INTRODUCTION
Rationale of the thesis
Vietnam's accession to the World Trade Organization (WTO) has significantly boosted its economic growth and international trade opportunities The strengthening of cooperative relationships across various sectors, especially in banking and finance, has drawn considerable interest from investors and banks in international transactions Furthermore, the advancement of the global banking system has facilitated non-cash payments, reducing commissions and saving time In this evolving landscape, banks are compelled to embrace the trends of union and cooperation, which provide them with opportunities to learn, share experiences, and enhance their competitive edge.
In recent years, Vietnam's commercial banks have actively partnered with foreign organizations to enhance exports and integrate into global financial systems Establishing correspondent relationships with foreign banks has emerged as a key strategy for fostering modern banking services and expanding market reach Consequently, developing and nurturing a robust correspondent network has become a primary focus for Vietnam's commercial banks today.
For my graduation thesis, I have selected the topic "Solutions to Develop the Correspondent Bank Network: The Case of Vietnam." This title aims to highlight the significance of correspondent banking relationships and offer recommendations to strengthen the correspondent network of commercial banks in Vietnam.
Aim of the thesis
The thesis aims at studying the theory of correspondent banking and analyzing the real situation of correspondent network of Vietnam’s commercial banks By
BUI HOANG GIANG ATC.A – K12 indicating strengths, weaknesses and recommendations, we can hold the general view on development of correspondent bank network of Vietnam.
Research questions
The thesis will give answers to the following questions:
What is a correspondent bank? What are correspondent banking operations?
How has correspondent bank network of Vietnam grown during recent years?
What are effective solutions to develop correspondent network of Vietnam’s commercial banks?
Research methodology
The thesis primarily utilizes secondary data sourced from websites and organizational reports, with the theoretical framework derived from various books and online resources This data is synthesized into tables and figures, and a thorough analysis, including a SWOT analysis, is conducted to highlight the strengths and weaknesses of Vietnam’s commercial banking network.
Research scope
The thesis accentuates the development of correspondent network of Vietnam’s commercial banks in the context of the integrated economy, particularly after the joining of Vietnam into WTO.
Research structure
The thesis is divided into four chapters:
Chapter 1: Introduction This chapter provides the foundation and the objective of the thesis, together with research methodology and research scope
Chapter 2: Theoretical framework of correspondent bank This chapter presents fundamental theoretics about correspondent bank
Chapter 3 delves into the correspondent bank network in Vietnam, outlining the current landscape of commercial banks' correspondent relationships It further examines the strengths and weaknesses of these banking connections, while also identifying the opportunities and threats that impact correspondent banking in the country.
Chapter 4: Recommendations and conclusion This chapter discusses some solutions to develop correspondent banking in Vietnam in the future
THEORETICAL FRAMEWORK OF CORRESPONDENT BANK
Definition, characteristics and roles of correspondent bank
A correspondent bank is a financial institution that offers services for another bank, whether equal or unequal, enabling it to conduct transactions, accept deposits, and manage documentation on its behalf These banks play a crucial role in facilitating business operations in foreign countries, effectively acting as an agent for domestic banks operating internationally.
Characteristics of correspondent bank include:
Correspondent banks serve commercial banks and financial intermediaries, forming a partnership grounded in mutual benefit These correspondents provide essential services that align with the requirements of the banks, helping to minimize commissions and save time As a result, clients enjoy advantages and preferential treatment when conducting transactions with banks that maintain correspondent relationships.
Correspondent banking plays a crucial role in wholesale transactions among commercial banks, primarily facilitated through the SWIFT network (Society for Worldwide Interbank Financial Telecommunication) This system effectively manages interbank wholesale transactions, alleviating cash pressure and strengthening partnerships between financial institutions.
Correspondent banking supports other wholesale operations of commercial banks such as settlement, credit, guarantee and investment… The development of
BUI HOANG GIANG ATC.A – K12 International Trade has significantly increased the demand for payment solutions Transactions between banks in different countries involve cash flow exchanges, making correspondent banking relationships essential These relationships streamline services, enhancing efficiency for both banks involved.
Correspondent banking plays a crucial role in facilitating banking operations and international settlements, especially in a rapidly changing global environment The significance of correspondent banks has grown substantially, providing essential services that enhance the efficiency and effectiveness of cross-border transactions.
