Ministry of education and training Hanoi University of Business & TECHNOLOGY Faculty of English * * * * * GRADUATION ASSIGNMENT INTERNATIONAL PAYMENT BY LETTER OF CREDIT AT SAIGON THUONG TIN COMMERCIAL JOINT STOCK BANK Student: Le Thi Phuong Group: TA14-02 Course: 2009-2013 Supervisor: Tran Thi Tuyet, MA Acknowledgements This graduation assignment could not have been completed without the help, encouragement and support from a number of people who all deserve my sincerest gratitude and appreciation First of all, I am heartily thankful to Mr Tran Anh Tho for his encouragement and support He is like a guide, who helps the students in each and every sphere of life, by giving the right advice I am also deeply indebted to my supervisor, Mrs Tran Thi Tuyet, whose encouragement, guidance and support from the initial to the final level helped me to finish this graduation assignment I would like to express my gratitude to the leaders of Sacombank branch in Dong Da district for offering me an opportunity to internship there Additionally, I am greatly indebted all the staff members in the International Payment sector of Sacombank- Dong Da for providing me with valuable reference documents to complete this report Finally, I would love to express my sincere thanks to my family and my friends who have helped and encouraged me to complete this graduation assignment CONTENTS ACKNOWLEDGEMENTS………………………………………………… CONTENTS………………………………………………………………… ABBREVIATIONS………………………………………………………… LIST OF TABLES…………………………………………………………….6 INTRODUCTION…………………………………………………………….7 Background of the study…………………………………………………….7 The scope of the study………………………………………………………7 The methods of the study……………………………………………………7 Organization of the study……………………………………………………8 CHAPTER 1: THEORETICAL FRAMEWORK…………………………….9 1.1 DocumentaryCredits…………………………………………………………9 1.1.1 Definitions of documentary credit…………………………………… 1.1.2 Parties to Letters of Credit…………………………………………….10 1.1.3 Process of L/C ……………………………………………………… 11 1.1.4 Types of Letter of Credit………………………………………………12 1.2 Norms to reflect the efficiency of international payment by documentary credit ….…14 1.2.1 Financial norms…………………………………………………………14 1.2.2 Non- financial norms………………………………………………… 15 1.3 Factors to impact the efficiency of international payment by documentary credit… 15 1.3.1 The commercial bank factor…………………………………………… 15 1.3.2 The customer factor…………………………………………………… 16 1.3.3 The business environment factor……………………………………… 16 CHAPTER : ANALYSIST AND FINDINGS ………………………….17 2.1 An overview of Saigon Thuong Tin Commercial Joint Stock Bank……… 17 2.2 Saigon Thuong Tin Commercial Joint Stock Bank - branch in Dong Da district………………………………………………………………………………18 2.2.1.The establishment and development of Sacombank- Dong Da Branch… 19 2.2.2 The organizational structure of Sacombank- Dong Da………………… 19 2.2.3 An overview of international payment operations at SacombankDong Da Branch………………………………………………………………… 20 2.3 Performance of international payment in Sacombank- Dong Da…………….21 2.4 The efficiency of international payment by documentary credit at SacombankDong Da Branch…………………………………………………………………… 23 2.4.1 Financial norms ……………………………………………………… 23 2.4.2 Non- financial norms…………………………………………………… 26 2.5 An evaluation of international payment by L/C at Sacombank- Dong Da…….27 2.6 Causes of limitations in international payment by L/C at SacombankDong Da Branch……………………………………………………………… … 28 2.6.1 Subjective causes……………………………………………………… 28 2.6.2 Objective causes………………………………………………………….30 CHAPTER 3: RECOMMENDATIONS…………………………………….31 3.1 The orientation for the development of international payments at Sacombank-Dong Da from 2013 to2015………………………………………… 31 3.2 Recommendations to improve the efficiency of international payment by documentary credit at Sacombank- Dong Da…………………………………… 31 3.2.1 Diversifying types of L/C……………………………………………… 31 3.2.2 Expanding the operation of export- import credits and support forms……32 3.2.3 Developing the service of customer consultancy…………………………33 3.2.4 Improving the professional skills of staff……………………………… 33 3.2.5 Managing risks in international payments……………………………… 35 3.2.6 Strengthening technology infrastructure……………………………………… 36 CONCLUSION………………………………………………………………37 REFERENCES 38 ABBREVIATIONS Sacombank- Dong Da Saigon Thuong Tin Commercial Joint Stock Bank branch in Dong Da district L/C SWIFT IFC FMO ADB Proparco Letter of Credit Society for Worldwide Interbank Financial Telecommunications International Finance Corporation Entrepreneurial Development Bank Of The Netherlands Asian Development Bank Investment and Promotions Company for Economic Cooperation LIST OF TABLES Acknowledgements Background of the study 2.The scope of the study .6 Organization of the study INTRODUCTION Background of the study International payment activity is more and more important to banks It can be said that the development of international trade depends a lot on the quality of international payment However, this activity is very complicated As one of the best options, documentary credit is the most commonly used in the international payment activity