Risk management in documentary credit a case study of saigon hanoi bank,graduation thesis

THE STATE BANK OF VIETNAM BANKING ACADEMY Foreign language faculty GRADUATION THESIS RISK MANAGEMENT IN DOCUMENTARY CREDIT: A CASE STUDY OF SAIGON-HANOI BANK (SHB) Supervisors : Phạm Thị Hoàng Anh (Ph.D) Trần Thị Thanh Giang (M.A) Student : Trần Thị Huyên Hanoi, 6th June 2012 Banking Academy Graduation thesis ACKNOWLEDGEMENTS The process of doing research and writing the thesis has been a painful, but interesting and rewarding experience There are a number of people that I ought to thank but, in particular, two individuals stand out as they contributed significantly to the completion of this thesis I would like to send a thousand thanks to Ph.D Phạm Thị Hoàng Anh, my supervisor, for her great support, constructive feedback and thorough understanding to keep me diligent and speed up my progress on the work I also wish to give my deepest gratitude to M.A Trần Thị Thanh Giang, my co-supervisor, who spent her precious time proofreading and improving the English language of the thesis However, the responsibility for any mistakes remains with the author In addition, I am deeply thankful to the individuals who are working at international payment unit of the Saigon-Hanoi joint stock commercial bank They recommended the research idea to me and helped me a great deal in collecting secondary data for the research I am also grateful to all the lecturers of the foreign languages faculty, Banking Academy as well for their dedicated teaching, encouragement, and friendship Last but not least, my warmest thanks go to my family I am deeply grateful for their encouragement and continuous support, and their gentle coaxing This thesis is dedicated to them Trần Thị Huyên i Banking Academy Graduation thesis ABSTRACT International trade throws up a number of risks both exporters and importers would not be concerned about if doing business solely inside Vietnam One of the fundamental considerations for them is the aspect of payment Selecting the most appropriate payment method is very effective in risk management However, every settlement method itself always contains certain risks So, there is no exception for documentary credit It is the potential loss of revenue caused by the mismanagement of risk in documentary credit This is where the research problem for this thesis arises The biggest objective of this research is to provide the investigated bank with an insight into its risk management framework in documentary credit and the effectiveness of the risk management practices In addition, the readers will also get familiar with the risks inherent in documentary credit, realize the importance of risk management in this method in banks Four research questions will step by step guide the audience on how these objectives are achieved In order to give out an evaluation of documentary credit risk management practices, this thesis has tried to build a list of assessment criteria deriving from the literature that has been revised during the study The analysis secondary data shows that this bank has been trying to adopt a close-to-standard risk management framework in documentary credit There are both good points and drawbacks in this process These findings have led to several constructive improvement suggestions for the case bank Trần Thị Huyên ii Banking Academy Graduation thesis TABLE OF CONTENTS Acknowledgements i Abstract ii Table of Contents .iii List of Figures v List of Tables vi List of Abbreviations vii Chapter 1: Introduction 1.1 Background of the study 1.2 Aims and scope of the study 1.3 Research questions 1.4 Methodology and data source 1.5 Organization of the study Chapter 2: Literature review 2.1 Overview of risk in documentary credit 2.1.1 Concepts 2.1.2 Types of risks in documentary credit 2.1.2.1 Credit risk 2.1.2.2 Operational risk 2.1.2.3 Moral hazard 2.1.2.4 Country risk 2.2 Risk management in documentary credit at commercial banks 10 2.2.1 Risk management in general 10 2.2.2 Risk management in documentary credit 12 Chapter 3: Risk management in documentary credit at Saigon- Hanoi Bank 14 3.1 Overview of international payment in documentary credit at SHB 14 3.1.1 Legal framework of international payment at SHB 14 3.1.1.1 International regulations 14 Trần Thị Huyên iii Banking Academy Graduation thesis 3.1.1.2 National and SHB’s internal regulations 14 3.1.2 International payment in documentary credit at SHB 15 3.2 Risk management in documentary credit at SHB 20 3.2.1 Risks of IP in documentary credit at SHB 20 3.2.1.1 Risks stemmed from SHB’s internal factor 21 3.2.1.2 Risks due to external factor from SHB’s customers 22 3.2.1.3 Risks from other unavoidable factors 24 3.2.2 Risk management in documentary credit at SHB 25 3.2.2.1 Policies in international payment in documentary credit 25 3.2.2.2 Organization in international payment in documentary credit 27 3.2.2.3 Applying information technology 30 3.2.3 The evaluation of risk management in documentary credit at SHB 31 3.2.3.1 Achievements 31 3.2.3.2 Limitations 33 Chapter 4: Recommendations and conclusions 35 4.1 Recommendations for SHB 36 4.1.1 For the formal documents 36 4.1.2 For the staff 36 4.1.3 For the practices 37 