Solutions to develop correspondent bank network the case of vietnam,graduation thesis

DECLARATION I declare that this thesis is the product of my own work and has not been previously submitted for any degree or examination in any other university All the sources I have used have been indicated and acknowledged by means of complete references Signature: ………………………………… Date: ……………………………………… i ACKNOWLEDGEMENT This graduation thesis would not have been possible without the guidance and the help of several individuals who in one way or another contributed and extended their valuable assistance in the preparation and completion of this study Foremost, I would like to express my sincere thanks to all the teachers in Banking Academy, who have provided me with invaluable knowledge during my four years at university My deepest gratitude is to my supervisor, Mrs Nguyen Phuong Lan I have been amazingly fortunate to have a supervisor who gave me the freedom to explore on my own and at the same time the guidance to recover when my steps faltered She taught me how to question thoughts and express ideas Her patience and support helped me overcome many crisis situations and finish this thesis Without her encouragement and guidance, this thesis would not have materialized Last but not least, I would like to express my heartfelt gratitude to my family and friends, who have been a constant source of love, concern, support and strength, greatly assisting me in completing my work ii ABSTRACT The graduation thesis presents the real situation of Vietnam’s correspondent bank network in the economic integration process, particularly after the joining of Vietnam into WTO This event has brought the country a large number of development opportunities Over the last years, correspondent operations of domestic banks have achieved many notable successes concerning the scale of network as well as the turnover of the services However, Vietnam’s correspondent banking has still faced some limitations and challenges, which were caused by the shortage of capital ability and experience in international transactions Therefore, to develop correspondent network of the Vietnamese banks, it is necessary to call for cooperation between the government and the banking system in order to create the advantageous regulatory environment Moreover, home commercial banks ought to enhance the quality of products and services, the qualification of employees, and actively participate in international payment systems to increase competitive capacity and position in foreign markets iii LIST OF ABBREVIATIONS Abbreviation Original ACDM ASEAN Central Bank Deputy Governors Meeting ACGM ASEAN Central Bank Governors Meeting ADB Asian Development Bank Agribank Vietnam Bank for Agriculture and Rural Development ANZ Australia and New Zealand Banking Group ASEAN Association of Southeast Asian Nations AUD Australian Dollar BBAN Basic Bank Account Number BEI Business Entity Identifier BIC Business Identifier Code BIDV Joint-Stock Commercial Bank for Investment and Development of Vietnam CAD Canadian Dollar CEO Chief Executive Officer CIDA Canadian International Development Agency CMIM Chiang Mai Initiative Multilateralization EUR Euro Eximbank Vietnam Export Import Commercial Joint-Stock Bank FPSO Floating Production Storage and Offloading iv GBP British Pound Sterling Habubank Hanoi Building Commercial Joint-Stock Bank HSBC The Hong Kong and Shanghai Banking Corporation IBAN International Bank Account Number IBM International Business Machines Corporation ID Identification IMF The International Money Fund ISO The International Organization for Standardization JICA Japan International Cooperation Agency JPY Japanese Yen L/C Letter of Credit MB Military Commercial Joint-Stock Bank No Number RA Registration Authority Sacombank Saigon Thuong Tin Commercial Joint-Stock Bank SBV The State Bank of Vietnam SeAbank Southeast Asia Commercial Joint-Stock Bank SWIFT Society for Worldwide Interbank Financial Telecommunication SWOT Strengths, Weaknesses, Opportunities and Threats TOR Terms of Reference T/T Telegraphic Transfer v UK The United Kingdom USA The United States of America USD United States Dollar VIB Vietnam International Commercial Joint-Stock Bank Vietcombank Joint-Stock Commercial Bank for Foreign Trade of Vietnam Vietinbank Vietnam Joint-Stock Commercial Bank for Industry and Trade VND Vietnamese Dong VP Bank Vietnam Prosperity Joint-Stock Commercial Bank WB World Bank WTO The World Trade Organization vi LIST OF FIGURES Figure 3.1: Geographical allocation of correspondents of Vietnam’s commercial banks 20 Figure 3.2: Overseas remittance sent through commercial banks in 2012 23 Figure 3.3: Methods of import – export payment in Vietnam 25 Figure 3.4: Import – export turnover of some commercial banks in 2011 and 2012 26 Figure 3.5: Import – export turnover of Vietnam with some foreign countries in 2012 30 Figure 3.6: Total import – export turnover of Vietnam from 2009 to 2012 33 LIST OF TABLES Table 3.1: The number of correspondents of Vietnam’s commercial banks (until 2012) 19 Table 3.2: List of countries having