International settlement operation a case study of agribank cho lon

The thesis’s structure:...4 Chapter1:Internationalsettlementoperationofcommercialbanksincontextof international economic integration...5 1.1 Integration into the world economyin field of

 -MINISTRY OFEDUCATIONAND TRAINING

UNIVERSITY OFECONOMICHOCHIMINH CITY

MASTER’S THESIS

Supervisor:Dr.TRANHUYHOANG

HoChiMinhCity–2010

Acknowledgment

Theprocessofthismasterthesiswritingwasawonderfullearningexperienceonmyacademiclifewhichwasfilledwithchallengesandrewards.Thecompletionofthep r e s e n t s t

u d y l e a d s a n e w b e g i n n i n g a n d a s t e p f o r w a r d t o w ard s myfuture.Thisprefaceprovidesawelcomedopportunityandchancetoacknowledgethehelpand

a ssi st an ce o f t h e p e o p l e w h o witht h e i r i n t e l l e c t u a l i n si g h t sorconstructivecriticism,othertimesintheformoffriendshiphavehelpedmetodevelopthisresearch.Specially,IwouldliketoextendmyappreciationtoMr.JerryandMr.GaryfortheirvaluableandenthusiasticsupportofEnglish

First,Iwouldliketoexpressmysinceregratitudetosupervisor,Associate Professor Ph.D.TranHuyHoangattheFacultyofBanking,forhisvaluablesupervision,never-endingsupportandencouragementduringthisprocess.I amvery thankfultohim,thathehasgivenmethispleasuretousehisvaluablecomments,feedbacksandsuggestionsduringthetimethatIhavebeenworkingonthis thesis and he has presentedanew world for myfurtheracademicresearch

Outsideo f a c a d e m i a , I w o u l d liket o t h a n k a l l m y f r i e n d s a n d c o l l e

a g u e s f o r theirf u l l y s u p p o r t andfinally,thegreatthanksaredirectedtomyfamily;Myfather;thathavetaughtmetogettheprioritiesstraightandtofocusonthewholeinsteadofgettinglostinthedetails;Mymotherwhohasmeantmetherealmeaningofpatienceandhelpedmebyheradvicestohavethisthesisfinishedons ch ed ule andfinally;mybrothersandsistersforcontinuessupportalongtheway

FinallywarmthanksgotoU n i v e r s i t y o f E c o n o m i c HoChiMinhC i t y f o r havingdevelopedthispost-

graduatecourseinEnglishthefirsttimeandsharingconsiderationduringthisperiodofhardwork

PhanManhHaAugust2010

HoChiMinhCity,Vietnam

Table of Contents

Acknowledgment i

Table of contens ii

List of tables vii

List of diagrams vii

List of charts viii

Introduction 1

1 Rationale of thesis 1

2 The thesis’s researchquestions and research objectives: 2

2.1 Research questions 2

2.2 Research objectives 2

3 Scope and limitation of thesis: 3

4 Research Methodology 3

5 The thesis’s structure: 4

Chapter1:Internationalsettlementoperationofcommercialbanksincontextof international economic integration 5

1.1 Integration into the world economyin field of banking and finance 5

1.1.1 Common issues ofintegration into the world economy 5

1.1.2 Economic integration in field of banking and finance 6

1.2 The international settlement operation of commercial banks 9

1.2.1 Concepts 9

1.2.2 Rolea n d theo b j e c t i v e necessityo f developinga n d improvinginter national settlement operation of commercial banks 10

1.2.2.1 Fortheeconomy 11

1.2.2.2 Fortheenterprises 11

1.2.2.3 Forthestatemanagement 12

1.2.2.4 Forcommercial banks 12

1.2.3 Means of international settlement operation 13

1.2.3.1 Bill of exchange 13

1.2.3.2 Promissory Note Payment: 15

1.2.3.3 Check 15

1.2.3.4 Paymentcard 16

1.2.4 Common methods of international settlement operation 16

1.2.4.1 Remittance 16

1.2.4.2 Collections 18

1.2.4.3 Documentary credit 21

1.3 Factors influencing international settlement operation ofcommercialbanks261.3.1 Objective factors 26

1.3.1.1 Globalization and economic integration 26

1.3.1.2 Development of information technology 26

1.3.1.3 .3.Practicesandstandards of international settlement operation 26

1.3.1.4 Level ofdevelopment and open of economy 28

1.3.1.5 Macro economic policiesofgovernment 28

1.3.1.6 Competition of other commercial banks 28

1.3.2 Subjective factors 29

1.3.2.1 Policyofcustomercareanddevelopingproducts,servicesofcommerci al banks 29 1.3.2.2 Policy of foreign affairs 30

1.3.2.3 Development level of banking technology 31

1.3.2.4 .4.Structureoforganizationandmanagementforinternationalsettleme ntoperation 31

1.3.2.5 Knowledge, ability of dealersin international settlement operation31 1.3.2.6Otheractivitiesinrelationwithinternationalsettlementoperationofcomm ercial banks 31

1.4 Somestandardstoevaluatetheperformanceininternationalsettlementoperation of commercial banks 32

1.4.1 Security and exactness 32

1.4.2 Quickness and Timeliness 33

1.4.3 Logic settlement process 33

1.4.4 Satisfaction of Customer 34

1.5 Someexperienceofdevelopingandimprovinginternationalsettlementoperation of other commercial banks in the world 34

1.5.1 Citi Bank 34

1.5.2 Hongkong and ShanghaiBanking Corporation 36

Conclusion of Chapter1 37

Chapter 2:Research Methodology 38

2.1 Research design 38

2.2 Data collection 40

2.3 Data Analysis 44

Conclusion of Chapter2 47

Chapter3:CurrentstatusofinternationalsettlementoperationatAgribankChoLon 48

3.1 Overviewoforganization and activities atAgribank Cho Lon 48

3.1.1 History of foundation and development 48

3.1.2 Organizational structure 49

3.1.3 Review of some main business activities of Agribank Cho Lon 49

3.1.3.1 Capital Mobilization 49

3.1.3.2 Loan 51

3.1.3.3 Foreign exchange trading and international settlement operation 53

3.2 Current status of international settlementoperationatAgribankChoLon 55

3.2.1 Legal basis of international settlementoperationatthisbranch 55

3.1.1.1 International legal documents 55

3.1.1.2 National legal documents 56

3.2.1.3.Agribank’sdocumentso f internalregulationsofinternationalsettlement operation 56

3.2.2 CurrentstatusofinternationalsettlementoperationatAgribankChoLon 57

3.2.2.1 Customers of international settlement operation at this branch 57

3.2.2.2 Currentstatusofsomemainmethodsofinternationalsettlementoperatio n deployed at the branch 62

Remittance 62

Collection 65

Letter of credit 66

3.3 General comments of international settlement operation at Agribank Cho Lon .68

3.3.1 The results 68

3.3.2 Shortcomings 71

3.3.3 Causes of shortcomings 74

3.3.3.1Objectivecauses 74

3.3.3.2 Subjective causes 77

Conclusion of Chapter3 80

Chapter4 : Solutionsf o r developingandimprovinginternationalsettlementoperat ionatAgribankChoLon 81

4.1 Some orientation of internationalsettlement operation atAgribankChoLon81 4.1.1 Someo r i e n t a t i o n o f foreigneconomicdevelopmentofVietnamfrom20 06 to 2010 81

4.1.2 MainorientationofinternationalsettlementoperationatAgribankChoLon.82 4.2 Some viewpoint of international settlement operation 83