4.2 Recommendations for further studies 39 REFERENCES 40 Trần Thị Huyên iv Banking Academy Graduation thesis LIST OF FIGURES Figure 2.1: Risk management process overview 10 Figure 2.2: Risk management process in detail 11 Figure 3.1: Causes of risk in documentary credit at SHB 21 Trần Thị Huyên v Banking Academy Graduation thesis LIST OF TABLES Table 3.1: Turnover of international payments at SHB 16 Table 3.2: Turnover of international payment in documentary credit for exports 17 Table 3.3: The amount of export letter of credit 18 Table 3.4: Turnover of international payment in documentary credit for imports 19 Table 3.5: The amount of import letter of credit 20 Table 3.6: Rate of provision for five debt categories 26 Table 3.6: Provisions for off-balance sheet items 27 Table 3.8: Responsibility in control of documentary credit process 29 Table 3.9: Control limits in international payment division of SHB head office 29 Trần Thị Huyên vi Banking Academy Graduation thesis LIST OF ABBREVIATIONS B/L: Bill of Lading DC: Documentary Credit H.O: Head Office ICC: The International Chamber of Commerce Incoterms: International Commerce Terms IP: International Payment ISBP: International Standard Banking Practice for examination of documents under documentary credits JSCB: Joint Stock Commercial Bank L/C: Letter of Credit LCs: Letters of Credit RMC: Risk Management Committee SBV: The State Bank of Vietnam SHB: Saigon-Hanoi joint stock commercial bank SWIFT: Society for Worldwide Interbank Financial Telecommunication UCP: Uniform Customs and Practice for Documentary Credit Trần Thị Huyên vii Banking Academy Graduation thesis CHAPTER 1: INTRODUCTION 1.1 Background of the study International trade transactions are risky and complex One of the fundamental considerations for both exporters and importers is the aspect of payment It is generally accepted that there are five traditional methods of payment including Cash in Advance, Documentary Credit (DC), Collection, Open Account, and Remittance Among them, Documentary Credit is playing an increasingly significant role in financing international trade This method, first codified after the World War I, has been described “as the lifeblood of international commerce” (D'Arcy et al, 2000, p 166) Documentary Credit has been developed to reconcile the various economic interests of the parties By agreeing to payment by documentary credit, the seller and the buyer invite a third trustworthy party – usually a bank - into their relationship Upon the buyer’s request, the bank opens a letter of credit in favor of the seller By issuing the letter of credit the bank undertakes a primary and independent obligation to effect payment for the seller provided that complying documents specified in the letter of credit are tendered The transaction may involve the service of other banks, acting as agents of the issuing bank, or simply advising the letter of credit to the seller or undertaking a separate obligation to pay to the seller That is to say, in the operation of DC, settlement is carried out with the dealing of documents, and the bank credit substitutes for commercial credit It improves international trade with security as well as efficiency However, DC system itself exists in limitations, and its risks increasingly emerge From the practice of international trade, risks can come from the inexperienced enterprises that are unfamiliar with DC system, and the international conventions, or some professional banking personnel who have lower alertness with the risks of DC Indeed, non-compliance is a significant risk as, according to the international chamber of commerce (ICC), worldwide documentary discrepancy rates against Documentary Credit are between 60% and 70% (ICC Thailand, 2002) These figures appear to be consistent with studies in the USA Trần Thị Huyên Banking Academy Graduation thesis citing discrepancy rates of 73% (Mann, 2000) and the UK, with 50% to 60% (SITPRO Ltd, 2003).Therefore, it is essential to prevent risks of DC for banks and traders In Vietnam, the financial sector is still in the developing phase and many small commercial banks have not been able to establish a solid risk management framework, especially regarding the international payment risk management, in order to prevent unfavorable events In addition, the supervision from the central bank, though playing a growing role, has not been protective enough Access to the credit information and history of foreign partners is very limited Indeed, after a thorough research into a great number of joint-stock commercial banks (JSCBs), the article “Prudential Supervision, Banking and Economic Progress: Implementation of Risk Management Procedures in Joint Stock Banks in Vietnam” (Ardrey et al, 2009) pointed out several facts of the JSCBs’ risk management framework such as: limited experience in modern banking techniques, products, and risk management models; lack of accurate, reliable and complete data for decision making; little capital spent to cushion or protect banks against risks due to small profits; poorly developed accounting, reporting and lack of bank supervision guidelines to deliver timely and useful information on the performance of JSCBs’; non-transparent legal