Correspondent banking serves as the essential conduit for cross-border banking services, enabling seamless payments between banks in different countries This system plays a crucial role in facilitating international business transactions, ensuring efficient interactions between customers and their partners across the globe.
Banks can leverage each other’s products and services, such as foreign exchange, guarantees, letters of credit, and collections This collaboration allows banks to benefit from diverse business sources and referrals for local banking opportunities.
Correspondent banks serve as vital intermediaries in the global financial system, effectively bridging the gap between capital supply and loan demand When the geographical distribution of loan assets does not align with a bank's capital, or when large transactions necessitate proficient asset distribution, correspondent banks play a crucial role in facilitating these financial flows.
Correspondent banking serves as a strategic advantage for banks, enhancing their competitiveness in the global market Unlike the complex and often legally challenging process of opening branches abroad, forming correspondent relationships with foreign banks offers a straightforward, efficient, and cost-effective method for banks looking to expand into new markets.
This activity serves as a vital distribution channel that is expanding alongside the globalization of financial markets Additionally, it acts as a crucial stepping-stone for banks to understand local cultures and regulations before entering foreign markets officially.
Correspondent banks play a crucial role in minimizing fraud and money laundering by leveraging the principle of polling financial information, fostering cooperation, and ensuring mutual protection among financial institutions.
Last but not least, correspondent banking contributes to the standardization of banks and banking under international practice, thereby improving their position at home and abroad.
Types of account in correspondent banking operations
A nostro account, derived from the Italian term meaning "ours," refers to an account held by a domestic bank in a foreign bank located in another country Essentially, it represents the funds that a domestic bank has deposited in a foreign bank, facilitating international transactions and currency exchange.
Nostro accounts are usually in the currency of the foreign country This allows for easy cash management because the currency does not need to be converted
Vietcombank opened a current account at
Barclays Bank of UK in GBP This account is known as a nostro account for Vietcombank
A Vostro account, derived from the Italian and Latin term meaning "yours," refers to an account held by a domestic bank for a foreign bank in a foreign country Essentially, it represents the funds of a foreign entity that are maintained within a domestic banking institution.
A vostro account with a credit balance (i.e a deposit) is a liability, and one with a debit balance (a loan) is an asset Vostro accounts are normally in the domestic currency
A Loro account, derived from the Italian term meaning "theirs," is a current account held by one domestic bank on behalf of another domestic bank with a foreign bank in a foreign country This type of account typically holds funds in foreign currency and is primarily utilized in complex syndicated financing, making it a rare choice in everyday banking practices.
Barclays Bank of UK opened a current account at Vietcombank in VND This account is called a vostro account by Vietcombank
2.3 Telecommunication method in correspondent banking operations – SWIFT 2.3.1 General introduction to SWIFT
SWIFT (Society for Worldwide Interbank Financial Telecommunication) was established in Brussels in 1973, led by its first CEO, Carl Reuterskiöld With the backing of 239 banks across 15 countries, SWIFT aimed to create a unified global data processing and communication network, along with a standardized language for international financial transactions.
Vietcombank opened a current account at Barclays Bank of UK in GBP
VP Bank refers to this account of Vietcombank for its transaction, then it is called loro account for VP Bank
BUI HOANG GIANG ATC.A – K12 responsibility and liability were established in 1975; and the first message was sent in
SWIFT, a member-owned cooperative based in Belgium, facilitates swift and secure financial transactions for over 10,000 institutions and corporations across 212 countries Each day, millions of standardized financial messages are exchanged, ensuring the confidentiality and integrity of proprietary data With offices in major financial centers and developing markets, SWIFT plays a crucial role in the global financial landscape.
SWIFT offers a secure and reliable communications platform, along with a range of products and services, enabling customers to exchange financial information effectively It serves as a catalyst for the financial community, fostering collaboration to shape market practices, establish standards, and address common challenges.
SWIFT empowers customers to automate and standardize financial transactions, resulting in reduced costs and operational risks while eliminating inefficiencies Additionally, leveraging SWIFT allows customers to unlock new business opportunities and generate additional revenue streams.
SWIFT ensures financial protection for its members by covering all direct and indirect costs incurred if a message fails to reach its intended recipient within a day The primary goal of SWIFT is to streamline banking operations rather than generate profit.