4.3 SolutionsfordevelopingandimprovinginternationalsettlementoperationatAgrib ankChoLon 84

4.3.1 Establishingcustomerpolicyandmarketingpolicysuitablefordiffusionof products and services of the branch 84

4.3.2 Modernizationofbanking technology 86

4.3.3 Proposingapolicy of service diversification 88

4.3.4 Improvingmanagementmodel,procedureofinternationalsettlementoperati on 90 4.3.5 Wellorganizingforeignexchangetrading,actingoninitiativetohaveforeignc urrencysourcesuitableforrequirementoftheinternationalsettlementoperation at the branch 93

4.3.6 Solution for increasing quality of human resource 94

4.3.7 Increasing quality of control and internal audit 96

4.3.8 Constantlypayingattentiontoestablishmentofbusinessculturestyleatthe branch 96

4.4 Recommendations 98

4.4.1 For the government, ministries,departmentsandindustriesconcerned984.4.2 For State bank 99

4.4.3 For customers 100

4.4.4 For Agribank 100

Conclusion of Chapter4 101

Conclusion 102

Appendices 103

List of References 110

vii

1 Table2.1 Exhibitionofpayment sales under method of remittance 45

2 Table 3.1 Capital source of Agribank Cho Lon in recent years 50

3 Table3.2 Some itemsofoutstandingdebtsatAgribankChoLon2006-2009 .52

4 Table3.3.Somemainitemsofforeignexchangetradingandinternationalsettlementoper ationatAgribankChoLon 54

5 Table 3.4 Sales of some main customers in international settlement operation atthe branch in2009 58

6 Table 3.5 Sales of some main import export commodities at the branch 61

7 Table 3.6 Payment sales under method ofremittance 63

8 Table 3.7 Payment sales under method of collection 65

9 Table 3.8 Payment sales under method of letter of credit 67

10 Table 3.9 Some indicators of loans forimport and exportat the branch 70

11 Table 3.10 Some key indicators for comparison 72

12 Table3.11.Comparisonofexportpaymentandimport paymentatthebranch.73 ListofDiagrams 1 Diagram 1.1 Process of remittance operation 17

2 Diagram 1.2 Process of collection operation 19

3 Diagram 1.3 Process of documentary credit 23

List of Charts

viii

1 Chart 3.1 Capital source of Agribank Cho Lon 2006-2009 51

2 Chart 3.2 Outstanding debtsatAgribankChoLon2006-2009 53

3 Chart3.3.Mainitemsofforeignexchangetradingandinternationalsettlementoperatio natAgribankCho Lon 54

4 Chart 3.4 Sales of some main customers in international settlement operation atthe branch in2009 59

5 Chart 3.5 Customer’s assessment ofinternational settlement operation 60

6 Chart 3.6 Sales of some main import export commodities at the branch 62

7 Chart 3.7 Payment sales under method ofremittance 64

8 Chart 3.8 Payment sales under method of collection 66

9 Chart 3.9 Payment sales under method of letter of credit 67

10 Chart 3.10 Some key indicators for comparison 72

11 Chart 3.11 Comparison of export paymentandimport paymentatthebranch.73

1 Rationale of thesis

Vietnameseeconomyhaswidelyintegrateditselfintotheregionalandworldeconomy.Alongwithotheractivities,foreigntradehasconstantlyaffirmedtoanimportantroleinVietnameconomicdevelopment.Commercialbanks,bylaunchingt h e internationalsettlementoperationhave,accordingtothe“Open Door Policy”

onintegration,becomeundeniablyessentialtothedevelopmentoftheeconomyoft h i scountry.I n addition,tobetterpromotet h e i r r o l e a n d p o s i t i o n i n speedingu p foreigntradeactivities,thesystemofcommercialbanksinVietnamhavecontinuouslyworkedtodevelopeandimprovetheinternationalsettlementoperation.Intheserecentyears,theeffortsofthesystemofVietnamcommercialbankshavefosteredadvantageousconditionsfortheinternationalsettlementoperationtobecomeincreasinglyenhanceddaybyday,fulfillingthebasicrequirementofopen process andintegrationofeconomy

However,internationalsettlementoperationmustundergolegalsystemsa n d complicatedoverseaspractices,ifitwasn o t tob e f u l l y understood,risksthatincludeeconomic,politicandsociallosseswouldinevitablyarise.LessonslearnedfromthepaststronglysuggestthattheworkingofVietnamcommercialbanksaren o t tobeignored

Theinternational settlementoperationofAgribankhasnowbeendeployedfor10years,yetAgribankhasbeenencounteringcountlessdifficultiesandinsufficienciesinthewideningofitsactivem a r k e t share.Int h e contextofintegrationintotheworldeconomyalongsidetoughcompetition,commercialbanksmustincessantlydevelopandwidentheirtradeactivities.Amongthosebanks,theinternationalsettlementoperationwasutilizedinordertobroadenandimprovetomeetcustomerneeds.Furthermore,theoperationhelpedincreasethebank’sincomeandenhance

theavailabilityofcompetition.Now,however,allbanksinVietnamandAgribankChoLoninparticulararefacinga greatdealo f d i f f i c u l t y a s theyp u t forththeireffortstoovercomethisobstacle.EvaluatingtheefficiencyoftheinternationalsettlementoperationatAgribankChoLonleadstotherealizationthatimprovementsto this operation must bescientificallybased.

Froma b o v e m e n t i o n e d practicali s s u e s , subjecto f t h i s t h e s i s “InternationalSettlementOperation–

- Howcanweevaluatethecurrentstatusoftheinternationalsettlementoperationa t ChoLonbranchduringthepastfewyears?

- Whatw e r e t h e a c h i e v e m e n t s a n d shortcomingso f t h e i n t e r n a t i o n a l settlemento p e r a t i o n atChoLonbranch?

- Howcanwedevelop andimprovetheinternationalsettlementoperation atCho

L o n branch?

2.2 Researchobjectives

Theresearchobjectiveistheresearcher’sversionofabusinessproblem.Oncetheresearchq u e s t i o n s h a v e be en s t a t e d , t h e r e s e a r c h o b j e c t i v e s a r e d e r i v e

d f r o m t h e problemd e f i n i t i o n T h e s e objectivesexplainthepurposeoftheresearchinmeasurabletermsanddefinestandardsofwhattheresearchshouldaccomplish

- To make clear literature of internationalsettlementoperation

- Topointoutfactorsinfluencingtheinternationalsettlementoperationaswellasstandardsforevaluatingthequalityoftheinternationalsettlementoperation

- ToanalyzeactualefficiencyoftheinternationalsettlementoperationappliedatAgribankChoLoninperiodoftimebetween2006and2009

- Tosuggestsolutionsf o r developingandi m p r o v i n g t h e i n t e r n a t i o n a

l settlementoperation

3 Scope andlimitationof the thesis:

Thethesismainlyfocusesondevelopmenta n d improvemento f theinternationalsettlementoperationa t oneb a n k , AgribankC h o L o n i n periodoftimebetween2006and2009

ChoLon.Surveysbyquestionnaireswereusedbecausetheyprovidequick,efficientandaccuratemeansofaccessinginformationaboutthepopulationandthesubjectofstudy.Ina d d

i t i o n , t h e y a r e moreappropriateincaseswheret h e r e i s a l a c k o f

secondarydata.Int h i s c a s e , secondaryd a t a concerningperformancea n d performan

ce measurementof the international settlementoperationatAgribankChoLonwasinsufficient,makingitnecessarytoconductasurveytogathertheneededinformation