and regulatory environment; challenging economic and natural environment This article’s results left the researcher with curiosity to more thoroughly learn how the practice of risk management in a certain business area of bank is Hence, this paper is intended to put a focus on describing in detail a Vietnamese medium joint-stock commercial bank’s risk management framework in documentary credit and evaluating their effectiveness in helping the bank succeed 1.2 Aims and scope of the study The thesis aims to achieve the following objectives Firstly, it will review risk management in documentary credit at Saigon-Hanoi Bank from 2009 to 2011 The evaluation of achievements and limitations in the SHB’s risk management will be its second target Finally, the paper intends to suggest recommendations to prevent risks in documentary credit at SHB Trần Thị Huyên Banking Academy Graduation thesis Table 3.7: Provisions for off-balance sheet items (unit: In billion of Vietnam dong) Year 2009 2010 2011 Financial guarantee 190.214 374.846 587.953 At sight letter of credit 118.511 521.013 338.341 Term letter of credit 564.279 66.651 199.887 Other guarantee items 339.245 307.055 82.625 Sum 212.349 269.565 208.806 Off-balance item Source: SHB’s financial reports in 2009, 2010, 2011 It is obvious that the changes in provisions for at sight L/C and term L/C were in the opposite direction It means the number of at sight LCs issued and negotiated by SHB have been increasing because the exporter has tended to use less risky kind of L/C in unpredictably volatile global economy recent years However, provisions for both of them had the relatively high proportions in those for off-balance items c Limit setting Appropriate limits should be set for respective products and activities Institutions may establish limits for a specific industry, economic sector or geographic regions to avoid concentration risk Indeed, preventing and minimizing risks of SHB are fulfilled through transaction, control limits specified by levels that are responsible for processing transactions, besides credit line The credit limit that SHB makes available for a commodity company is greatly influenced by the type of commodity (soft or hard commodity, perishableness), the market (does the commodity have a ready market) and the commodity’s price volatility 3.2.2.2 Organization in international payment in documentary credit a Reorganization of documentary credit operation Based on the perception that international payment methods in general, documentary credit in particular have been increasingly playing a key role in all activities of banks, SHB board of directors decided to change the operational model of international Trần Thị Huyên 27 Banking Academy Graduation thesis payment from "dispersion model" to "centralization model" in order to better risk prevention In the dispersion model, the branches are permitted to implement documentary credit payment from the first stage to the final one, and then make reports for H.O; yet in the centralization model, documentary credit operation is concentrated in the international payment office of H.O Almost all branches only receive documents and then transfer the data to headquarters The branch known as front-end specializes in dealing with clients, receiving documents and transferring data Head office called backend specializes in processing documentary credit operation on the whole Therefore, the new model has improved the speed of processing documents, saved operating costs, created favorable conditions for the monitoring and gathering of information for the risk management b Control activities According to decision No 36/2006/QD-NHNN on 01/8/2006 by the SBV, SHB has built internal control system in accordance with regulations Headquarters set up its internal inspection, control department and branches have also established internal control teams in order to inspect, detect timely mistakes in business activities there Moreover, the control before, during and after arising transaction of SHB have been put into every business process and the Core Banking system in order to cross check and define clearly the approval authority in each business activity to minimize the risks Indeed, implementing an international payment transaction in documentary credit at SHB usually goes through levels: performing documentary credit procedures (international payment officer), control (controller), approval (branch manager, head of international payment unit in headquarters) More specifically, the responsibility in control is stipulated as follows: Trần Thị Huyên 28 Banking Academy Graduation thesis Table 3.8: Responsibility in control of DC process Sale points Have Head/ controller The responsibility in control The first time The second time The third time IP officer in branch Controller/ Head of Controller/ Deputy/ IP unit in branch Head of IP unit in of international payment (IP) Have no Head/ H.O IP officer in branch IP officer in IP unit Controller/ of H.O Deputy/Head of IP controller of IP unit in H.O Source: International payment procedure at SHB modified in 2009 Table 3.9: Control limits in international payment division of SHB head office Positions Control limits IP Controller in