SWIFT has become the industry standard for syntax in financial messages Messages formatted to SWIFT standards can be read by, and processed by, many well-
BUI HOANG GIANG ATC.A – K12 highlights the significance of established financial processing systems, regardless of whether messages are transmitted through the SWIFT network SWIFT collaborates with international organizations to define standards for message formats and content, serving as a registration authority (RA) for various ISO standards that are pertinent to banking operations.
ISO 9362: 2009: Banking – Banking telecommunication messages – Business identifier code (BIC)
ISO 9362, commonly referred to as SWIFT or BIC code, is a standardized Business Identifier Code recognized by the International Organization for Standardization (ISO) This unique identification code is utilized by both financial and non-financial institutions, with non-financial entities sometimes referred to as having a Business Entity Identifier (BEI) SWIFT codes play a crucial role in facilitating money transfers between banks, especially for international wire transfers, and are also used for the exchange of various messages between banking institutions Additionally, these codes may appear on account statements, providing essential information for transactions.
The SWIFT code is 8 or 11 characters, made up of:
4 letters: Institution code or bank code
2 letters or digits: Location code
3 letters or digits: Branch code
Where an 8-digit code is given, it may be assumed that it refers to the primary office
Vietcombank has head office in Hanoi, Vietnam The SWIFT code for its primary office is BFTVVNVX, in which:
BFTV identifies Bank for Foreign Trade of Vietnam
VN is the country code for Vietnam
VX is the code for any city in Vietnam
Vietcombank, Hochiminh Branch has the SWIFT code BFTVVNVX007
ISO 13616: 2003: Banking and related financial services – International bank account number (IBAN)
ISO 13616:2003 outlines the components of the International Bank Account Number (IBAN), which streamlines data processing in global financial transactions and various industries While the IBAN is primarily intended for automated processing, it is also adaptable for use in other formats, such as paper documents The standard does not define internal procedures, file organization, storage methods, or programming languages for implementation, nor does it aim to facilitate message routing within networks Its focus is on the textual data that may be transmitted across networks.
The IBAN is made up of a maximum of 34 alphanumeric characters, starting with a two-letter country code, followed by two check digits, and concluding with a country-specific Basic Bank Account Number (BBAN) The inclusion of check digits allows for a preliminary verification of the bank account number's integrity prior to transaction submission Each national banking community determines the BBAN format, ensuring it adheres to specific guidelines.
BUI HOANG GIANG ATC.A – K12 fixed length of case-insensitive alphanumeric characters It includes the domestic bank account number, branch identifier, and potential routing information.
Correspondent banking operations
Correspondent banking involves the sale of banking services to other banks and financial institutions Correspondent banking typically involves clearing, making international loans and foreign trade financing
In banking and finance, clearing encompasses all processes from the initiation of a transaction commitment to its final settlement This essential step transforms payment promises, such as cheques or electronic payment requests, into actual monetary transfers between banks.
In trading, clearing plays a crucial role due to the rapid pace of trades compared to the time required to finalize the underlying transactions It encompasses the management of post-trading, pre-settlement credit exposures, ensuring that trades are settled according to market regulations, even if a buyer or seller becomes insolvent before the settlement occurs.
Clearing currency, an inconvertible currency designated for the clearing process, is utilized to maintain bank account records and cannot be transferred between accounts As per an agreement between two parties, this currency may either be the local currency of one party or a third-party currency.
2.4.2.1 Making loans to foreign banks
Correspondent relationship helps banks break the geographical distance In case a bank faces the shortage of foreign currency in its nostro account at a foreign
BUI HOANG GIANG ATC.A – K12 correspondent bank, this correspondent will consider lending all or a part of the amount in foreign currency needed for payment
A syndicated loan is a financial arrangement where a group of lenders, known as a syndicate, collaborates to provide funds to a single borrower, which may be a corporation, a large-scale project, or a government entity These loans can consist of fixed amounts, a credit line, or a combination of both, and may feature either fixed interest rates for the duration of the loan or floating rates tied to a benchmark rate.
Typically, there is a lead bank or underwriter of the loan, known as the
The lender, often referred to as the "arranger," "agent," or "lead lender," may contribute a larger portion of the loan and is responsible for essential administrative tasks, such as distributing cash flows among the syndicate members.
Syndicated lending aims to distribute the risk of borrower default among multiple banks and institutional investors, mitigating the impact on any single lender Given that syndicated loans are typically larger than conventional bank loans, the potential for a single borrower defaulting poses significant risk Additionally, these loans enable banks to extend their lending capabilities across wider geographical areas and various industries.