Expanding international payment operation by L/C is getting some trouble for banks, especially, Saigon Thuong Tin Commercial Joint Stock Bank branch Dong Da Derived from that practice along with the process of internship in the International Payment Sector of the Sacombank, Dong Da branch, recognizing the importance of this method of payment for international trade, the author would like to carry out the research “International Payment by Letter of Credit at Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) Dong Da Branch -Overview and Recommendations” The scope of the study It is impossible for this report to deal with every aspect of international payment operations in depth The author chooses to focus on researching and analyzing problems Sacombank- Dong Da met within its international payment method by L/C in order to make some recommendations to improve the effiency of Sacombank- Dong Da’s international payment operations The methods of the study To carry out this study, the author of the report has chosen a quantitative method By examining Sacombank- Dong Da’s reports on the general performance and international payment of the bank, the author collected data which were then analyzed and presented in the forms of tables and charts Organization of the study The Graduation Assignment is in chapters: Chapter 1: Theoretical framework This chapter gives basic knowledge about documentary credits as the definitions, parties to L/C, process of L/C and types of L/C After that, this chapter also points out norms to reflect the efficiency of international payment by documentary credit as well as some factors to impact the efficiency of international payment by documentary credit Chapter 2: : Analysist and Findings This chapter will provide a brief presentation on the establishment and development of Saigon Thuong Tin Commercial Joint Stock Bank, Saigon Thuong Tin Commercial Joint Stock Bank in Dong Da district and introduce about international payment operations of the bank and its documentary credit method Also, some information about International Payment sector of Sacombank- Dong Da is presented Then by researching of financial norms and non-financial norms of international payment operation by L/C of Sacombank Dong Da, the researcher focuses on giving analysis and findings of its problems Chapter 3: Recommendations The researcher makes some recommendations to expand the international payment activity by L/C CHAPTER 1: THEORETICAL FRAMEWORK 1.1 Documentary Credits 1.1.1 Definitions of documentary credit International payment is one of the banking performances transacting the payment of the value of the shipment between the buyer and the seller in the field of foreign trade And Documentary Credit is the most popular and effective measure in international payment beside measures such as Advance Payment, Open Account, Remittance, Collection A documentary credit is a separate contract from an export contract The parties to a documentary credit deal with documents, not the goods that the documents relate to Documentary credits are a common method of payment in the international trade of goods as they offer some protection to both you and your buyer There are different classification of letter of credit, including revocable or irrevocable letter of credit, at sight or deferred payment or transferable letter of credit, etc A documentary credit—also called a letter of credit—is a conditional guarantee of payment in which an overseas bank takes responsibility for paying you after you ship your goods, provided you present all the required documents (such as documents of title, insurance policies, commercial invoices and regulatory documents) The name “letter of credit” derives from the French word “accréditation”, a power to something, which in turn derives from the Latin “accreditivus,” meaning trust This applies to any defense relating to the underlying contract of sale This is as long as the seller performs their duties to an extent that meets the requirements contained in the letter of credit (source : http://en.wikipedia.org/wiki/Letter_of_credit ) 1.1.2 Parties to Letters of Credit According to Nguyen Van Tien (International Payment Book-2007, page 291-321), some key terms can be definite below: Commercial bank: Commercial bank shall mean an enterprise, established in accordance with the Law On Financial Institutions and other applicable laws, conducting monetary business and providing banking services in the form of receiving deposits and using the same to extend credits, provide payment services Applicant: is the buyer/ importer and also the person requesting to issue the letter of credit Beneficiary: is the seller/ exporter or the other third party for those benefits the letter of credit is opened Issuing bank: is the bank responsible for issuing the letter of credit at the request of the applicant as well as making the payment for the perfect commercial document Advising bank: is the bank to notify the credit at the request from the issuing bank Confirming bank: is the bank who commits to coordinate with the issuing bank to pay for the