Thesecondarydatamethodwasa l s o usedt o i n v e s t i g a t e t h e performanceoftheinternationalsettlementoperationatAgribankChoLon.Variablessuchasratiosofimportexportpayment,ratiosofcommodities,andratiosofpaymentmethodswerederivedfromannualreportsfromAgribank.Somecomparisonsweredepictedi n tables.Proceduresoftheinternationalsettlementoperationwe r e o u t l i n e d b y diagrams

Sourceofinformation:Sourceofdatawascollectedfrombankingmagazinesanda n n u

a l reportsfromtheStatebankofVietnam, annual reports from Agribank

Limitationsofdatasource:Datawasmainlycollectedfroma periodo f 4 y e a r s : 2006,2007,2008and2009

5 The thesis’s structure:

anddiagrams,listofcharts,listofreferences,themainbodyofthethesiswasconstructedinto4chaptersdetailedasfollows:

Chapter1:Internationalsettlementoperationofcommercialbanksincontextofinternationaleconomicintegration

Chapter 2: Research Methodology

settlementoperationatAgribankChoLonChapter4:Solutionsfordevelopinga n d i m p r

o v i n g internationalsettlementoperation atAgribankChoLon

Chapter1:Internationalsettlementoperationofcommercialbanks incontextofinternationaleconomicintegration

1.1 Integrationinto theworldeconomyinfield of banking and finance

1.1.1 Common issues ofi n t e g r a t i o n intothe world economy

Today,theglobalizationmakestheinternationaleconomicintegrationbecomea reality.Itattractsallcountries,fromrichonestopooronesandlargeonestosmalloneswithoutexception.Thisintegrationisregardedasakeyfactorforacountry’sdevelopment.Iftheintegrationweredonewell,t h e r e wouldbeextensiveopportunitiesforfavorablesocialandeconomicdevelopment;onthecontrary,anycountrythatfailstointegratewouldhavelittlechanceforeconomicdevelopment.Internationaleconomicintegrationinvolvesahighlevelofinternationaleconomiccooperation.Itisa processinwhicha countryparticipatesi n a commonorganization,agenerallyinternationaltrend.Itisthisprocessthatincorporateseachcountry intotheworldeconomy.Integrationisaglobaltendencywhichinfluencesa l l c o u n t r i e s ,

e v e n t o c o u n t r i e s t h a t havenotyett a k e n parti n i n t e g r a t i o n Asa matteroffact,theinfluenceofintegrationi s verystrong,notonlya f f e c t i n g t h e economybuta l s

o politics,c u l t u r e a n d society.Anycountryimplementingintegrationmustadjustitspoliciesandlawstoimplementtheintegrationprocesssuccessfullyand efficiently

Thismatterclearlyshowsthatintegrationisafactortodevelopmentbutitisonlyapotentialone.Toturnitintothetruthinstrategyofeconomicdevelopment,c o u n t r i e s alwayshavetohaveanartofcombinationbetweenexternalandinternalstrengthtomakeapropulsiveforce for economic growth

Infact,manycountriesexecuteopenpolicymoredeeplyandobtainmoreeconomicachievementsandviceversa;however,itdoesn’timplythatanycountrycarriesontheprocessofopendoorpolicyandintegrationwillachievesuccessimmediately.Theresultsmainlydependonthewayandartofintegrationofeachcountryafter

preparingthepremisesandinternalconditionsoftheeconomymaturely.Theoriesofinternationalcommercefromthepastupt o nowaffirmt h e benefitofeachcountrywhenparticipatingi n internationaltrade.Howeverifa countryenterstheglobalplaying-

fieldonlyfort h e benefitofbuyinggoodsandserviceswithgoodprices,butfailtofindthewaytosellitsgoodsandservices,itwillgainlowprofitincomparisontothecostitpays.Thepaymentbalancew i l l alwaysbedeficient,unstable issues willalways appear

Fordevelopingcountries,economicintegrationisagoodchancetofindtheopportunitiestospeeduptheirunderdevelopedeconomy;however,becauseofbeingpoorcountrymeansthattheeconomyofthesecountrieswillhaveinsufficiencies.These

thingslimittheabilityofattractionandutilizationofexternalsourcesasa targetfordevelopment.Sometimes,t h e costofexecutingtheintegrativestrategyissimplytooexpensive.Therefore,tointegrateeffectively,thesecountriesha ve to fi nd thesolutionsforth ei ri nt er

na l problems.Theprocesscannotbeshortened,itmayevenhavetobelengthenedifthereisnoalternative.However,iftheinternalinsufficienciesweresolvedquicklyandeffectively,thei nt eg ra ti on processwouldbringthesecountrieswithmanyopportunitiestospeeduptheireconomy,shortenthelead-

f e a c h country,openingt h e doori n t h i s areai s alwaysanimportantandsensitiveproblem.Activitiesofbankingandfinancialserviceshaveorganicrelationswithothereconomicfields,theyarealsofieldsthat

bringbackmuchprofit,thereforecountriesmustalwaysbecautiousabouthowtheyhandleopening the door of this economic field.

Incomparisonwithothereconomicfields,i n t e g r a t i o n ofbankingandf i n a n c e i s characteristicas follows:

First,thisistheprocessofcapitalsourcemovementamongfinancialmarkets.Thiscanbecomestrongera n d strongera n d i s manytimeslargerthanthecommercialscaleamongcountries

Second,integrationofbankingandfinanceisboththeresultandmotivationofthedevelopmentoftechnologicalscienceintheworld.Thedevelopmentoftechnologicalscienceisa factorthatenhancesfasta n d e f f i c i e n t i n t e g r a t i o n ofbankingandfinance.Nowadays,transactionsareeffectedquicklyandsafely:BillionsofUSDollararedealtwithamongsemi-

globaldistantmarketsinamatterof30secondswithahighlevelofsecurity.Transactionscanbethousandsofmilesawaybutcustomersfeelveryclosehere…

Obviously,technologicalscience“shortens”distanceamongpeople,boundariesamongcountrieshavebecomefaintintheageoftechnologicalscientificrevolution.Itisthisthingthatmakesfinancialmarkets very close in all aspects

Ont h e c o n t r a r y , i n t e g r a t i o n o f bankingandfinancecreatethemotivationforthedevelopmentoftechnologicalsciencedaybyday.Opportunitiesfortradingintheexchangemarketc a n happenveryf a s t , s o timingi s a l w a y s t h e k e y problemi n exchangetrade.Customerdemandsininternationaltradealwaysrequireefficiency,accuracyandsecurity

…

theserequirementscanonlybemetwithusingdevelopedtechnologicalscience.Thedevelopmentoftechnologicalscienceisthepremisesforbankingdevelopmentoftraditionalservicesaswellasnewservice,anditincreasescustomer conveniencein the open economy.Third,integrationo f ba n k i n g andfinancechangesthepracticeofmonetarytrade.Becauseactivitiesofbankingandfinancehaverelationshipswithothereconomicactivities,integrationinthisfieldformsastablebasisfortheeffectiveintegrationofotherfields.Ifso,regulations,l a w s a n d monetaryfinancialstandardsneedt o be

modifiedsothattheyaresimilartoi n t e r n a t i o n a l c u s t o m a n d practice,byconformingtoanidenticalcompetitiveenvironment.Tradingpracticesindifferentmarketsn e e d t

o b e c h a n g e d sot h a t t h e y m a k e opportunitiesforc a p i t a l flowst o moveeasilyacrosstheglobe