Foreign trade finance is provided in order to support import – export activities and foreign investment This banking operation is carried out in the following forms:
Export financing is usually categorized as follows:
Inventory financing is a trade finance solution that allows exporters to secure funding from banks while their commodities are stored in warehouses, extending until after shipment This financing method enables exporters to leverage their stored goods as collateral, facilitating borrowing and repayment once the importer’s payment is credited to the exporter’s bank account.
A red clause letter of credit (L/C) is a unique financial tool designed to provide immediate funding to the seller (beneficiary), allowing the issuing or nominated bank to advance a specified percentage of the total L/C value directly to the beneficiary.
Red clause letters of credit (L/C) were historically utilized in industries like wool and cotton trade, providing sellers with pre-shipment financing to procure goods Today, this financial instrument is employed in various sectors where buyers may have a weaker negotiating position, or where buyers choose to support sellers by offering advances based on their relationship.
Factoring is a comprehensive financial solution that integrates export working capital financing, credit protection, bookkeeping for foreign accounts receivable, and collection services A factoring house, or factor, acts as a financial institution that provides funding by purchasing invoices or accounts receivable This process occurs through an agreement where the factor buys the exporter’s short-term foreign accounts receivable for cash at a discounted rate from their face value.
BUI HOANG GIANG ATC.A – K12 without recourse The factor also assumes the risk on the ability of the foreign buyer to pay, and handles collections on the receivables
Bank negotiates with or without recourse the export bills under sight L/C or usance L/C
L/C export bills negotiation with recourse allows banks to advance funds to exporters upon request, with the expectation that repayment will be received from the foreign bank If the foreign bank fails to make payment by the due date, the exporter is responsible for repaying the advanced amount to their bank.
Negotiating export bills under a letter of credit (L/C) without recourse allows banks to purchase these bills based on terms set with the exporter This arrangement ensures that if the foreign bank fails to make payment by the due date, the exporter is not held liable for repayment.
After submitting their documents to the bank, sellers can request financing to secure working capital before receiving payment from the buyer If the buyer defaults on payment, the bank has the right to seek reimbursement from the seller.
Import financing comprises some typical services:
Overseas loan under domestic guarantee
Margin deposit account for issuance of L/C
Bank’s commitment (under L/C) to pay to the exporter (the beneficiary)
Criteria to choose correspondent bank
In order to ensure the sustainable development of correspondent relationship, the selection of correspondents should be based on several important criteria as below:
When evaluating correspondent banks, financial institutions must prioritize not only asset size but also the quality of assets and capital adequacy This consideration is particularly crucial for banks engaged in credit-related transactions, as it directly impacts the stability and reliability of their financial relationships.
Products and services: The products and services of correspondents should be diversified and fit into the strategic business niches of banks
The quality of management is a crucial factor in business success, as it significantly influences operational efficiency Evaluating correspondents based on their ability to minimize errors, respond swiftly to issues, and adapt quickly to changing customer needs is essential for effective management.
Broad domestic and global branch network: Correspondents having widespread network of branch can facilitate international banking transactions considerably
The correspondent banking business relies heavily on advanced technology, necessitating correspondent banks to establish a robust technological foundation Additionally, being a member of SWIFT is essential for these banks to facilitate quick and efficient international settlements.
CORRESPONDENT BANK NETWORK: THE CASE OF
An overview of international cooperation in Vietnam’s banking sector
In recent years, the State Bank of Vietnam (SBV) has effectively enhanced its external relations, focusing on strengthening cooperation with international partners This strategic approach has accelerated the mobilization of technical and financial support for Vietnam, playing a crucial role in stabilizing macroeconomic conditions, promoting economic integration, and improving the country's standing in the global arena.
In 2010, during Vietnam's ASEAN Chairmanship, the State Bank of Vietnam (SBV) played a crucial role in enhancing financial and monetary cooperation within ASEAN and ASEAN +3 The SBV successfully hosted the ASEAN Central Bank Governors Meeting (ACGM) and the ASEAN Central Bank Deputy Governors Meeting (ACDM) for the second time, creating valuable opportunities for ASEAN central banks to collaborate on addressing external shocks and preventing future financial crises.