beneficiary at their presence of perfect commercial document Accepting Bank: By accepting the draft, the Drawee Bank signifies its commitment to pay the face amount at maturity to anyone who presents it at maturity After accepting the draft, the Drawee Bank becomes the Accepting Bank Exporter/Beneficiary/Seller: The party that has contracted to sell goods Importer/Applicant/Buyer: The party that has contracted to buy goods 1.1.3 Process of L/C According to Export Finance Navigator- a guide to finance for SME exporters, the diagram below shows the main steps in a typical documentary credit transaction: Importer/ Applicant Goods shipper Exporter/ Beneficiary (5) (1) Contract of sale (2) application for L/C (8) (8) Documents Payment Application Advise (4) (5) (6) Documents Payment (7) Issuing Bank (7) Documents (3) Advise Note to diagram: 10 Negotiating and Advising Bank Payment L/C opened was 65 packs This figure went up 90 packs in 2011 and added 102 packs in 2012 Although the number of L/C opened by Sacombank- Dong Da wasn’t as high as the number of L/C opened by other Sacombank branches, the increasing number of L/C opened over years has expressed the never-ending effort of Sacombank- Dong Da in attracting customers and doing business Because the number of L/C opened from 2010-2012 increased, its payment value also increased The fact can be found in table below Table 3: Sales of international payment by L/C Years 2010 Norms Payment value of L/C (USD) 20,591,653 2011 2012 50,735,421 69,454,784 Next year/previous year 2.4 1.3 (Source: Sacombank- Dong Da’s report about sales of international payment in 2010, 2011 and 2012) It’s seen that the sales of L/C payment has an increasing trend over years The sales in 2012 increased 1.3 times compared to the sum in 2011 which increased 2.4 times compared to 2010 In 2011, the bank only transacted some export L/C, and this has stayed the same since 2010 Customers of Sacombank- Dong Da are mainly in imports businesses such as Tan Dai Phat company, Kim Duong company, South Star company, or export business such as Asia Metal Export Import company This situation comes from the fact that Vietnam enterprises must ensure conditions of money, goods and the security in payment for of foreign parties while they didn’t understand thoroughly about international payment rules 24 According to reports collected from International Payment Sector of Sacombank- Dong Da over the years of 2010, 2011 and 2012, the revenue of export and import L/C went up year by year, the revenue from L/C performance increased However, the revenue from international payments by L/C only occupied a very small proportion in the total revenues At present, Sacombank- Dong Da has 12 significant partners which carried out payment by L/C regularly 2.4.2 Non- financial norms At first, in the group of non- financial norms, the figure about the quantity of L/C paid from 2010-2012 expresses the efficiency of international payment operations by L/C Chart : The quantity of L/C paid from 2010-2012 (Source: Sacombank-Dong Da’s report about payments by L/C in 2010-2012) In accordance with international payment operations’ report in 2012 of Sacombank- Dong Da, the number of L/C opened 102 packs including 20 packs of export L/C and 82 packs of import L/C Each pack often had high payment value because almost customers of Sacombank- Dong Da are import 25 or export enterprises with big quantities of raw materials and equipment In reality, the number of L/C opened by Sacombank- Dong Da account for one third of the total number of L/C opened by Sacombank in 2012 2.5 An evaluation of international payment by L/C at Sacombank- Dong Da As analysis above, the international payment operations by L/C in Sacombank- Dong Da gained some achievements and faced up with some limitations  Achievements With a network of 1027 agent banks through 82 countries in the world, Sacombank- Dong Da has achieved some great results from 2010-2012: Firstly, revenue of payment by L/C has increased despite the Global Economics Crisis 2008 Secondly, the technology used in international payments in general and method of L/C in particular has been moderner and has toughed international payment standards Thirdly, payments by L/C has always occupied high rate in revenue from international payments in the branch Therefore, it has created favorable conditions for developing other banking activities Finally, the time implementing international payment operations has been shorter and its security has been higher  Limitation There were major limitations in international payment by L/C in Sacombank- Dong Da: The first one is that revenue of international payment by L/C from 20102012 wasn’t high enough The total revenue from international payments by 26 L/C from 2010 to 2012 increased But this increase wasn’t adequate with the potentiality of the branch The second limitation is the imbalance between import L/C and export L/C The quantity of issued L/C was mainly import L/C It means almost customers of Sacombank- Dong Da were import enterprises The third limitation about advertising and marketing for