correspondent relationship with Vietnam 21 Table 3.3: The growth rate of overseas remittance between 2008 and 2012 22 Table 3.4: Some syndicated loans made by Vietnam’s commercial banks and foreign credit institutions over recent years 28 Table 3.5: The number of Vietnamese nationals in some countries (until 2012) 32 vii TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENT ii ABSTRACT iii LIST OF ABBREVIATIONS iv LIST OF FIGURES vii LIST OF TABLES vii CHAPTER 1: INTRODUCTION 1.1 Rationale of the thesis 1.2 Aim of the thesis 1.3 Research questions 1.4 Research methodology 1.5 Research scope 1.6 Research structure CHAPTER 2: THEORETICAL FRAMEWORK OF CORRESPONDENT BANK 2.1 Definition, characteristics and roles of correspondent bank 2.1.1 Definition 2.1.2 Characteristics of correspondent bank 2.1.3 Roles of correspondent bank 2.2 Types of account in correspondent banking operations 2.2.1 Nostro account 2.2.2 Vostro account 2.2.3 Loro account 2.3 Telecommunication method in correspondent banking operations – SWIFT 2.3.1 General introduction to SWIFT 2.3.2 Standards 2.4 Correspondent banking operations 12 2.4.1 Clearing 12 2.4.2 Making international loans 12 2.4.3 Foreign trade financing 13 2.5 Criteria to choose correspondent bank 16 CHAPTER 3: CORRESPONDENT BANK NETWORK: THE CASE OF VIETNAM 17 3.1 An overview of international cooperation in Vietnam’s banking sector 17 3.2 The real situation of correspondent bank network 18 3.2.1 Correspondent network of Vietnam’s commercial banks 18 3.2.2 Correspondent operations of Vietnam’s commercial banks 22 3.3 Findings of Vietnam’s correspondent banking 29 3.3.1 Strengths 29 3.3.2 Weaknesses 30 3.3.3 Opportunities 32 3.3.4 Threats 34 CHAPTER 4: RECOMMENDATIONS AND CONCLUSION 35 4.1 Recommendations to develop correspondent bank network 35 4.1.1 Improving regulatory environment and laws on correspondent banking operations 35 4.1.2 Applying information technology in banking management 36 4.1.3 Enhancing employees’ skills in correspondent banking operations 36 4.1.4 Managing nostro account effectively 37 4.1.5 Intensifying diplomatic activities with correspondent bank network 38 4.1.6 Joining international payment systems 38 4.2 Conclusion 39 REFERENCES GRADUATION THESIS 29 BANKING ACADEMY 3.3 Findings of Vietnam’s correspondent banking 3.2.1 Strengths In the period from 2008 to 2012, Vietnam’s correspondent operations have recorded some remarkable achievements Firstly, Vietnam’s commercial banks have built up a worldwide network of correspondent The number of countries in which domestic banks have correspondents is relatively considerable (table 3.2) With a global correspondent network, the Vietnamese banks are able to help customers save time and fees because international transactions are carried out directly between them and their correspondents, but not through an intermediary Secondly, the majority of correspondents have been established in the key economic regions, namely Asia and Europe (figure 3.1), from which there are many regular partners of Vietnam in international trade It not only facilitates international settlement between two countries but also helps home commercial banks take full advantage of correspondent network It is undisputable that if correspondents are set up in overseas countries that are not strategic partners of Vietnam, it is very wasteful because nostro accounts opened in these nations are not used completely and effectively Thirdly, there has been an upward trend in the volume of overseas remittance flowing into Vietnam between 2009 and 2012 (table 3.3), in which the amount transferred through correspondent network accounts for the overwhelming proportion This is a notable success in correspondent operations of domestic commercial banks as it has substantially contributed to their revenue Additionally, overseas remittance is a channel attracting foreign currencies to Vietnam’s banking system since most customers want to receive money in VND BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 3.2.2 30 BANKING ACADEMY Weaknesses In spite of achieving noteworthy results, correspondent operations of Vietnam’s commercial banks cannot avoid limitations First of all, America has been an important partner of Vietnam in many fields during recent years In 2012, import – export turnover between Vietnam and USA made up 10.73% of the total, ranking 2nd, just behind that of Vietnam to China This country is definitely a potential market that the Vietnamese banks should penetrate and exploit Figure 3.5: Import – export turnover of Vietnam with some foreign countries in 2012 Unit: 1,000 USD 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 Export Import Source: gso.gov.vn BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 31 BANKING ACADEMY However, the quantity of correspondents in this region is quite small, merely occupying 10% of correspondent network (figure 3.1) Obviously, this number of correspondents cannot satisfy the demand for import – export payments between Vietnam and this region It is the fundamental weakness of domestic banks when they have not yet grasped development