Fourth,integrationofbankingandfinanceleadstothetendencythatcountrieswilldependmoreononeanother.Alongwiththeopen-

doortendencyofthemonetaryfinancialm a r k e t , a n y e c o n o m y t u r b u l e n c e happensinonecountrieswillinturnaffectt h e economicsoft h e others.Thebenefitofa completedependenceamongcountriesisthateconomicdevelopmentofagroupofcountriesorofanarealeadtothe developmentofthe others.Thisis theresultofmonetaryfinancialintegrationthatinvolvescompromisesbetweeninvestmentliberalizationandfreetrade.However,t

h i s a l s o bringsupsomeunwantedimpacts:suchasthesituationofinflationimport,a neconomicc r i s i s i m p o r t t h a t hasoftenbeentermeda phenomenoninrecentyears.Thisistheunavoidableconsequenceofstageofglobalization, internationaleconomicintegration

Integrationinthefieldofbankingandfinanceisrenderingcompetitioninthisfieldfiercerallthetime.Unlikecompetitioninotherfields,competitioninthe fieldofbankingandfinancehasspecificcharacteristics:

(1)Rivalsbothcompeteandcooperatetogetherinthesensitivebusiness;rivalsmustdirecttheirattentiontoonecommonsoundenvironmenttoavoidasystemriskwhichcouldleadtothecollapseofserialbanks;

(3)CompetitionintheenvironmentunderthecontroloftheCentralBankineachcountryorinarea;

(4)Competitiondependsnotonlyoni n t e r n a l factorsbutalsoonexternalones(businessenvironment,countrycustom,financialinfrastructure,…)

FortheVietnambankingsystem,internationali n t e g r a t i o n willopenopportunitiesforcooperationaswellasanexchangeofexperience.Thesethingswillhelptoproposesolutionsandapplyefficienttools

inbusinessestopreventriskandenhancetheprestigeandpositionoftheVietnamesecommercialbanksininternationalfinancialtransactions,theywillalsomakegoodconditionsforcapital,technology

andmanagementexperience.Alongwiththeintegrationprocess,legalenvironmentandmonetarypoliciesofVietnamwillbeimprovedquickly,commercialbankswillhavetospecializemoredeeplyinmodernb a n k i n g professiona n d deploynewbanking

productsandservices for widermarket shareat home and abroad

1.2 The internationalsettlementoperationofcommercialbanks

1.2.1 Concepts

* Settlement:Therearemanyconceptsofsettlementbutgenerallysettlementisthepaymentofapartytoanotherforhavingusedorpossessedgoodsandservices,orsome specificrights

Settlementis the paymentfollowing each trade or exchangeof goods and/orservice.Settlementisthefinalstageof relation between goods andmoneythatisbuiltonthebasis of each party’s satisfaction

orservicesb e t w e e n organizationsorindividualsinthisc o u n t r y andt hos e ofothercountries,betweenone co un tr y andotherinternationalorganizations.Thisisputintoeffectbybanking relations

ofthecountriesinvolved.Ingeneral,internationalsettlementisthesettlementofmonetaryobligationsandmonetaryrequirementsgeneratingfromrelationsb e t w e e n economy,commerce,f i n a n c e , a n d c r e d i t amonginternationaleconomicorganizations,enterprises,andindividualsindifferentcountries.Itendsanoperationprocessinthefieldofextern

al economy under different forms

Thenatureofinternationalsettlementisanoperationinwhichthebanksareintermediaryinstitutionswhichusetheirexperience,knowledge,andprofessional

skillsmakethepaymentsafeandefficient,andalsotoprotecttheclient’sbenefitint r a n s ac

t i o n s of payment as wellasincreasethebank’s profit

Ultimately,internationalsettlementarisesfromworldtradeactivities,itisthelaststageintheprocessoftradingandexchanginggoodsandservicesamongorganizationsa n d individualsi n differentcountries.Iftheinternationalsettlementoperationwerewellorganizedandperformedquickly,safely,efficiently andprecisely, it would make an activeeffecttoforeigntradeactivityofacountry

Internationalsettlementisdifferentfromdomesticpayment(inlandoperation),ito ft en relatescloselytocurrencyexchangeamongdifferentcountries.Thedomesticcurrencywithfunctionsasmeansofcirculation,meansofpaymentwillnotexcessitsvalueiftwopartiesinthecontractdonotreachtoaspecificagreement.Hence,thecurrenciesofforeigntransactionarenormallystatedwithprecisionininternationalcreditagreementsa n d foreigncommercialc o n t r a c t s bynegotiatingparties.Currenciesusedfrequentlyininternationalsettlementareoneswiththeability to participate in free exchange, such as USD, GBP,JPY,andEUR

However,USDstillplaysakeyroleininternationalsettlementbyitsconvenienceandefficiencyintransactionsperformed.Now,mostpaymentsininternationalsettlementare bytele

x, SWIFT,orderforcollection,ororderforpaymentamongbanks concerned,thereforetheratio ofcash paymentisvery small

1.2.2 Roleandtheobjectivenecessityofdevelopingandimprovingi n t e r n a t i o n

a l settlementoperation of commercial banks

Becauseinternationalintegrationishappeningintensely,eachcountrythatwantstodevelopalsohastohavecomplicatedanddiversifiedinternationalrelationsconcerningitseconomy,politics,society,c u l t u r e , etc…

Amongt h e m , e c o n o m i c integrationa l w a y s playsa keyrolea n d maintainsaninfluentialpositioninotherfields.T h e processofeconomicintegrationindispensablydevelopsdemandforpayment.Themoreeconomicintegration progresses,the highertheneedofinternationalsettlement.Theinternationalsettlementoperationhasani m p o r t a n t

roleinensuringthecirculationofinternationaleconomicrelations,andpromotingthe developmentofimportandexport enterprisesaswellasthegrowthofcommercialbanks.

1.2.2.1 Fortheeconomy

Theinternationalsettlementmaybethelaststageintheinternationalexchangeofgoodsandservices,butitiscertainlyoneofthemostimportantstagesofall.Ifnotfortheinternationalsettlementoperations,theinternationalcommercialoperationsinp a r t i c u l a r a n d t h

e e x t e r n a l economicoperationsi n generalwouldhardlye x i s t , andmuchlesshaveroomfordevelopment.Therefore,thedevelopmentandimprovementoftheinternationalsettlementoperationisanobjectiverequirement,therebyitsetsthestagef o r t h e e x t e r n

a l economytodevelop.I f f o r e i g n t r a d e d e v e l o p s , acountrycouldutilizetheadvantagesefficiently,andthuspromotegoodand stableeconomic growth, allresourceswouldbeexploredand usedefficiently

1.2.2.2 For the enterprises

Theinternationalsettlementisa factordirectlyaffectingbusinessoutcomes.Developmentandimprovementofinternationalsettlementmakesopportunitiesforenterprises

toparticipate in internationalcommercial operations, because:

(1) Ifpaymentwereeffectedquickly,thetimeforcapitalturnoverwouldbeshortened,efficiencyofcapitalwouldincreasealongwithgrowthofsaleandprofitof

participatingparties

(2) Throughinternationalsettlementoperation,wecanjustifyfinancialability,prestigeand economic potential of eachparticipating parties;

(3) Ifinternationalsettlementwereeffectedquickly,safelyandefficiently,domesticproduction would thenbeableto export goods abroad

Inshort,theinternationalsettlementisani m p o r t a n t l i n k t h a t i s indispensablet o foreigntradeifitisseriouslyconsideredunderbothspacea n d time.T h e morefavorabletheinternationalsettlementis,themorebusinessrelationscanbe

consolidatedandwidelyopened.Likelinkingachain,thesepaymentscanbeprocessedmorequickly,whichwillnotonlyincreaseoverallcapitalturnoverandbusinessoutcomes,butalsowillpullotherlinksofthechaintowarditsorbitandstrengthenthe motivational power forthe developmentof the economic machine.