products and services of the bank This performance is hardly noticed by Sacombank- Dong Da Many customers don’t know about Sacombank- Dong Da’s products and services Whereas, many other banks such as Vietnam Commercial Bank, Vietnam Joint Stock Commercial Bank For Industry and Trade, etc has implemented many advertising campaigns to attract customers’ attention 2.6 Causes of limitations in international payment by L/C at Sacombank- Dong Da 2.6.1 Subjective causes First of all, Sacombank- Dong Da has not built up its competitive advantage It’s admitted that the branch is located near many big bank As a result, the branch ought to face up with many obstacles in marketing, and approaching customers about favorable conditions they can be received Sacombank- Dong Da has taken part in Hanoi market since 2006, it ought to be influenced by the first-mover banks in the field of L/C ( Sai Gon-Hanoi Commercial Joint Stock Bank, Vietnam Commercial Bank) Now, Sacombank- Dong Da has not planed to reduce the cost for close customers compared to other branch It’s supported that all clients including close clients must pay cost table on the regulation without any discount In brief, this is the main reason causing limitations of Sacombank- Dong Da 27 Secondly, the branch has not diversified its types of services to support international payments by L/C The branch used to apply services such as collateral loans, guarantee to support international payments by L/C Other forms such as counterpart L/C, transferable L/C or back-to-back L/C were rarely implemented This is one of reasons making revenue of export L/C occupied inconderable rate Now, Sacombank- Dong Da hasn’t offered documentary discounts form for importers while discounts have long been offered by Vietnam Commercial Bank On the other hand, the branch has not regularly provided services such as loans on L/C profile, etc to support exporter activities Thirdly, the professional skill of the staff was not really high According to reports from Personnel Management Sector, most of the staff ought to study about international payment operations while working Their knowledge about international commerce and international rules has not been updated regularly The next subjective cause relates to technology equipment and banking engineering Although Sacombank- Dong Da has been equipped with modern technology, the branch has not yet met standards of modern banks Some duties such as managing of customers profile, saving files, etc are still carried out traditional ways of records or notebooks Finally, the process of international payment operations in the branch has still depended the headquarter in Ho Chi Minh city about mobilizing resources and performing payment Thus, procedures of international payment by L/C have been prolix, payment time has been slow This fact caused difficulties for the branch in exports, imports and payment with customers 2.6.2 Objective causes 28 Firstly, the Global Financial Crisis 2008 has seriously impacted all banks in the world including Sacombank- Dong Da Therefore, there was strong fluctuation of foreign exchange in international payments To be more specific, at the time the increase of USD price, the cost of transactions from Management Of Capital and Foreign Currency Department was high, which reduced transactions in payment of import goods with the customer of all banks On the other hand, the customer cautioned with all kinds of international payment transactions So the international payment operations by L/C really met obstacles Next, the commercial policy of Vietnam government wasn’t stable, which caused difficulties for commercial banks in transacting with international parties The continuously change of import taxation causes the fluctuation of goods price So the commercial bank and the importer fell into a difficult situation Whereas, the government’s orientation for import plans of commercial banks is quite important and decide to business strategies of enterprises Finally, the problems came from the customer Actually, the lack of information and international relations made companies wonder much about choosing a partner to transact It’s admitted that customers’ knowledge about regulations, international rules in international payment is not really much Therefore, the combination between the customer and the bank in international transactions was sometimes difficult CHAPTER 3: RECOMMENDATIONS 3.1 The orientation for the development of international payments at Sacombank- Dong Da from 2013 to 2015 29 On the Sacombank’s website, the branch set up the philosophy "to bring perfection to the customer" The general objectives of Sacombank and Sacombank- Dong Da in particular are:   Diversifying its types of banking products and services from 2013 to 2015; Maintaining customers’ satisfaction, loyalty and engagement of with Sacombank;  Maintaining a healthy financial situation;  Continuously improving work incentives to motivate the staff’s creativity In addition, the bank will also continue to improve the organizational structure, expand its network of agent banks to maintain