The SBV co-chaired the Chiang Mai Initiative Multilateralization (CMIM) Task Force meeting, a cooperative effort involving ASEAN nations and Japan, China, and South Korea This initiative aims to establish a mechanism that supports the balance of payments for participating countries experiencing short-term economic challenges.
The State Bank of Vietnam (SBV) has effectively represented the government in international monetary and financial organizations, including the International Monetary Fund (IMF), World Bank (WB), and Asian Development Bank (ADB) This proactive engagement has strengthened its relationships with these institutions and maximized their support for both Vietnam and the SBV specifically.
The State Bank of Vietnam (SBV) has established numerous international cooperation agreements to enhance the banking sector Key initiatives include a training cooperation program with Luxembourg, two Terms of Reference (TOR) for technical assistance with the US Department of Treasury, and a capacity-building project funded by the Japan International Cooperation Agency (JICA) Additionally, the SBV is involved in a Banking Reform Project supported by the Canadian International Development Agency (CIDA), a technical assistance program backed by the Central Bank of Sweden, and the "Developing the Banking Sector Development Strategy for 2011-2020" project financed by the Swiss Federal Department of Economy.
Vietnam's commercial banks greatly benefit from successful international cooperation, as it enhances their correspondent banking networks This strengthened relationship with foreign banks not only facilitates market expansion but also opens up new opportunities for domestic banks to grow and thrive in the global financial landscape.
The real situation of correspondent bank network
3.2.1 Correspondent network of Vietnam’s commercial banks
In the realm of economic integration, fostering bilateral cooperation with foreign banks is crucial Recognizing this importance, Vietnam’s commercial banks have actively broadened their correspondent networks globally.
Table 3.1: The number of correspondents of Vietnam’s commercial banks
Name of banks The number of correspondent banks The number of countries
Sources: Annual reports of Vietnam’s commercial banks
Since Vietnam joined the WTO, the number of correspondents for domestic commercial banks has significantly increased, yet it remains average compared to foreign banks Foreign banks, leveraging their extensive experience in banking and finance, have established widespread correspondent networks and expanded into branches and representative offices globally In contrast, Vietnam's commercial banks are still in the early stages of expanding their correspondent banking relationships, focusing on broadening cooperation and increasing the number of partnerships with foreign banks.
BUI HOANG GIANG ATC.A – K12 potential for foreign market expansion by establishing branches and representative offices
Regarding regions in which correspondent relationship is built up, most of Vietnam’s commercial banks have chosen large markets such as Europe, America, and East Asia
Figure 3.1: Geographical allocation of correspondents of
The chart illustrates that Asia has the highest number of correspondent banks, followed by Europe and America, while Oceania and Africa have significantly fewer This highlights Vietnam's focus on strengthening correspondent banking relationships with key economic regions, particularly in Asia, Europe, and America, which are vital strategic partners in international trade.
AsiaEuropeAmericaOceaniaAfrica
Bui Hoang Giang ATC.A highlights that Vietnam's K12 export turnover remains consistently high, and establishing numerous correspondent banks in key markets can enhance the speed, safety, and efficiency of international payments for commercial banks This strategy not only expands the customer base and boosts revenue but also allows Vietnamese banks to gain valuable experience and improve their competitive edge in developed markets with vibrant economic activities.
Table 3.2: List of countries having correspondent relationship with Vietnam
Northeast Asia China, Korea, Japan
Southeast Asia Laos, Cambodia, Thailand, Malaysia,
Southern Asia India, Bangladesh, Pakistan
Western Europe France, Luxembourg, Germany, Sweden,
3.2.2 Correspondent operations of Vietnam’s commercial banks
Correspondent banking in Vietnam primarily facilitates clearing transactions, including remittances and import-export settlements Additionally, some commercial banks engage in transferring investment capital overseas and co-financing international projects, although these activities represent a relatively small portion of their overall operations.
Overseas remittance is recognized as a reliable and effective source of investment capital in Vietnam It is channeled into the country through two primary methods: the official route via commercial banks and money transfer companies, and the unofficial route through the black market.
Since the early 1990s, overseas remittances have accounted for 60-70% of Vietnam's foreign investment resources, significantly bolstering the national economy, stabilizing the foreign exchange rate, and enhancing foreign currency reserves.