opportunities in a large alien 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 Likewise, making syndicated loans in the Vietnamese banks’ correspondent operations has not developed The volume as well as the value of syndicated loans made by Vietnam’s commercial banks and foreign banks is comparatively limited (table 3.4) Furthermore, only few banks in Vietnam have participated in providing these loans as the others cannot have enough capital ability In addition, the Vietnamese banks have not yet designed coherent strategies for maintaining and promoting cooperation with correspondent networks As the result, correspondent relationship can be destroyed whenever economic fluctuations occur For example, in the global financial crisis at the end of 2008, home commercial banks withdrew deposit from nostro accounts at foreign banks to minimize risks and protect capital resources because they were concerned about the crash of these banks This action could have negative impacts on cooperative relationship of local banks with their partners The Vietnamese banks should have planned for long-term collaboration and forecasted about economic changes to adjust promptly BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 3.2.3 32 BANKING ACADEMY Opportunities Since Vietnam has been in the economic integration process, correspondent banking will have many opportunities to grow According to the statistics of National Committee for Overseas Vietnamese Affairs, about 4.5 million Vietnamese nationals live and work in 103 countries and territories in the world, in which the majority gather in high-income economies such as USA, Australia, Canada, and Western Europe The Vietnamese entrepreneurs abroad have had the improvement in number and potential during recent years Table 3.5: The number of Vietnamese nationals in some countries (until 2012) Countries The number of Vietnamese nationals France 300,000 UK 40,000 Russia 60,000 Laos 30,000 Korea 100,000 Japan 40,000 USA 2,200,000 Canada 250,000 Australia 300,000 Source: tgvn.com.vn BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 33 BANKING ACADEMY Thanks to this labor force, the amount of overseas remittance flowing into Vietnam has been expected to substantially rise in the future and become an effective investment resource The growth of overseas remittance can result in the development of payment services and the increase in revenue of Vietnam’s commercial banks whereby they will have motivation for comprehensively developing correspondent networks with foreign partners Moreover, in the period from 2009 up to now, total import – export turnover of Vietnam has been following an upward trend In 2012, total import – export turnover stood at 228.36 billion USD, 12.13% higher than that in 2011, in which export turnover went up by 18.22% and import turnover rose by 6.59% In the first four months of 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 Unit: billion USD 12.13% 29.65% 23.64% 113.79 106.75 84.84 69.95 57.1 2009 72.24 2010 96.91 2011 Export 114.57 2012 Import Source: customs.gov.vn BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 34 BANKING ACADEMY These figures are the positive signs in the global integration process of Vietnam, opening up a prospect of the exponential growth in import – export activities It will not only increase the volume of international settlement through correspondent networks but also encourage commercial banks to diversify import – export services It is evident that the development of import – export activities will bring about the extension of correspondent banking operations 3.2.4 Threats In the process of setting up correspondent networks, Vietnam’s commercial banks have confronted some challenges due to limitation of professional ability Primarily, when establishing correspondent relationship, domestic banks need to open nostro accounts at overseas credit institutions The amount of money in foreign banks’ accounts helps international settlement be carried out more easily Nonetheless, maintaining the balance of these nostro accounts invisibly become an obstacle to the Vietnamese banks because it may produce adverse effect on their liquidity Secondly, if the amount of international payment made by letter of credit continues to be negligible in the future, domestic banks’ staff surely lack experience in this field As a result, they can make faults when issuing letter of credit or checking documents It will lower the prestige of Vietnam’s commercial banks; hence they may lose valuable opportunities in international cooperation BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 35 BANKING ACADEMY CHAPTER 4: RECOMMENDATIONS AND CONCLUSION 4.1 Recommendations to develop correspondent bank network 4.1.1 Improving regulatory environment and laws on correspondent banking operations After joining into WTO, Vietnam’s regulatory environment has positively changed; yet the quality of legal documents is still low and legal sanctions are insufficient To develop correspondent operations, the authorities need to enhance regulations and offer long-term orientation to commercial banks