1.2.2.3 Forthestatemanagement

First,throughthecontrolandmanagementoftheinternationalsettlementoperation,thegovernmentcouldregulatetheinflowandoutflowofforeignexchanges,andmakeabasisonwhichtoproposefiscalpoliciesandeffectuatethem.Bycontrollingthei n t e r n a t i o na l settlementoperationi n commercialbanks,thegovernmentcouldmanagetheimport-

exportoperation,formingthebasisonwhichtoregulatecurrentbalance.Moreover,th ro

u gh these,t h e governmentc o u l d proposeappropriatepoliciesofforeigntradetomaximizethebenefitfrominternationalsettlementoperation Worldtradeisnotonlyacommercialinstrumentbutalsoatoolthatcanbeusedtoimplementsocialandpoliticalintriguesofothercountries,blocofcountries, andtheforcesintheworld.Therefore,theinternationalsettlementisveryimportanti n macro-

managemento f government.T h e governmentc o u l d controlforeign loans,anduseoftheseloansto understand all parties’ purposes

Second,throughpracticalmattersofinternationalsettlement,thegovernmentcouldadjustinadequaciesintherulingsystem,policiesrelatingtointernationalsettlement,sot h a t t h e ywouldbesuitableforthenewsituation,andensurethel i f t i n g ofallbarriers,andpromotethe foreign trade development

1.2.2.4 Forcommercial banks

Int h e contextofintegration,a vastfieldofoperationforcommercialbankshasbeenopenedduetointernationalcommercialactivitiesbecomingmorepopularandtheneedforinternationalsettlement,loaninforeigncurrency,andforeignexchangetradeincreasing.Ifcommercialbanksutilizetheinternationalsettlementoperationefficiently,theywillobtainmeanstoattractmoreclientsandaffirmtheirbrand

nameinbusiness.Therefore,thedevelopmentandimprovementoftheinternationalsettlementoperationhasbecomeanobjectiveforthecommercialbankstoexecutetheir customerstrategies.

Theinternationalsettlementoperationisabankingactivitythatmakesincomewithfewerrisksincomparisonwithtraditionalbankingproducts.Throughthedevelopmentoftheinternationalsettlementoperation,bankshavereceivedmoreincomefrommanykindsofchargesandfees.Moreover,asmentioned,thedevelopmentandimprovementoftheinternationalsettlementoperationisanefficientwaytoupprestigeandtradenameo f t h e banksi n market,a t t r a c t morepotentialclients,anddevelopnewkindsofproductstoincreaseincome.Thesehelpto diversify banking activities and minimize risks in business

Theinternationalsettlementoperationisdifferentfromotheractivitiesinthatbankshaverelationswithnotonlytheirclientsbutalsoanetworkofcorrespondingbanksintheworld,andthroughit,commercialbanksgainopportunitiestoapproachoverseacustomersaswellasmakeanimageintheworldwideeconomy.Thispromisesafirmbasis

forthedevelopingmarketinthefuture

Asi n abovem e n t i o n e d analysis,t h e developmenta n d improvemento f t h e internationalsettlementoperationisanobjectiverequirementofcommercialbanksi n contextofworldintegrationofeconomy.Ithelpsbankstoproperlyexecutetheircustomerstrategies,andaffirmtheirtradenamesintheworldcommunity stepbystep

1.2.3 Meansofinternationalsettlementoperation

1.2.3.1 Bill ofexchange

Abillofexchangeplaysanimportantpartinthecommerciallifeofacountry.Theneedforitariseswhenthebuyerofgoodsneedsaperiodofcreditbeforepayingit;itisdrawnbythecreditorandisaccepted bythedebtor.AccordingtotheBillofExchangeActof1882:Abillofexchangeisanunconditionalorderinwriting,addressed b y o n e persontoanother,signedb y t h e p e r s o n givingit,requiringthe

persontowhomitisaddressedt o payo n demando r a t a fixedo r determinablefuturetimeasumcertaininmoneytoortotheorderofaspecifiedperson,ortothebearer.

Abillofexchangemustbeinwriting.Itmustcontainanordertopay.Theordertopaymustbeunconditional.Ifitissubjecttothehappeningofsomeevents,itwillnotbeconsideredabillofexchange.Itmustbesignedbythedrawerandproperlystamped.Thepartiestothebill,thedrawerandthedraweeandpayeemustbecertainanddefiniteindividuals.Theamountpayablemustbecertain.Thepaymentmustbemadeinmoneyandnotinotherkind

Froma b o v e m e n t i o n e d definitionofbillofexchange,wecandeducethreemaincharacteristics fromit:

Abstract:Theremustnotbecontentofcreditrelationonthebillofexchange;i t terminatesobligationimplyingfromcausalrelation;thebillofexchangeonlycontains an ordertopay.The amount payable mustbecertain

Obligatoryt o pay:T h e payeemustpaythesumpayableasstatedonthebillofexchangeandcannotq u o t e privater e a s o n torejectpaymentforthedrawerorendorser,unlessthebillofexchangeismadeillegally.Theordertopaymustbeunconditional

Transferable:Billofexchangecouldbenegotiatedonet i m e orm a n y t i m e s i n i t s maturity

Abillofexchangemustcomplywithregulationsofappearanceandcontenttobelegallyvalid

+Forappearance:Thebillofexchangemustbeinwriting.Thebillofexchangeisoften madeintwocopies withthesamelegalvalue

+Forcontent:Thebillofexchangemusthavethetitle,specificplace,anddateofi s s u e ofthebill,unconditionalorder,specificamountindigitsandinwords,specificnames ofboththepayer and thepayee

Withtheobligationtopayandabstract,thebillofexchangecanbeusedasa convenientmeans

of circulation in the foreign exchangemarket

1.2.3.2 PromissoryNote Payment:

Apromissorynoteisanunconditionalpromiseinwritingmadebyonepersontoanothersignedbythemakerengagingtopayondemandor

atafixedordeterminablefuturetimeasumcertaininmoneytoortotheorderofaspecifiedpersonortothebearer

Ingeneral,legalprinciplesofbillofexchangeareoftenusedtoexplainthespecifiedfactorsofpromissorynote,suchas:endorsement,timeofpayment,sum

ofmoney,wayo f making,e t c However,a promissorynotehassomemaindifferencesfromabillof exchange, as follows:

Checkisameansofpaymentusedformanyyears;itisnotonlyusedpopularlyininternalpaymentofcountriesbutalsousedi n internationalsettlementsofco mm od it y, service,a n

d

non-tradepayment.Becausec h e c k i s a n unconditionalorderofpayment,bankwillhonoracheckifthefundsofthedraweraresufficientandthecheckisproperlypresented

Ingeneral,countriesusingchecksasmeansofinternationalsettlementmustmeetthefollowing regulations:Geneva ConventionandUniformlawcheckULC1931

Accordingtotheconvention,tobei n conformitywithlegalregulations,a checkm u s t have

t i t l e , c l e a r l y sumofm o n e y i n digitsa n d i n words,datea n d placeofissuance,na

addressofbeneficiaryandthesignatureofdrawer.Toissuea check,thedrawermusthavesufficientfundsintheirbankaccount;amountoncheckmustnotexceeditsaccountbalance.Thetime of payment must bementionedclearlyontheface ofcheck