In the period from 2008 to 2012, overseas remittance flowing into Vietnam had the high growth rate; only in 2009 it experienced a slowdown due to the impacts of global economic crisis
Table 3.3: The growth rate of overseas remittance between 2008 and 2012
In 2009, overseas remittances experienced a significant decline due to the global financial crisis, which led to a sharp rise in unemployment rates The sluggish demand in labor export markets, coupled with a marked decrease in the income of Vietnamese nationals abroad, contributed to this downturn As a result, the foreign currency sent back to Vietnam in 2009 was considerably lower than in previous years.
In 2012, Vietnam received 10 billion USD in overseas remittances, ranking among the top 10 countries globally for remittance inflow The State Bank of Vietnam (SBV) reported that most of these remittances were processed through the banking system, a significant shift from previous years when many transactions occurred in the black market This change is largely due to commercial banks enhancing their transaction procedures.
Figure 3.2: Overseas remittance sent through commercial banks in 2012
Sources: Annual reports of Vietnam’s commercial banks
Vietcombank Vietinbank Eximbank Sacombank MB DongA Bank
Regarding the structure, about 80 percent of overseas remittance is in USD; the remainder is in other hard currencies such as EUR, GBP, AUD, JPY, and CAD…
Since the implementation of Decree No 71/2010/ND-CP in 2010, Vietnamese nationals have gained the right to own property in Vietnam, leading to a significant shift in the motivations behind overseas remittances These funds are increasingly being used for real estate investments rather than solely for family support.
The advancement of information technology has led to the emergence of innovative remittance services, such as e-remittance and mobile remittance, which are increasingly replacing traditional methods and significantly enhancing the convenience of customer transactions.
Import-export settlement is crucial for economic development, serving as a vital component of national economic activities It boosts international economic exchanges, increases cashless payment volumes, and draws significant foreign currency into Vietnam In the banking sector, import-export payments enable commercial banks to fulfill customer financial service needs, expand their customer base, enhance revenue, and bolster their reputation.
In Vietnam, the primary methods for import-export settlement include letters of credit (L/C), documentary collections, and telegraphic transfers (T/T) According to annual reports from commercial banks, telegraphic transfers account for the largest share of these settlement methods, highlighting their significance in international trade transactions.
Figure 3.3: Methods of import – export payment in Vietnam
Sources: Annual reports of Vietnam’s commercial banks
Telegraphic transfer is the leading payment method in international trade, representing 75% of import-export settlements, significantly surpassing letter of credit transactions by 55% In contrast, documentary collection and other payment methods account for only 5% of the total.
In 2012, Vietnam's import-export settlements via SWIFT experienced a nearly 13% annual growth rate, with the country ranking 63rd among 212 nations, processing approximately 15,000 money transfer messages daily While these figures reflect a strong performance in import-export payments, Vietnam ranked only 6th in Southeast Asia for message flows, despite having the second-highest number of commercial banks in the region, trailing only Singapore.
With reference to import – export turnover among commercial banks, Vietcombank has been the leader for many years, making up approximately 20 percent of import – export market share
Telegraphic transferLetter of creditDocumentary collection and other methods
Figure 3.4: Import – export turnover of some commercial banks in 2011 and 2012
Sources: Annual reports of Vietnam’s commercial banks
In 2012, Vietcombank and Vietinbank recorded the import – export turnover of
Findings of Vietnam’s correspondent banking
In the period from 2008 to 2012, Vietnam’s correspondent operations have recorded some remarkable achievements
Vietnam's commercial banks have established an extensive global correspondent network, allowing them to operate in numerous countries This network enables Vietnamese banks to facilitate international transactions directly with their correspondents, significantly reducing both time and fees for customers by eliminating the need for intermediaries.
The majority of correspondents are established in key economic regions, particularly Asia and Europe, which host many of Vietnam's regular international trade partners This strategic positioning not only facilitates international settlements between countries but also allows Vietnamese commercial banks to maximize the benefits of their correspondent networks Establishing correspondents in non-strategic overseas countries can lead to inefficiencies, as nostro accounts in these regions may remain underutilized and ineffective.
Between 2009 and 2012, Vietnam experienced a significant increase in overseas remittance inflows, primarily through correspondent networks, which dominated the transfer volume This success highlights the effectiveness of domestic commercial banks' correspondent operations, greatly enhancing their revenue Furthermore, overseas remittances serve as a vital source of foreign currency for Vietnam's banking system, as most recipients prefer to receive their funds in Vietnamese Dong (VND).