At the outset, the SBV should add regulations regarding international banking activities, especially correspondent banking to Law on Credit Institutions so that commercial banks will have reference in cooperation with overseas partners Also, the banking sector could consider forming a supporting organization that specializes in providing information about international cooperation in banking and consulting about strategies when commercial banks find opportunities in foreign markets Besides, the SBV had better restructure the banking system towards specialization, making Eximbank become a government agency in order to supervise import – export settlement through commercial banks This model has been put into practice and led to beneficial effects in some countries Therefore, it is necessary to work out a plan on using this model in Vietnam Last but not least, after the issuance of laws, legislators need to promptly promulgate decisions, decrees and circulations giving instruction to enforce these laws Nowadays, there have been some laws supporting correspondent banking operations; however, instructions to implement them have not yet introduced If authorities not BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 36 BANKING ACADEMY 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 In company with the development of information technology, customers’ demand for modern banking services has been increasingly high It is undeniable that loyalty of customers depends on the quality of services and time of making transactions; particularly when clients business with partners abroad Consequently, commercial banks must build up the solid infrastructure of information technology, satisfying the demand for expanding facilities quickly, accurately, scientifically and conveniently To start with, commercial banks have to work out a budget for setting up infrastructure of information technology and appropriately allocate for each development stage They can also use this fund for advancing staff’s ability in applying information technology Regularly updating the latest version of software applications in banking sector, especially in correspondent banking is a good approach to catch up with international standard, maximizing effectiveness of correspondent operations and strengthening domestic banks’ position in international transactions Similarly, the banking system should collaborate with technology and consulting corporations such as Microsoft, IBM for the purpose of receiving advice on choosing suitable information technology products 4.1.3 Enhancing employees’ skills in correspondent banking operations Developing human resources is always a burning issue attracting lots of concern from banks’ managers Staff that is good at professional knowledge and studious is an invaluable asset, assisting banks in raising competitive capacity In the relationship BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 37 BANKING ACADEMY with foreign credit institutions, qualified manpower performs role as the link to promote bilateral cooperation between two parties The number of employees in Vietnam’s banking sector is now significant; however, their skills in correspondent operations are rather poor Domestic banks should organize training courses to heighten professional competence of staff in International Department and hold meetings to discuss about shortcomings in operations Also, workers must be instructed to flexibly use and combine different telecommunication methods in international payment such as telex, mail or SWIFT message Simultaneously, standardizing recruitment criteria concerning foreign language level is a resolution by which bank will possess high-quality manpower Obviously, when being confident in communicating with overseas partners, domestic bankers can work more effectively Again, banking management might invite experts of foreign correspondents to Vietnam in order that both parties have chance to exchange experiences Another proposal is to send International Department’s employees on a refresher course abroad with the aim of drawing lessons from partners’ achievements 4.1.4 Managing nostro account effectively The amount of money in nostro accounts at foreign banks partly occupies working capital of local banks Accordingly, to minimize liquidity risk and exchange rate risk, commercial banks must maintain these accounts in hard currencies, which are widely accepted around the world, freely convertible and highly stable Additionally, it is necessary for banks to keep track of foreign exchange market’s fluctuations and analyze factors affecting exchange rate in each period 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 – K12 GRADUATION THESIS 38 BANKING ACADEMY countries Alternatively, the Vietnamese banks could think about closing nostro accounts at some overseas banks which have few transactions with them and focusing on regular partners 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 now have widespread correspondent networks in many countries and territories all over the world Stimulating diplomatic activities with these partners