Becausei t i s characteristicofcheckpaymentt o d e p e n d o n a

Thistoolrequiresspecializedmodernelectronicmachines.Paymentcarddependsonthetimeofvalidityandinitialaccountbalanceatissuingplace.Itisoftenusedtosettlesmallsumofmoney in travel

1.2.4 Common methods of international settlementoperation

Remitter (Import)

Beneficiary (Export)

(3)

thecustomerrequests.Remittingbankmustbethroughitscorrespondentbanksinforeigncountries,andinthebeneficiary’scountrytoapplythefunds

* Parties concerned in methodofremittance:

- Remitter: person who asks his banktotransfermoneytobeneficiary

- Beneficiary: person who receives moneythatthebanktransferredto

- Remitting bank: bank that servesthe remitter

- Paying bank: bankthatdirectlyappliesfundforbeneficiaryMethod of

(4) Payingbankappliesfunds for beneficiary

* Types of remittanceinclude:

- Telegraphic transfer (TT):

Remittingbankputsthemoneytransfersintoeffectbyelectronicorderincorrespondentbanksinforeignc o u n t r i e s t o p a y t o t h e b e n e f i c i a r y T h i s modeo f paymentisbeneficialtothesellerforobtainingmoneyquickly,butthecostishigh.Today,most

moneytransfersaremadethroughthe SWIFT network

- Mail transfer (MT):

Remittingbankeffectuatesthemoneytransfersbymailorderforthecorrespondentbanksinforeign countriestopay forthebeneficiary

* Conditionsof application:

Ifbuyersuseadvancepayment,theywouldbetakingariskbecausetheyhavenotr e c e i v

e d thegoods yet.Thereforebuyers

willbeinacapitaltie-upandtake suchrisksifthesellerdoesnotdeliverthegoods,ortheydelivergoodsdifferentfromtheonesagreeduponinthesalescontract;conversely,sellersgetretainedwhenth ey havenotdeliveredgoodsyet.Hence,theyfeelsecureaboutreceivingmoneythustakingadvantageofthebuyer’scapital

Ifbuyerse f f e c t paymenta f t e r receivinggoods,t h e y willcertainlycontrolthesegoods.Thus,sellersarenotonlyindudcapitalbutalsoinriskbecausethepaymentdepends onbuyer’sgoodwill and seller’sinterests are not guaranteed

Therefore,themethodofremittanceisoftenappliedforpaymentofdebt,paymentinadvancefordeposit,redemptionofsparecash,claimsettlement,ortradeexpenses concerningimport-export activities

Remitting Bank

Presenting Bank (6)

Drawer (Exporter/Seller)

(Importer/Buyer)

- deliver documents on othertermsandconditions

Internationalregulationswhichrelatetoc o l l e c t i o n haveb e e n formulatedb y t h e InternationalChamberofCommerceunder“UniformRulesf o r Collection(URC)522”

* Participantsconcerned in method of collections:

- Principal:Partysubmitst h e c o l l e c t i o n instruction(seller/exporter/ partyprovidingthe service),partyentruststhehandling ofacollectiontoabank

- Remittingbank:Thebanktowhichtheprincipalhasentrustedthehandlingofacollection,thebankremitst h e documentsi n accordancewiththetermsofthecollectioninstructionstothe importer’sbank

- Collectingbank:Anybank,othert h a n theremittingbank,entrustedwiththeexecutionoft h e c o l l e c t i o n ; a l s o c a l l e d thecollectingbank.Itisresponsibleforactuallycollecting payment from the importer

- Presentingbank:thecollectingbankmaking presentationtothedrawee

- Drawee:Recipientofaservicetowhomthecollectiondocumentsarepresentedinaccordance with the collectioninstruction

Method ofcollectionishereunder shownindiagram(Diagram1.2)

Diagram1.2 Process of collection operation

(1) Theseller/

exporterforwardsthegoodsorperformstheserviceandpreparestherequireddocumentstocomplywiththeregulationsoftheimportingcountryandtherequirements of the contract(2) Theseller/exporterlodgesthedocumentsattheremittingbank,signsthedraftafter

it is made up, and completesacollection instruction

to the seller/exporterwhenthedraft is refused to honor by importer

* Common types of collection:

- Cleancollection:documentarycollectionwherebyonlyt h e f i n a n c i a l document(dra

ftorbillofexchange)issentthroughthebankswithoutabillofladingand/

orothershippingdocuments(whicharesentseparatelybytheconsignortotheconsignee).Cleancollectionallowsa consigneetotakedeliveryoftheshipmentwithoutpayingandwitho

ut makingafirmcommitmenttopayonafixeddate

Thismethodofsettlementisappliedwhenthereisarelationshipoftrustbetweentheexporterandtheimporter.Theremustbenodoubtastotheimporter’swillingnessandabilitytopay.Itisalsousedwhenthereisa relationshipofjoint venturebetweentheparentcompanyandthesubsidiarycompany,oramongbranchestogethertopaychargesandexpensesofserviceconcerningtoimportande x p o r t ofgoods.Ingeneral,thismethodisrarelyappliedduetotheseparationofcommodity receipt from payment

- Documentarycollection:amethodofsettlementwherebyabankintheimporter'scountr

ya c t s onbehalfofanexporterforcollectingandremittingpaymentfora shipment.Theexporterpresentstheshippingandcollectiondocumentstoremittingb a n k whichsendsthemt

o i t s c o r r e s p o n d e n t bankint h e importer'scountry.T h e presentingbankhandsovershippingandtitledocumentstotheimporterinexchangeforcashpayment(incaseof'documentsagainstpayment'instructions)ora firmcommitmenttopayonafixeddate(incaseof'documentsagainstacceptance'instructions).Thebanksinvolvedinthetransactionactonlyinafiduciarycapacitytocollectthepaymentbutmakenoguaranties.T h e y areliableonlyforcorrectlycarryingouttheexporter'scollectioninstructions

Documentarycollectionismoresecurethancleancollectionbecausethecollectingbankcontrolstheconsignmentonbehalfoft h e exporter.However,therearestillsomeproblemswithdocumentarycollection,i t doesnotc o v e r t h e riskofnon-

paymento f t h e documents;forexample,t h e importerc o u l d rejecta commodityowin

g tothedownturn of price, orfailuretohonorthedraft atmaturity

1.2.4.3 Documentarycredit

*Concept:documentarycreditisa methodofpaymentt h a t thebankgivesa n undertakin

gundera l e t t e r ofcreditarrangement( o n b e h a l f o f buyera n d a t t h e request o f

a p p l i c a n t ) t o p a y theshipper( beneficiary) thevalueofthegoodsshippedi f c e r t a i

n documentsa r e submitteda n d i f t h e stipulatedt e r m s a n d conditions arestrictlycompliedwith

* Participantsconcernedindocumentary credit:

- Applicant:Entity(usuallyanimporter)whoappliestoabanktoestablishaletterofcreditinfavorofanotherentity(the'accreditedparty'or'beneficiary,'usuallyanexporter).However,whereafinancecompanyappliesforaletterofcreditonbehalfofanimporter,thefinancecompanyisusuallycalledthe'applicant'andtheimporter

iscalledthe'accountparty.'Alsocalledaccounteeorapplicant

- Beneficiary:Partynamedinaletter ofcredit thatcan demandordraw paymentund

er it

- Issuingbank:Buyer’sorimporter'sb a n k whichestablishes(opens)a letterofcreditinfavorofabeneficiary(sellerorexporter),forwardsittoanadvisingbankfordeliverytothebeneficiary,andcommitsitselftohonordemanddraftsdrawnbythebeneficiaryagainstt h eamountspecifiedi n t h e l e t t e r ofcredit.Alsocalledopeningbank