H.O ≤ USD 250 000 or other equivalent foreign currency Deputy of IP unit in H.O ≤ USD 500 000 or other equivalent foreign currency Head of IP unit in H.O Unlimited value Source: International payment procedure at SHB modified in 2009 Clarifying clearly the responsibilities of each level and control limits helps control work in documentary credit payment be always smooth Accordingly, there is almost none phenomenon of overlapping, or shirking responsibility Hence, the operational risk is likely to reduce noticeably, and other risks can be timely detected c Staff training in international payment SHB has always taken care of training, improving professional technique and ethics for international payment officers to minimize operational risk and moral hazard The training is performed by the excellent controllers, department managers, or international payment experts inside and outside the country The diverse forms of training consist of direct focused training, online training through video conferencing, discussions and online testing, while its content concentrates on supplementing professional knowledge, and Trần Thị Huyên 29 Banking Academy Graduation thesis risks that international payment officers may encounter Lectures are designed on the basis of circumstances arising in SHB or banks in the world In addition, SHB always pay attention to evaluating the qualifications of staff in general and international payment officers in documentary credit in particular through periodic tests The result of the test regarded as a basis for promoting them to higher positions In 2011 the training center organized 143 courses with 60 special subjects for more than 8700 times of employee’s attendance and adequately examined, evaluated the training results 3.2.2.3 Applying information technology Upgrading banking technology in international payment area of commercial banks is one of the factors that contribute to improving risk management work On 01/05/2010 Intellect Corebanking technology system and Core Card (SmartVista) went live successfully Corebaking modern system helps enhancement of SHB executive management, transactions made on the system always be closely monitored to restrict and reduce operational risks The system also provides tools that allow SHB to manage, monitor instantly all business activities to help leaders make decisions promptly and accurately Indeed, through Outlook software and SHBInside electronic library, the information flow inside the bank including notification of new policies, decisions or modifications in the existing formal documents from the top management to the lower level employees has been informed throughout SHB so that every department, employee can promptly keep themselves updated to apply in business operations Furthermore, up to now the automated rate has been 100% in transactions with customers, and in internal information exchange between branches and head office This helps the documentary credit payment process to be quickly, safely, and effectively performed; allows to easily forward documents from a branch to the head office The system of modern information technology also contributes to an easy access to customer information in the domestic country Assessing clients before making a decision to open a letter of credit or negotiate documents to exports is very important The bank Trần Thị Huyên 30 Banking Academy Graduation thesis should collect sufficient information about customers, their operation in recent times, their bad debts at SHB and other banks By the time, SHB has established a very good relationship with banks and credit information centers to have enough information before trading with customers Furthermore, it is the simplest way to get access to information of foreign partner banks and clients Before SHB makes choices about the advising bank, and confirming bank to a letter of credit, it always researches carefully about these banks in areas such as their reputation, financial capacity, and professional skill Those make it convenient for processing documentary credit transactions because their views in examining documents are similar to SHB’s point of view Consequently, SHB can limit risks, and unnecessary disputes Up to now, SHB has had good leverage resources from the International Chamber of Commerce (ICC) and the Society for Worldwide Interbank Financial Telecommunication (SWIFT) 3.2.3 The evaluation of risk management implementation in documentary credit at SHB 3.2.3.1 Achievements Although SHB has just implemented international payment in recent years, its total turnover of international settlement continues to increase steadily each year Such a result is due to the fact that processing skill of SHB staff has become more professional; the application of modern banking technology system has shortened time to treat transactions; risk management in international payment has been rationally and strictly performed, creating the trust from customers and foreign partners a To ensure that risk taking remains within limits set by senior management, SHB established the Risk Management Committee (RMC) It is generally a board level subcommittee constituted to supervise overall risk management functions of the bank It