to continue unshakeable relationship is extremely important Primarily, domestic banks ought to form and strengthen the association with representative offices of foreign governments and branches of overseas banks in Vietnam It will be helpful in introducing potential and promoting imagines of home commercial banks to alien credit institutions These moves will surely open up new cooperative opportunities and help to increase the number of correspondents 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 As a final point, the Vietnamese banks and their correspondents should make periodic appraisal of cooperative relationship, pointing out achievements and limitations, and then devising feasible plans for the coming time 4.1.6 Joining international payment systems The appearance and development of international payment systems are always accompanied by the innovation of technology; for this reason, all the members of these systems are standardized in operations Joining global settlement systems will provide BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 39 BANKING ACADEMY Vietnam’s commercial banks with opportunities to approach professional working style and gradually meet international standards of banking sector This is a practical solution in the strategy for developing correspondent networks of local banks The Vietnamese banks must conduct some painstaking researches into global payment communities and multinational financial services corporations such as Eurogiro, Moneygram, American Express, and MasterCard… with the purpose of specifying potentials, advantages and disadvantages of these organizations Depending on requirements of each development stage, commercial banks can choose suitable partners to cooperate Also, before making decision on collaboration, domestic banks should make careful preparations to conform fully to terms and conditions of international payment systems 4.2 Conclusion Globalization has been strongly developing in banking – finance that is the most sensitive and important sector of the economy The simple and popular form of cooperation in this sector is establishing correspondent relationship between Vietnam’s commercial banks and foreign banks It has created a great number of opportunities for domestic banks to progressively demonstrate their competence On one hand, correspondent relationship helps banks enhance prestige and capacity of competition; on the other hand, it serves as a stepping-stone to overseas market expansion In reality, correspondent operations of Vietnam’s commercial banks have obtained some praiseworthy results Correspondent networks have been set up in many essential economic regions such as Europe, America, and East Asia; turnover of international settlement has experienced positive changes Nonetheless, correspondent banking still faces challenges due to the shortage of highly-qualified employees and BUI HOANG GIANG ATC.A – K12 GRADUATION THESIS 40 BANKING ACADEMY negotiation experience Besides, local banks have not yet drawn up long-term strategies to reinforce correspondent relationship with partners abroad and to actively manage nostro accounts To overcome these difficulties, the Vietnamese banks must improve the quality and diversify the forms of products and services; particularly attach special importance to train the staff Again, diplomatic activities should be stimulated to promote banks’ imagines and seek new alien partners Thanks to these efforts, Vietnam’s banking sector will be increasingly modernized and gain more opportunities to cooperate with overseas banks in ASEAN region as well as around the world BUI HOANG GIANG ATC.A – K12 REFERENCES  Books Le Thi Tuyet Hoa & Nguyen Thi Nhung (2006) Money – Banking Hanoi: Statistical Publishing House Nguyen Dang Don (2009) International payment Hochiminh city: Vietnam National University Publishing House Nguyen Van Tien (2009) Commercial banking Hanoi: Statistical Publishing House Nguyen Van Tien (2011) International payment and foreign trade financing Hanoi: Statistical Publishing House Edward G Hinkelman (2003) A short course in international payments (2nd ed.) California: World Trade Press Benton E Gup & James W Kolari (2005) Commercial banking (3th ed.) Hoboken: Wiley Peter S Rose & Sylvia C Hudgins (2008) Bank management and financial services (7th ed.) New York: McGraw-Hill International Edition  Legal documents Decision No 154/1998/QD-NHNN14 dated April 19th, 1998 Decree No 71/2010/ND-CP dated June 23rd, 2010 Circular No 42/2011/TT-NHNN dated December 15th, 2011  Annual reports of SBV in 2010 and 2011  Annual reports of Vietnam’s commercial bank in 2011 and 2012 (BIDV, DongA Bank, Eximbank, MB, Sacombank, VIB, Vietcombank, Vietinbank)  Websites Definition of correspondent bank (n.d.) In Investopedia Retrieved from http://www.investopedia.com/terms/c/correspondent-bank.asp Vostro, nostro and loro accounts (2009, May 5) Retrieved from http://forex-infoplus.blogspot.com/2009/05/vostro-nostro-and-loroaccounts.html Society for Worldwide Interbank Financial Telecommunication (n.d.) 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