- Advisingbank:Correspondentbank(usuallyi n t h e exporter'scountry)ofani s s u i n

g bank(usuallyintheimporter'scountry)thatreceivesaletterofcreditfromtheissuingbankforauthenticatingitandinforming('advising')t h e exporter(thel e t t e r ofcredit'sbeneficiary)thataletterofcredithasbeenopenedbytheimporterintheexporter'sfavor.Thea d v i s i n

g bankusuallyalsotakesonotherrolesinthetransaction,suchas(1)confirmingtheletterofcredit(playingtheroleofthe'confirmingbank'),

Confirmingbank:Bankinanexporter'scountrywhichguaranteesthattheletterofcreditestablishedbytheimporter(forthebenefitoftheexporter)willbehonoredoncetheconditionsthereinarefullycompliedwith.T h e confirmingbank(Alsoc a l l e d t hea dv isi ng bank)undertakesthisresponsibilityonanarrangement(calledconfirmation)withtheimporter'sbankwhichissuedtheletterofcredit(calledthei s s u i n g bank)

Nominatedbank:thebankwithwhichthecreditisavailableoranybankinthecaseofthecred

it available withany bank

(2) Thei s s u i n g bankwillopena l e t t e r ofc r e d i t a s t h e a p p l i c a t i o n c a l l e d fora n

d contactitscorrespondentintheexporter’scountrytosenddetailsofthecredittotheexporter

(3) Advisingbankinspectst h e l e t t e r ofcreditreceived,authorizesandadviset h e exporter

(4) Theexporterwillmanufacturethegoodscalledforundertheletterofcreditandthen takethe goods to the docks to have themshipped

(5) Theexporterwillthengathertogetherallthedocumentationcalledforunderthecredit.Thesetofdocumentswillbetakentothenegotiatingbankandtheexporterasksthebanktopayornegotiatethedocumentation

(6) Thenegotiatingbankstaffwillinspect thedocumentationandifitissatisfiedthedraftwillbeacceptedbythebank.Thebankmakespaymentornegotiatesthedocumentsunderletterofcredit.

(7) Negotiatingbank willforward the documents to the issuing bank

(8) Uponreceipt,thisbankwillinspectthemandiftheyareinorder,itwilleffectpaymentunder instructionsofnegotiatingbank

(9) Thei s s u i n g bankwilldebittheimporter’saccountandm a k e t h e documentsavailabletotheimporterreceiving goods

Common typesofdocumentarycredit:

Irrevocableletterofcredit:Firmcommitmentbyanissuingbanktopayanacceptingbank

a specifiedsumi n a specifiedcurrency,providedt h e conditionsincludedintheletterofcreditdocumentaremetwithinaspecifiedtimeframe.Thisletterofcreditcannotbecanceled(oritstermsamended)withouttheseller's(beneficiary's) prior writtenapproval

Revocableletterofcredit:l e t t e r o f creditt h a t m a y b e a m e n d e d o r canceledan

ytimebythebuyer(theaccountparty)withouttheapprovaloftheseller(thebeneficiary).Sinceitd o e s notprovideanyprotectiontotheseller,itisrarelyu s e d Somebanksevenrefusetoissuesuchletterofcreditsforfearofgettinginvolvedinthepossiblelitigationbetween the buyer and the seller

Revolvingletterofcredit:Singleletterofcreditthatcoversmultiple-shipmentso v e r alongperiodoftime.Insteadofarranginganewletterofcreditforeachseparateshipment,thebuyerestablishesaletterofcreditthatrevolveseitherinvalue(afixedamountisavailable whichisreplenishedwhenexhausted)orintime(anamountisavailableinfixedinstallmentsoveraperiodsuchasweek,month,oryear).letterofcreditsrevolvingintimeisoftwotypes:inthe

cumulativetype,thesumunutilizedinaperiodiscarriedovertobeutilizedinthenextperiod;whereasinthenon-cumulativetype,it is not carried over.

Redclauseletterofcredit:letterofcreditthatcarriesaprovision(traditionallywritteno

rtypedinredink)whichallowsasellertodrawuptoafixedsumfromtheadvisingorpaying-

bank,inadvanceoftheshipmentorbeforepresentingtheprescribeddocuments.Itisnormallyusedonlywherethebuyerandsellerhavec l o s e workingrelationshipb e c a

u s e , theb u y e r i s essentiallyextendinganunsecuredloantotheseller(and

bearsthefinancial riska n d the currency

risk).Standbyletterofcredit:Primarilyasubstituteforaperformancebondorpaymen

tguaranty,thisletterofcreditisusedmainlywherebanksarelegallybarredfromissuingcertaintypesofguaranties.Itservesasaparallel(collateral)paymentsourceincasetheprimarysourcefailstomeetitsobligationsinpartorin full

Transferableletterofcredit:Irrevocableletterofcreditwitht w o (andonlytwo)succe

ssivebeneficiaries.Inthisarrangement,thefirstbeneficiary(anintermediaryorimporter'sforeignrepresentative)canassignpartorwholeoftheletterofcreditamounttoasecondbeneficiary(thesupplierormanufacturer).Tobetransferable,theletterofcreditmustbesomarkedbytheissuingbankontheinstructionsofthebuyeror importer(theaccount-

party).Ontheinstructionsofthefirstbeneficiarytheadvisingbankcantransferittothesecondbeneficiarybut not anyfurther

Backtobackletterofcredit:Arrangementinwhichoneirrevocableletterofc r e d i t

servesasthecollateralforanother;theadvisingbankofthefirstletterofcreditbecomestheissuingbankofthesecondletterofcredit.Incontrasttoa'transferableletterofcredit,'permissionoftheultimatebuyer(theapplicantoraccountpartyofthefirstletterofcredit)o r t h a t o f t h e issuingb a n k i s n o t

1.3.1.2 Developmentofinformation technology.

Nowadays,revolutionininformationtechnologysciencehappensveryquickly,andinformationtechnologyhasseengreatprogress.Itsdevelopmenthasaffected theactivitiesofthecommercialbanksingeneral,theoperationofinternationalsettlementinparticular.Theinternationalsettlementoperationhasbasicchangesincomparisontopasttraditionalpayment

M a n y c e n t e r s o f c l e a r i n g paymenth a v e beenestablishedinEuropeandAmerica.TheappearanceofSocietyforworldwidei n t e r b a n k financialtelecommunication(SWIFT)allowstheinternationalsettlementoperationtobecarriedout quicklyandsafely

1.3.1.3 Practicesandstandardsofinternationalsettlementoperation.

Theinternationalsettlementoperationwillbeaffectedorgovernedbynationallawsfirst,thenbyasystemofcustoms,internationalpracticesthatareverycomplicated

- UCP:TheUniformCustomsandPracticeforDocumentaryCredits(UCP)isasetofrulesontheissuanceanduseoflettersofcredit.Historically,t h e commercialparties,particularlybanks,havedevelopedthetechniquesandmethodsforhandlingl e t t e r s ofcreditininternat

standardizedbytheICC(InternationalChamberofCommerce)bypublishingtheUCPin1933andsubsequentlyupdatingitthroughouttheyears.TheICChasdevelopedandmoldedth

e UCPinregular revisions,thecurrentversionbeingtheUCP600

- URR:TheUniformRulesforBanktoBankReimbursementsunderDocumentaryCreditsICCPublicationNo725shallapplytoallBankt o Bankreimbursementswheretheyareincorporatedintothetextofthereimbursementauthorization.Theyarebindingonallpartiestheretounlessotherwiseexpresslystipulatedinthereimbursementauthorization Theissuingbankisresponsibleforindicatinginthedocumentarycreditthatreimbursementclaims are subjectto these rules

aidbankers,buyers,a n d sellersi n t h e collectionsprocess.T h e ruleshavebeenprepare

dt o resolveproblemsthatpractitionershaveexperiencedintheireverydayoperationssince1979