In spite of achieving noteworthy results, correspondent operations of Vietnam’s commercial banks cannot avoid limitations
In recent years, America has emerged as a crucial partner for Vietnam across various sectors In 2012, the trade volume between Vietnam and the USA accounted for 10.73% of Vietnam's total import-export turnover, positioning the US as the second-largest trading partner after China This indicates that the United States represents a significant market opportunity for Vietnamese banks to explore and capitalize on.
Figure 3.5: Import – export turnover of Vietnam with some foreign countries in 2012
The number of correspondents in this region is limited, representing only 10% of the overall correspondent network, which is insufficient to meet the demand for import-export payments between Vietnam and this area This highlights a significant weakness of domestic banks, as they have yet to capitalize on development opportunities in a vast foreign market.
In terms of payment methods, the volume of international settlement made by letter of credit (L/C) is much lower than that made by telegraphic transfer (figure 3.4)
It is considered a weak point of Vietnam’s correspondent banking because letter of credit is a modern and safe method of payment, assisting commercial banks in increasing turnover from service fees
Syndicated loans within the correspondent operations of Vietnamese banks remain underdeveloped, with both the volume and value of these loans being relatively low compared to industry standards As indicated in Table 3.4, only a handful of banks in Vietnam engage in providing syndicated loans, primarily due to insufficient capital resources among the majority of banks.
Vietnamese banks currently lack coherent strategies for maintaining and enhancing their correspondent networks, making these relationships vulnerable to economic fluctuations For instance, during the global financial crisis of late 2008, domestic commercial banks withdrew deposits from nostro accounts with foreign banks to mitigate risks, fearing potential bank failures This decision negatively affected the cooperative relationships between local banks and their partners To strengthen these connections, Vietnamese banks need to develop long-term collaboration plans and proactively anticipate economic changes for timely adjustments.
Since Vietnam has been in the economic integration process, correspondent banking will have many opportunities to grow
According to the National Committee for Overseas Vietnamese Affairs, approximately 4.5 million Vietnamese nationals reside and work in 103 countries and territories worldwide, predominantly in high-income economies like the USA, Australia, Canada, and Western Europe In recent years, the number and potential of Vietnamese entrepreneurs abroad have significantly increased.
Table 3.5: The number of Vietnamese nationals in some countries (until 2012)
Countries The number of Vietnamese nationals
The increasing overseas remittances to Vietnam are anticipated to significantly boost the country’s economy, serving as a vital investment resource This surge in remittances is expected to enhance payment services and elevate the revenue of Vietnam’s commercial banks, motivating them to expand their correspondent networks with international partners.
Since 2009, Vietnam's total import-export turnover has shown consistent growth In 2012, it reached 228.36 billion USD, reflecting a 12.13% increase compared to 2011 This growth was driven by an 18.22% rise in export turnover and a 6.59% increase in import turnover during that year.
2013, total import – export turnover reached 79.65 billion USD, an increase of 17.5 % over the same period last year
Figure 3.6: Total import – export turnover of Vietnam from 2009 to 2012
Vietnam's integration into the global market signals promising growth in import-export activities, enhancing international settlement through correspondent networks This trend will motivate commercial banks to diversify their import-export services, ultimately leading to an expansion of correspondent banking operations.
In the process of setting up correspondent networks, Vietnam’s commercial banks have confronted some challenges due to limitation of professional ability
To establish correspondent relationships, domestic banks must open nostro accounts with foreign credit institutions, facilitating smoother international settlements However, the need to maintain balances in these accounts can pose a challenge for Vietnamese banks, as it may negatively impact their liquidity.
If the use of letters of credit for international payments remains minimal, domestic bank staff in Vietnam will likely lack the necessary experience in this area This inexperience can lead to errors in issuing letters of credit or verifying documents, ultimately diminishing the reputation of Vietnam’s commercial banks and causing them to miss out on important opportunities for international collaboration.
RECOMMENDATIONS AND CONCLUSION
Recommendations to develop correspondent bank network
4.1.1 Improving regulatory environment and laws on correspondent banking operations
Since joining the WTO, Vietnam's regulatory environment has improved; however, the quality of legal documents remains inadequate, and legal sanctions are insufficient To foster correspondent operations, authorities must strengthen regulations and provide long-term guidance to commercial banks.