will decide the policy and strategy for integrated risk management containing various risk exposures of the bank The responsibilities of RMC include the following work Firstly, it devises policies and guidelines for identification, measurement, monitoring and control Trần Thị Huyên 31 Banking Academy Graduation thesis for all major risk categories Secondly, the committee ensures that resources allocated for risk management are adequately given the size nature and volume of the business The managers and staff that take, monitor and control risk possess sufficient knowledge and expertise It also must be sure that the bank has clear, comprehensive and welldocumented policies and procedural guidelines relating to risk management, and the relevant staff fully understands those policies Next, it is responsible for reviewing and approving risk limits, including triggers or stoplosses for traded and accrual portfolios Finally, RMC has to set up a robust management information system relating to risk reporting b To satisfy risk management in international payment generally and documentary credit particularly, SHB has issued the procedure in DC, regularly updated and revised it to match practice Its content prescribed that conditions and process for issuing, advising, honouring L/C are abided by professional employees Secondly, it states conditions of negotiating documents, responsibilities and negotiating limit to branch managers, officers in charge of the international payment unit Thirdly, exemptions of security rate to open L/C are decided by the credit council yearly Ultimately, it is about accounting offbalance sheet items in accordance with regulations of the State Bank Apart from that, based on the actual situation in the regions and credit quality, L/C guarantee, L/C payment in each branch, the General Manager of SHB has issued some documents related to risk management in DC such as: regulations on the determination of credit limit for customers; provisions on granting of credit line, limits to open a L/C to affiliates; limits on the judgment of branches in a project investment loan, guarantee and opening a L/C with free security Thanks to the efforts to strengthen risk management, DC activity of SHB has attained the very high growth and safety remained fairly good, risks was at a very low, and acceptable rate Trần Thị Huyên 32 Banking Academy Graduation thesis 3.2.3.2 Limitations Besides the achieved successes, documentary credit activity and risk management in documentary credit of SHB still have been existing limitations and problems that need to be addressed to find out solutions a Insufficient and inefficient organizational structure of international payment division Currently, SHB still does not have any unit in charge of integrating, monitoring, evaluating, and analyzing risks in international payment operations and managing the limits of opening L/C In fact, it only sets up a team taking on aggregating statistics, operation of the branch, and supporting the branch in handling transactions There is no unit specializing in monitoring, assessing, and analyzing risks to take timely corrective measures In addition to this, though SHB has also had regulations on granting credit line for opening a L/C to affiliates, there is no one to follow and manage the transaction limit, credit line of issuing it in order to timely penalize exceeding cases, or supply additional ones Furthermore, SHB has no team of experts for the analysis of market, customers, partners, and price volatility so as to advise clients, serve for the bank itself, and professional personnel when it makes the decision to open L/C or negotiate documents The bank has also not defined credit limits available for dealing with each transaction of foreign countries and banks yet It has been unable to manage the risks from them, and accepted indefinitely letters of credit, guarantees issued by them Along with this, it is the lack of preventive measures on the risk of foreign currency supply at the time of payment Consequently, the bank is likely not to meet the demand for foreign currency to settle L/C as it expected b Staff and staff training SHB has built its staff with higher qualification than before; but in reality, the staff still contains some flaws Specifically, there is a lot of fledgling in knowledge of management and speciality Moreover, the staff training lacks strategic, broad Trần Thị Huyên 33 Banking Academy Graduation thesis orientations, and does not associate with the arrangement of personnel Finally, there is no real mechanism to encourage employees to work actively Therefore, it is necessary for SHB to immediately overcome these drawbacks in order to partly minimize risks generated from human factors c Information flow within organization With top-down information flow, the bank just focuses on issuing new policies, but it does not really give reminders to its employees Usually, it is the employees’ responsibility to check out new updates on the SHBinside; however, not all of them have habit of checking the SHBinside regularly Only when changes are really urgent, the managers may come to branches, transaction offices and directly discuss with the officers Regarding the bottom-up