stable, safe, efficient, and sustainable growth in order to develop Sacombank as a multipurpose commercial bank Sacombank’s goal is to become a strong financial corporation on the local market, gradually reaching the world market in 2015 To gain these aims, Sacombank- Dong Da needs suitable methods to develop international payments, especially international payment by L/C 3.2 Recommendations to improve the efficiency of international payment by documentary credit at Sacombank- Dong Da 3.2.1 Diversifying types of L/C At present, Sacombank- Dong Da only applies some types of L/C such as standby L/C, revolving L/C, most of which are import L/C Whereas, international commerce has been more and more expanded, the demand of domestic and foreign enterprises getting for international payment by L/C is higher Calling for more different types of L/C such as back-to-back L/C, counterpart L/C If the bank provides a variety of L/C, it will be able to attract a larger number of customers, leading to an considerable increase in revenue from international payments by L/C 30 For firms importing raw materials and producing products after for the suppliers, the branch should use counterpart L/C This L/C is more effective than packs of irrevocable L/C because the payment process takes less time For firms importing the large quantity and the partner request deposit, the bank may apply standby L/C This L/C ensures that the importer be able to receive goods according to the contract Besides, it will return deposit and related costs for the importer if the exporter doesn’t supplying goods For commercial companies or intermediaries, the branch may open transferable L/C or back-to-back L/C The beneficiary is the producer instead of the intermediary It’s supposed that this type brings the most effective for both sides 3.2.2 Expanding the operation of export- import credits and support forms To gain the aim of expanding international payments by L/C, Sacombank- Dong Da ought to have more methods to support foreign trade Nowadays, the bank has a number of measures to support export import credits However, they has not been used widely It’s necessary to deploy following measures: Documentary discounts: in comparison with loans, this form are less risky because the bank has duty to check the exaction of documents So the bank can deliver goods for the buyer on time Loan on payment of imported goods: now there are many enterprises which after importing goods can’t have immediately enough capital to pay for the bank while the imported goods are in need of the society and sold at high prices In this case, Sacombank- Dong Da may extend the overdue date for the borrowers if they are able to prove to have effective methods of selling goods 31 3.2.3 Developing the service of customer consultancy Export-import companies now lack experience in international negotiating to sign foreign trade contracts and ability to implement rules indicated in contracts signed, rules or different laws of countries in the world There’s a fact that staff of small private companies which have just undertaken operations in international commerce are not good at foreign languages and lack professional about international payments and international trade Hence, disputes between parties involved in transactions often arise, leading to lawsuits and cease in business performance It’s admitted that Sacombank is a big and reputable bank on the market with a large network of agent banks in the world Sacombank- Dong Da’s staff are able to acquire comprehensive information about the financial situation, business capacity and payment ability of foreign clients 3.2.4 Improving the professional skills of staff The quality and efficiency of international payment by L/C depends primarily on human factors The branch’s staff should have better knowledge of international payment to avoid risks in payment The staff should have opportunities to continuously improve their professional qualifications, and have good moral quality In fact, Vietnam’s import and export business is now in the first phase of integration, the payment by L/C is still fairly new to many businesses On the bank side, Sacombank- Dong Da entered into SWIFT system in March 2007, so its payment activity is not really perfect If the staff don’t really understand international laws and customs of international payments, they can not perform international payments quickly, conveniently and accurately 32 Understanding the importance of human factors in international payments, Sacombank- Dong Da’s leaders have continuously organized training courses for the staff to improve or retrain their knowledge of international payments Currently, most of the staff in Sacombank- Dong Da branch are young, qualified and well trained However, they not have a lot of practical experience That’s why many questions and recommendations from customers have not been satisfactorily resolved Therefore, Sacombank- Dong Da needs to carry out some following measures to improve the professional skills of the staff: Building a human development strategy towards improving the quality of