its confirmation to a credit upon the

issuing bank’s authorization or request.” (ICC,2007.UCP 600)

Credit: “any arrangement, however named or described, that is irrevocable

and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.” (ICC,2007.UCP 600)

Honour:

a to pay at sight if the credit is available by sight payment.

b to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.

c to accept a bill of exchange ("draft") drawn by the beneficiary and pay at maturity if the credit is available by acceptance (ICC,2007.UCP 600)

Issuing bank: “the bank that issues a credit at the request of an applicant or

on its own behalf.” (ICC,2007.UCP 600)

Nominated bank: “the bank with which the credit is available or any bank

in the case of a credit available with any bank.” (ICC,2007.UCP 600)

Chapter II: THEORETICAL FRAMEWORK2.1 Definition of L/C

Letters of Credit are regulated by International Chamber of Commerce underthe Uniform Customs and Practice for Documentary Credits (UCP 500) According

to Edward G Hikelman (2003), “A documentary letter of credit is a bank’s promise

to pay a seller on behalf of the buyer so long as the seller complies with precisely defined terms and conditions specified in the credit”

In simple term, a letter of credit is a promise to pay Banks issue letters ofcredit as a way to ensure sellers that they will get paid as long as they do what theyhave agreed to do

With use of a letter of credit, buyer and seller do not communicate directly.The bank(s) act as intermediary(ies) between the two The bank, however, dealsonly with the documents regarding the goods rather than the goods themselves.Letters of credit are common in international trade because the bank acts as anuninterested party between buyer and seller For example, importers and exportersmight use letters of credit to protect themselves In addition, communication can bedifficult across thousands of miles and different time zones A letter of credit spellsout the details so that everybody is on the same page

2.2 Classification of L/C

According to “A Practical Guide on Documentary Letters of Credit” published

by Scotiabank - a leading multinational financial services provider and Canada'smost international bank, there are a variety of basic and special types of L/C Eachtype has its own features as well as its advantages and disadvantages Having athorough grasp of the characteristics and the terms conducting the transaction ofeach type of Letter of credit will help the exporter and the importer discuss thenreach an agreement on the type of L/C which is most suitable and meet the demand

of both parties They would be well advised to seek advice from their bankers whenthey draw up sales contract

2.2.1 Basic types of L/C

As stated by Scotiabank (2008), there are three basic features of letters ofcredit, each of which has two options These are described below Each letter ofcredit has a combination of each of the three features.

SIGHT OR TERM/USANCE

Letters of credit can permit the beneficiary to be paid immediately uponpresentation of specified documents (sight letter of credit), or at a future date asestablished in the sales contract

REVOCABLE OR IRREVOCABLE

Letters of credit can be revocable This means that they can be cancelled oramended at any time by the issuing bank without notice to the beneficiary.However, drawings negotiated before notice of cancellation or amendment must behonored by the issuing bank An irrevocable letter of credit cannot be cancelledwithout the consent of the beneficiary

UNCONFIRMED OR CONFIRMED

An unconfirmed letter of credit carries the obligation of the issuing bank tohonor all drawings, provided that the terms and conditions of the letter of credithave been complied with A confirmed letter of credit also carries the obligation ofanother bank which is normally located in the beneficiary’s country, thereby givingthe beneficiary the comfort of dealing with a bank known to him

of credit If the beneficiary fails to ship the goods or cannot do so before the expiry

of the letter of credit, the issuing bank is bound to reimburse the negotiating orpaying bank, recovering its payment from the applicant.