The State Bank of Vietnam (SBV) should implement regulations concerning international banking activities, particularly in correspondent banking, within the Law on Credit Institutions This addition will provide commercial banks with essential guidelines for collaborating effectively with foreign partners.
The banking sector should establish a dedicated organization to offer insights on international cooperation and provide strategic consulting for commercial banks seeking opportunities in foreign markets.
The State Bank of Vietnam (SBV) should consider restructuring the banking system to enhance specialization, transforming Eximbank into a government agency responsible for overseeing import-export transactions through commercial banks This model has proven effective in several countries, highlighting the need for a strategic plan to implement it in Vietnam.
After the enactment of laws, it is crucial for legislators to quickly issue decisions, decrees, and guidelines to ensure their enforcement While there are existing laws that support correspondent banking operations, the necessary implementation instructions are still lacking Without these directives from authorities, effective compliance and operational efficiency may be compromised.
BUI HOANG GIANG ATC.A – K12 improve regulatory environment early, the banking sector will become less attractive to foreign partners since the government assistance is inadequate
4.1.2 Applying information technology in banking management
As information technology advances, customer demand for modern banking services continues to rise Customer loyalty is closely tied to service quality and transaction speed, especially for international business dealings Therefore, commercial banks must establish a robust IT infrastructure to meet the growing need for rapid, precise, and convenient service expansion.
Commercial banks must develop a budget for establishing their information technology infrastructure, ensuring proper allocation for each stage of development Additionally, these funds can be utilized to enhance staff skills in utilizing information technology effectively.
Regularly updating software applications in the banking sector, particularly in correspondent banking, is essential for aligning with international standards, enhancing the efficiency of correspondent operations, and bolstering domestic banks' competitiveness in global transactions Furthermore, collaboration with technology and consulting firms like Microsoft and IBM is crucial for obtaining expert guidance on selecting the most appropriate information technology solutions.
4.1.3 Enhancing employees’ skills in correspondent banking operations
Developing human resources is a critical concern for bank managers, as skilled and knowledgeable staff are invaluable assets that enhance competitive capacity Investing in employee development not only improves professional expertise but also strengthens the overall performance of banks in a competitive landscape.
BUI HOANG GIANG ATC.A – K12 with foreign credit institutions, qualified manpower performs role as the link to promote bilateral cooperation between two parties
Vietnam's banking sector has a significant workforce; however, the skills in correspondent operations are lacking To enhance the professional competence of staff in the International Department, domestic banks should implement training courses and hold meetings to address operational shortcomings Employees must also be trained to effectively utilize various telecommunication methods for international payments, including telex, mail, and SWIFT messages Additionally, standardizing recruitment criteria for foreign language proficiency will help banks acquire high-quality talent By improving communication skills with overseas partners, domestic bankers can enhance their effectiveness in international operations.
Banking management may consider inviting foreign correspondents to Vietnam for valuable experience exchange Additionally, sending employees from the International Department on refresher courses abroad could help them learn from the successes of international partners.
Nostro accounts held by local banks in foreign banks represent a portion of their working capital To mitigate liquidity and exchange rate risks, commercial banks should maintain these accounts in stable, widely accepted hard currencies Furthermore, it is essential for banks to monitor fluctuations in the foreign exchange market and analyze the factors influencing exchange rates over time.
Moreover, commercial banks had better keep the amount of money in nostro accounts in accordance with the demand for payment to avoid liquidity risk in foreign
Bui Hoang Giang ATC.A suggests that Vietnamese banks should consider closing nostro accounts with overseas banks that see minimal transactions Instead, they should focus on strengthening relationships with regular partners for more efficient banking operations.
Since the sum of money in nostro accounts is not inconsiderable, banks have to predict economic fluctuations to swiftly adjust structure of these accounts
4.1.5 Intensifying diplomatic activities with correspondent bank network
Vietnam's commercial banks have established extensive correspondent networks globally, making it crucial to foster diplomatic relations with these partners to maintain strong and enduring connections.
Domestic banks in Vietnam should focus on building strong relationships with foreign government representative offices and branches of international banks This strategy will enhance the visibility and reputation of local commercial banks among foreign credit institutions Such initiatives are likely to create new cooperative opportunities and expand the network of correspondent banks abroad.
Furthermore, home commercial banks can invite delegates of correspondent to conferences which are hold to launch new products and services, thereby fostering extensive collaboration in different fields