flow, staff’s reports are made weekly, monthly or quarterly; sometimes immediately if unexpected incidents occur (must be labeled “urgent”) However, there is a hardly deniable fact that most of these reports are made to meet in terms of quantity, not really in the nature of positive contribution Through the content presented in this section, it is concluded that SHB’s payment activity in documentary credit from 2009 to 2011 has been quite good The payment value of this method has been increasingly enhanced However, though risks for the participants are not even desired, they are inevitable to happen Thus, SHB is also not an exception These risks are emanated from many different reasons causing damage to both customers and banks Therefore, the thing needs to is that we have to draw hard lessons from such risks and to find solutions to limit them, minimize losses in regard to banks and customers Trần Thị Huyên 34 Banking Academy Graduation thesis CHAPTER 4: RECOMMENDATIONS AND CONCLUSIONS The preceding 34 pages introduced risk management operations in Documentary Credit at Saigon-Hanoi joint stock commercial bank The paper begins with some research background information that triggers the author’s interest in this specific field What the researcher wants to figure out after the research has been clearly defined with two research questions relevant to three research objectives In brief, risks are inherent in every daily activity but can always be managed Banking organizations are natural risk takers Banking risks stem from any transaction or business decision that contains uncertainty concerning the result Risks in DC arise from the settlement process of parties concerned that is non-complying with terms and conditions specified in a L/C when they fulfill international trade transactions DC risks can be divided into: credit risk (related to customer’s ability to make payment), operational risk (related to human error, internal inadequacies), moral hazard (associated with human attitude to L/C rules) and country risk (associated with objective external changes) The question of risk management in documentary credit has continuously been studied about and improved Banks usually handle the risk with a structured organization and firm personnel base, a comprehensive set of policies governing documentary credit payment activities in the whole group, and a continuous application of modern technology Introducing theories to the audience, however, is not the final aim of this thesis What the research truly cares about is to use those theories as the foundation for the evaluation of the effectiveness of risk management implementation in documentary credit The thesis has gone through those theoretical concepts to lead the readers to a much more practical section of the factual practices in SHB Our subject bank is exposed to all types of risks in the banking business Risk management is a separate function in the bank’s organization structure and plays a growingly significant role within the bank’s activities In managing international payment in DC, SHB has developed its own policy system relying on the general regulations of SBV, issued a lot of documents regarding Trần Thị Huyên 35 Banking Academy Graduation thesis international payment operations, and organized the payment staffs in a hierarchy The analysis part has given the readers an in-depth assessment of the bank’s documentary credit risk management practices In summary, there are both good points that are appreciated and areas that need improvements This paper will conclude with some constructive suggestions for the bank and for future research 4.1 Recommendations for SHB 4.1.1 For the formal documents Some official guidelines on how the policy review process is conducted should be developed by the bank Especially, a policy review must take the employees’ ideas into consideration It not only improves the practical factor of the policies but also enhances employees’ satisfaction The staffs will work with a better attitude if they feel their contribution is appreciated 4.1.2 For the staff Lack of training and improper understanding of letters of credit administration can lead to problems and rejection Training is a key component in achieving greater efficiency in completing letters of credit properly Accuracy in properly completing a letter of credit is a vital requirement to avoid problems and corrections, thus saving time and money (improving cash flow and enhancing profitability) Thus, the staff training quality must be critically revised The bank should dig out whether the little effectiveness is due to the employees’ own perception or due to the bank’s implementation If it is the latter case, it must be improved on the bank’s accord For instance, SHB should regularly organize seminars, exchange of experience talks for documentary credit staff to be able to understand in depth and ensure consistency in checking documents in order to limit conflicts in catching document errors among negotiating bank, beneficiary, and issuing bank Trần Thị Huyên 36 Banking Academy Graduation thesis SHB should step by step plan, standardize, and examine, reorder its staff in the international payment area to ensure from managers