Transferable L/C

A transferable letter of credit allows the beneficiary to act as a middleman andtransfer his rights under a letter of credit to another party or parties who may besuppliers of the goods Depending on whether the letter of credit permits partialshipments, fractional amounts may be transferred to more than one beneficiary Theletter of credit however, can be transferred only once: the secondary beneficiariescannot transfer their rights to a third party Transfer of a letter of credit can be made

on specific application by the original beneficiary to the authorized transferringbank To be transferable, a letter of credit must be so marked by the issuing bankwhich can only do so on the applicant’s specific instructions The applicant should

be aware that any second beneficiary, the probable supplier, is usually a party notlikely known to the applicant

Back-to-Back L/C

Although not recorded on a letter of credit, “back-to-back” is a term used intransactions involving two irrevocable letters of credit Such transactions originatewhen a seller receives a letter of credit covering goods which must be obtained from

a third party who in turn requires a letter of credit The “second” issuing bank looks

to the first issuing bank for reimbursement after paying under the second letter ofcredit

The difference between back-to-back letters of credit and transferable letters ofcredit, is such that in a transferable letter of credit, the rights under the existingletter of credit are transferred In a back-to-back transaction, different letters ofcredit are actually issued Because technical problems can arise in back-to-backtransactions, banks tend to discourage their use

Deferred Payment L/C

Under a deferred payment letter of credit, the applicant does not pay until afuture date determined in accordance with the terms of the letter of credit No draftsare called for, which avoids “stamp duties” charged by some countries on bills ofexchange (drafts) One reason an exporter might extend credit terms to an importer

could be the competitiveness of the market and the need for the exporter to financethe importer if the exporter is to make the sale.

Standby Letters of Credit

Standby letters of credit may apply in general to transactions which are based

on the concept of default by the applicant in performance of a contract orobligation In the event of default, the beneficiary is permitted to draw under theletter of credit Standby letters of credit may be used as a substitute for performanceguarantees, or issued to guarantee loans granted by one firm to another, therebysecuring payment to the creditor in the event the other party fails to repay itsobligation on the due date Even if the applicant claims to have performed, the bankissuing the letter of credit is obliged to make payment provided the beneficiaryproduces complying documents, usually a sight draft, and a written demand forpayment

2.3 Process of L/C

As Joseph Zaritski stated in “Payments and Export Credit Insurance” (2002),there are several parties who are most commonly involved in a letter of credittransaction, including at least four following participants:

Applicant: The buyer or the party who requests the letter of credit to be issued Beneficiary: The seller or the party to whom the letter of credit is addressed Advising Bank: A branch or correspondent bank at or near the domicile of the

beneficiary, to which the issuing bank either sends the letter of credit, or anotification that a letter of credit has been issued, with instructions to notify thebeneficiary The advising bank advises the beneficiary of the letter of credit withoutengagement

Issuing Bank: The bank which opens a letter of credit on behalf of the

applicant and forwards it to the advising bank for delivery to the beneficiary

The diagram below shows how participants are involved in the process ofpayment under L/C

1 The Applicant and the Beneficiary negotiate terms and conditions of the L/C

2 The Applicant applies to the Issuing Bank to issue the L/C

3 The Issuing Bank issues the L/C and forwards it to the Advising Bank

4 The Advising Bank checks the apparent authenticity of the L/C and advises

the L/C to the Beneficiary

5 The Beneficiary checks if the L/C complies with the commercial

agreements and if all terms and conditions specified in the L/C can be satisfied andships the goods

6 The Beneficiary assembles the documents specified in the L/C, checks the

documents for discrepancies with the L/C, draws the draft and presents the draft andthe documents to the Advising Bank

7 The Advising Bank bears the draft and the documents against terms and

conditions of the L/C and forwards them to the Issuing Bank

8 The Issuing Bank checks if the documents comply with the L/C and makes a

payment immediately (if the L/C is available by sight) or on a certain date (if L/C isavailable by deferred payment)

Another party, which may be involved in the L/C procedure, is the Nominated Bank

The Nominated Bank

The Nominated Bank is the bank, which is authorized by the Issuing Bank "topay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate."(UCP 500, Article 10, b)

The Issuing Bank may authorize the Nominated Bank to negotiate the draftsand/or documents Negotiation means that the nominated Bank – in this case theNegotiating Bank - gives value to such draft(s) and/or documents, not justexamination of the documents (UCP 500, Article 10, b)

Confirming Bank

The confirmation of the L/C by another bank - the Confirming Bank - meansthat if the Issuing Bank refuses to make the payment, the Confirming Bank isresponsible for this payment