the staff, encouraging and promoting the initiative, creativity and scientific working style; Regularly evaluating staff’s capacities On that basis, the branch gives rewards for those who try to their job effectively On the contrary, the branch offers the discipline for those who not complete the task Through these forms, the branch might improve staff’s responsibility, encourage their working spirit Training and retraining international payment knowledge for the staff, regularly organizing seminars to share feedback between the staff and customers, and experience among staff especially between staff of the headquarter and Sacombank- Dong Da In the coming time, when Sacombank expands the market and its international payments, the branch should have separate International Payment Sector to clear every activity and improve the quality of each division 3.2.5 Managing risks in international payments 33 The process of international payment in general and documentary credit in particular often meet a lot of risks such as risks about the exchange rate, the credit, the partners’ profile and international payment rules Nowadays, only in Sacombank- Head Office, there is a Risks Management Department for international payments When performing transactions, at first Sacombank- Dong Da has to fax to the Head Office, then the Head Office checks L/C, finds sources and feedbacks to the branch When risks occur at the branch, the Head Office can not handle in time And during the fax process, signal of transmission lines may be misleaded causing the risk for customers and the branch In the future, along with opening an separate International Payment Division, Sacombank- Dong Da needs a Risks Management Division for international payment operations The staff in this department must have high professional skills to analyze, manage and monitor risks The branch should implement more ways to gather information, get full information source In addition to the available information such as through directly searching from customers, records and reports, etc, the branch may seek information through the mass media, through legal entities, through the prestigious credit institutions 3.2.6 Strengthening technology infrastructure Banking technology is an important factor to decide to the success of international payments, especially documentary credit Therefore, Sacombank- Dong Da should equip with more modern equipment to further speed, improve the accuracy of transmission line, which makes the efficiency of payment 34 Besides, to make competitive advantage, Sacombank- Dong Da should expand its market share, open more transaction offices to meet the demand of international payment operations CONCLUSION Vietnam became a member of the Association of Southeast Asian Nations (ASEAN) in November 2004, the World Trade Organization (WTO) on January 11, 2007 We have been integrating with the world economy, and now our international payment activity of which the documentary credit is the 35 major method is one of the factors that are promoting our economic exchange It can be said that credit method has been a useful tool for Vietnamese exportimport businesses to join the international trade Vietnamese commercial banks are main subjects which keep the important role in credit payment The capacity of banks is a determinant key to the effectiveness of payment method, vice versa; the quality of this method has a direct impact on the expansion of the international trade of Vietnamese businesses Recognizing these matters, firstly, my report focuses on presenting the general theory of documentary credit method, in which the report pays having special attention to standards that assesses the quality of credit payment Then, deriving from practice that I interned in Sacombank branch in Dong Da district, I try to summarize the L/C payment operation in Sacombank- Dong Da in recent years Then I offer some recommendations to improve the efficiency of international payment by L/C in Sacombank- Dong Da in particular and Vietnamese commercial banks in general Because the time for researching and internship is limited, my report has inevitable shortcomings I hope to receive comments from my lecturers and friends that help my report perfect REFERENCES Vietnamese Nguyễn Văn Tiến (2007) Giáo trình tốn quốc tế, 291-321, xuất lần thứ Tư, NXB Thống kê, Hà Nội 36 Ngân hàng Sài Gịn Thương Tín- chi nhánh Đống Đa, Báo cáo thường niên (2008-2010), Hà Nội Ngân hàng Sài Gịn Thương Tín- chi nhánh Đống Đa, Báo cáo hoạt động toán quốc tế (2008-2010, Hà Nội English BIS (2007), Triennial Central Bank Survey of Foreign Exchange and Derivative Market Activity in 2007, Bank of International Settlement, Basle Annual report of Sacombank in 2010, 2011, 2012 URL : http://www.sacombank.com.vn Saurabh Kumar (2008) The Foreign Exchange Market, April 2010 URL: http://www.scribd.com/doc/3928782/The-Foreign-Exchange-Market Jeremy Evans Foreign Currency Trading, forex on demand, April 2010 URL : http://en.wikipedia.org/wiki/Letter_of_credit 9.URL: http://www.eximguru.com/exim/guides/exportfinance/ch_3_letter_of_credit_1c.aspx) 37