URC522underlinestheneedfortheprincipaland/

ortheremittingbanktoattachaseparatedocument,thecollectioninstruction,toeverycollectionsubjecttotherules

thatbankswillnotexaminedocuments,particularlynottolookforinstructions-addressesproblemsbanksexperienceinrespecto f documentsagainstacceptance(D/A)anddocumentsagainstpayment(D/P)-clearlyindicatest ha tbankshavenoobligationtostore and insure goods when instructed

- Incoterm:I n t e r n a t i o n a l CommercialTermsarea seriesofi n t e r n a t i o n a l salesterms,publishedbyInternationalChamberofCommerce(ICC)andwidelyusedininternationalcommercialtransactions.Theyareusedtodividetransactioncostsandresponsibilitiesbetweenbuyera n d sellera n d reflectstate-of-the-

arttransportationpractices.Thefirstversionwasintroducedin1936andthemostrecentdatesfrom2000.Incotermsmakeinternationaltradeeasierandhelptradersindifferentcountriestounderstand oneanother

1.3.1.4 Levelofdevelopmentandopenofeconomy.

Thelevelofdevelopmentoftheeconomywillstronglyimpacttheinternationalsettlementoperationofa country.Whent h e e c o n o m y grows,activitieso f productionanddomesticinvestmentwillbeenhancedandwillattractforeigninvestment…

Thesemaketheinlandactivitiesofimportandexportmoreeventful.Allofthosewillstimulatetheinternationalsettlementoperationtodeveloptomeetthe economy’s requirements

1.3.1.5 Macro economic policiesof government

Theinternationalsettlementoperationi s a d j u s t e d b y macroeconomicp o l i c i e s o f government, such as:

- Foreignt r a d e policy.T h e r e a r e t w o maint r e n d s ofi n t e r n a t i o n a l c

o m m e r c i a l policies.Thosearetradeprotectionpolicyandfreetradepolicy.Iftradeprotectionpolicyismuchmoreapplied,foreigntradewillhavemanydifficulties,andinternationalsettlementoperation willbe reduced;andvice versa

- Foreignexchangecontrolpolicy.Relatedtoloosenessortightnessofforeignexchange.Ifthepolicyisloose,theadvancedconditionsforinternationalsettlementoperation develop,and vice versa

- Exchangeratepolicy.Relatedtotheassessmentofthedomesticcurrencyvalue.Ifdomesticcurrencyisquotedata lowprice,exportwillincreasebutimportwilldecrease,andviceversa.Exchangeratealsohasaneffectoncashflowoftourism,

Alloftheseinfluenceinternationalsettlementoperation

1.3.1.6 Competitionofother commercialbanks.

Competitionbetweencommercialbanksconstitutesanimportantfactortoperfectionoftheinternationalsettlementoperation.Acommercialbankwillwininastruggle,increaseofitsvarietyofcustomersandboostt h e scaleoft h e internationalsettlementoperationifitcanservethecustomersoftheinternationalsettlementoperationwithhighsecurity,lowcost,andshortprocessingtime.Thatistheissuewhichmakesadvantageousconditionsforinternationalsettlementoperationtoimprove

t i o n a l productsandservices,andthedevelopmentofnewones,acombinationo f applyingmanykindsofproducts,servicesandgeneralcustomer’sneeds,ac o m b i n a t i o n ofincreasingqualitiesofcustomerserviceandstrengtheningmarketing policy.Ifso,thebankwouldwininfiercecompetition,andattractmoreandmore customers

1.3.2.2 Policyofforeignaffairs

Thepolicyofforeignaffairsincludesgeneralorientationsofextendingrelationsofforeignaffairs,andrelationsofcorrespondentsbetweenforeignbanks.Thosethingshelptobringaboutgoodresultsinservingcustomers,diversifyingbusinessactivitya n d increasingbankingp r o f i t s i n t h e contexto f i n t e g r a t i o n A g o o d policyo f foreigna f f a i r s woulda t t r a c t increasinglymorecustomersa t homea n d a b r o a d ,makingreliablerelationswithforeignbanks,raisetheeffectsofservingthec u s t o m e r ,

themidstoffiercecompetitioninbankingandfinance.A rightforeignpolicywillmakeasoundbasisonwhichtoconsolidatea n d raiseprestige,a t r a d e marko f commercialb a n

k s i n t h e worldcommunity

1.3.2.3 Developmentlevelofbanking technology

Bankingtechnologyincludeswholem a t e r i a l facilitiesa n d networkformanagement,

a n d a l s o t h e o p e r a t i o n o f t h e bankingbusiness.Theinternationalsettlementoperationwouldhardlydevelopunderthep r e s s u r e o f o b s o l e t e technology.Accordingt o n e w practices,transactionsa n d paymentsa r e processedbytelegraphictransferthroughSWIFT;settlementsaretreatedonaccountsatclearingpaymentcenters.Therefore,outdatedtechnologywillcreatedifficultiesforforeign banks,andthebank

asitdropsinthenumberofcustomers daybyday.Approachingmoderntechnologycannotonlyhelpimprovetheprocessoftheinternationalsettlementoperationbutalsomakeagoodbasisforthedevelopmentofnewproductsandservices,makingt h e i n t e r n a t i

o n a l settlementoperationprogressivelydevelop more effectively

1.3.2.4 Structureoforganizationandmanagementforinternationalsettlementoper

ation

Thisincludesthesystemoforganization,function,mission,authorityofeachdivision,regulations,a n d processofthei n t e r n a t i o n a l settlementoperation…

A consistentsystemofmanagementundera reasonableprocesswillminimizerisks,shortenpaymenttime,increaseeffectivenessoftheinternationalsettlementoperation,andraisethebank’s prestige among customers

1.3.2.5 Knowledge,ability of dealersininternationalsettlementoperation

Theinternationalsettlementoperationrequireshavinga thoroughgraspofinternationalpractice;theprocessoftheinternationalsettlementoperationbywhichrisks arereducedforcustomersandbankitself.Thatiswhyofficersoftheinternationalsettlementoperationmustbefluentina foreignlanguage,andalsofluentininternationalpayments.Theymustoftenanalyzemarket’sfluctuationsthati n f l u e n c e exchangeratesan dp ro po se quickdecisionstoobtainthebestresultsinbusiness.Then,theycouldconsultcustomersfromthestageofsigningcontracttot h e stageofselectingsafeandsuitablepaymentmethod.Theseareveryimportantpremisesonwhich to attract customers

1.3.2.6Otheractivitiesi n r e l a t i o n withinternationalsettlementoperationofcom mercial banks

Thisincludesforeigncurrencytradeandcreditforimport-export.Theseactivitieshavecloserelationstotheinternationalsettlementoperation;theysupportandboostthei n t e r n a t i o n a l settlementoperationofcommercialbanks.Iftheseaspectsarenotedtodevelop,theinternationalsettlementoperationcan be carried outeasily.Onthecontrary,iftheinternationalsettlementoperationisproperlycarriedout,creditfor import-exportand foreign currencytradingwill be developed