The best-case scenario is when the Advising Bank confirms the L/C If theAdvising Bank does not agree to confirm the L/C, ask the bank to recommend youanother bank to be the Confirming Bank

There are additional charges for the confirmation of the L/C, which depend onthe risk involved in dealing with the particular country The responsibility to pay forthe confirmation is negotiable and usually is paid by the buyer However, if it wasnot agreed prior to the issuance of the L/C, the seller is the one who will pay for thisservice

When L/C is to be confirmed the payment process is different and is shown inthe following diagram

1 The Applicant and the Beneficiary negotiate terms and conditions of the L/C

2 The Applicant applies to the Issuing Bank to issue the L/C

3 The Issuing Bank issues the L/C and forwards it to the Advising Bank

4 The Confirming Bank confirms the L/C to the Advising Bank

5 The Advising Bank checks the apparent authenticity of the L/C and advises

the L/C to the Beneficiary

6 The Beneficiary checks if the L/C complies with the commercial

agreements and if all terms and conditions specified in the L/C can be satisfied and ships the goods

7 The Beneficiary assembles the documents specified the Issuing Bank

in the L/C checks the documents for discrepancies with the L/C and presentsthem to the Advising Bank

8 The Advising Bank bears the documents against terms and conditions of the

L/C and forwards them to the Confirming Bank

9 The Confirming Bank checks if the documents comply with the L/C and

makes payment immediately (if the L/C is available by sight) or on a certain date (ifL/C is available by deferred payment)

10 The Issuing Bank reimburses the funds to the Confirming Bank

immediately after the payment

2.4 Main contents of L/C

Letter of credit is an important tool used in international trade as they providesecurity for both buyer and seller where conditions may be uncertain or there islittle or no previous trading relationship between the parties However, letters ofcredit only provide this security when they are used in a prudent manner – it isessential that exporters remember that documents must be in strict compliance withthe credit to secure payment According to Joseph Zaritski (2002), the L/C has to beprepared carefully and correctly with the following contents so that there would be

no legitimate ground for refusal of payment under the L/C

- Full Applicant's name and address

- Full Beneficiary's name and address

- Issuing Bank details

- Advising Bank details

- Form and type of credit (e.g irrevocable, transferable)

- Issue date

- Expiry date

- The latest date of shipment (usually "no later than")

- Expiry date for presentation of documents

- Amount payable under L/C

- Currency of payment

- Port of loading

- Port of discharge

- Terms of delivery

- Indication of the payment of the freight (Freight Prepaid/Freight Collect)

- Allowances for partial shipment or transshipment if needed

- Type of payment availability (e.g at sight, on the maturity date)

- Description of goods (must correspond with the description given in theinvoice)

- List of documents required for the payment

- Accountability for bank charges

There is no limit to the number and variety of documents which letters ofcredit may stipulate The following is a list of documents most commonly seen in aletter of credit transaction

- Certificate of origin

- Certificate of quality

- Weight certificate

- Packing declaration

- Packing list

- Fumigation certificate, and so on

2.5 Criteria to evaluate the effectiveness of international payment by L/C

The effectiveness of international payment by L/C is the satisfaction of thecustomers’ demand on international payment such as accuracy, quickness and safety Atthe same time, this activity can bring in profit and ensure the safety of the bank

To evaluate the performance of international payment by L/C, there iscurrently no standard at all That is because there would be different evaluationcriteria under different viewpoints For example, the efficiency of the internationalpayment by L/C can be completely different under the view of the economy, theview of the banks and the view of customers The following points out one in themost popular way to assess the effectiveness of international payment by L/C,including quantitative criteria and qualitative criteria ( Nguyen Van Tien, 2008)

2.5.1 Quantitative criteria

The revenue from L/C payment by operation (RLC)

The revenue from L/C payment is the total value of international paymentoperation by L/C earned by collecting related fees, including issuance fee, amendmentfee, advising and confirming fee It is specifically calculated as follows:

RLC= Pi x Qi

RLC : Revenue from L/C payment operation

Pi: Price of one transaction i

Qi: Quantity of transaction i

n: total quantity of transactions

Net profit from international payment by L/C

1

n i



This is the most important absolute quantitative criterion to evaluate theinternational payment by L/C as it clearly reflects the actual effectiveness ofinternational payment operations by L/C of the bank The higher amount of revenue

is, the more effective L/C payment is

The net profit from international payment by L/C indicates the surplus value orlevel of business efficiency that banks earned from international payment activities by L/C

Net profit from L/C payment = Revenue from L/C payment – Cost of L/Cpayment

To get the highest net profit, the banks can conduct plans to either increase therevenue or decrease the cost of international payment by L/C

Proportion of L/C payment in the total international payment operation of thebank

The international payment operations can be implemented by three methods:Letter of credit, Remittance and Documentary collections The effectiveness ofinternational payment by L/C can be estimated by comparing the revenue from L/Cpayment with the total revenue from international payment operations

Proportion of L/C payment =

Payment period:

Payment period is a criterion that reflects the quickness of the internationalpayment transaction, which is a factor that customers really care about If an L/Ctransaction is conducted with short payment period, this will satisfy the demand ofcustomers, then it is considered to be an effective international payment

In L/C transactions, payment period is calculated from the day the exporterpresents a “clean” document package to the issuing bank until the day he actuallyreceives payment

Transaction cost

Revenue from L/C paymentTotal revenue from international payments

Transaction cost consists of the cost of time spent on L/C transactions and thecost of implementing L/C procedures This quantitative criterion directly affects theNet profit from international payment by L/C

2.5.2 Qualitative criteria

The performance of international payment by L/C is assessed not only bydirect quantitative indicators but also by indirect way qualitative indicators Thequalitative indicators here are built on the basis of the relationship betweeninternational payment by L/C activities and other services of the bank In otherwords, we evaluate the performance of international payment by L/C through theassessment criteria of the activities that it impacts In particular, we can use thefollowing criteria to assess:

Through the contribution to the credit quality and efficiency, import andexport financing

L/C specifically serves for securing the supply and payment obligations inforeign trade relations It also encompasses the credit factors

- For exporters: banks offer lending services such as:

+ Lending the exporters under the L/C opened The exporters can rely on L/C

to ask for bank’s credit grant to export goods

+ Lending the exporters in advance or discount export vouchers

- For importers:

+ All L/Cs are opened by the bank at the request of the importers However, insome situations, the importers do not have enough accounts to ensure L/C Then,when banks accept to open L/C for importers, it means that banks grant credit forimporters

+ Securities lending to open L/C: in some circumstances, banks can lendimporters to secure L/C The value of loan depends on financial situation, solvencyand relations of the importers and the bank

Through the contribution to foreign currency trading efficiency

As we know, international payment by L/C requires foreign currency whendealing with international clients through the agent bank in other countries, so this

is a good opportunity for banks to trade foreign currencies Therefore, the efficiency

of foreign currency trading partly reflects the performance of international payment

by L/C

Through the growth of foreign currency funds

Foreign currency fund is the principal source that banks use to finance theoperation of international payment At the same time, international payment is also

a source that provides foreign currency to banks The growth of foreign currencyfund not only reflects the ability to raise foreign currency to meet the needs ofcustomers, but also partly reflects the efficiency of international payment by L/C

Through the development of agent banking network and foreignrelationships

Basing on the role of international payment, we know that the internationalpayment is effective if it has an expanded banking system throughout the world.This creates favorable conditions for banks in developing the services ofinternational payment by L/C

2.6 Factors to influence the efficiency of international payment by L/C

The efficiency of international payment by L/C is affected by many factors,including subjective factors and objective factors

2.6.1 Subjective factors

The domestic economic environment

International payment operation by L/C is a business relating to foreign trade.Therefore, it is inevitably subject to the impact of the economic environment Inparticular, only in stably developed economy can international payment operationexpand, improve its performance and promote its full role for the development ofthe country's economy

Political Environment

Being a macro-level factor, the political environment also affects the activity

of international payment First of all, stable political environment is an essentialcondition for economic activities to grow up, thereby international payment candevelop and operate effectively Moreover, the political environment here also