to staff to meet standards of academic degree, professional know-how, and foreign languages At the same time, they must have moral, a sense of responsibility Additionally, the bank should work out a reward and punishment regime clearly, promptly with right person in a right time It is necessary to have material, and spiritual incentives for good proposals Lastly, payment staff should be proactive in influencing the top-down information flow by suggesting some reminders from the manager, for instance They should also familiarize themselves with updating news from the SHBinside 4.1.3 For the practices For SHB, firstly the bank should focus on improving the assessment of financial status, business plan of its client when he requests to issue a L/C In addition to this, the bank must also thoroughly understand their business ethics, relationship with the bank in other transactions, relationship with their partners These can assess the level of confidence as well as revenue of the customers to ensure payment in due time or not On that basis, the bank gives security rates, appropriate forms of financing which both assure safety in payment, and make customer policy Moreover, in order to minimize country risk it also should set country credit ceilings The factors that influence the ceilings are the country’s political and economic stability; its foreign debt commitments and its track record in meeting its past commitments; exchange controls if any; and the country’s penchant for protectionism of domestic industry All these elements will determine whether the country can and will honour its payment commitments in time After setting up the credit limits of the countries, SHB needs define the credit limits for the various institutions it is willing to deal with in those countries If a local bank is very risky, it will refuse to deal with it If the country is risky, it will either reduce the credit limits or increase the rates charged Next, the bank should play an active role in advising its clients It advises its clients on the wording of the contract, establishment of a letter of credit (letters of credit Trần Thị Huyên 37 Banking Academy Graduation thesis are in some cases not known by traders), highlight where there might be a concern for it or for its clients A key element that the bank may advise on is the documentary requirements that come with a letter of credit These documents should be limited to what is necessary for the proper conclusion of the deal There are levels of documentation that complicate the transaction rather than secure payment for the transaction The consulting work promoted not only tightens the relationship between SHB and its customers, but also reduces risks for both parties For import enterprises, the bank can give advice for the following matters Firstly, the importer should require goods must be insured for risks so that in case the event happens, the importer may claim compensation from the insurer An insurance document must be endorsed in blank for transferring compensated rights if insurance is purchased by the exporter Next, L/C should stipulate the pre-shipment inspection at arrival is the final result This will help the importer restrict risks posed by transporting cargo and buy goods of right quality Perishable goods, for instance, are verified at arrival to make sure of the state of quality of the merchandise (e.g fruits are verified at arrival) At the same time, L/C should also prescribe the notices of shipment, vessel name, and its voyage must be sent earlier so that the importer can get on the track of goods, in time complain if there is fraud For the export enterprises, the bank can give advice for the following problems At the first place, the exporter should choose the bank that issues L/C with reputation and on a good relationship with SHB, making a fairly regular payment, so payment for him is more reliable Secondly, L/C should demonstrate that a full set of B/L is forwarded through the bank; hence the importer cannot get goods unless he accepts payment In addition, L/C should limit complicated terms leading to difficulty for the preparation of complying documents An exporter’s bank also advises the exporter on the workability of a letter of credit in order to ensure no refusal of payment from the issuing bank Lastly, an extensive network of correspondent banks overseas is recommended for the bank The establishment and expansion of correspondent banks have strategic significance in the efficient development and risk reduction in international payment in Trần Thị Huyên 38 Banking Academy Graduation thesis general and documentary credit in particular After setting up the agency relationship, the bank needs supplement, update necessary information about these banks such as Bic code, Swift code to look up, and select banks in the payment process quickly, and timely Furthermore, correspondent banks also have to update information on financial institutions in their countries, then rely on those institutions’ domestic reputation, and operating market in order to evaluate, score, and build transaction limits for them This will be a source of information that is very important to support the international payment division of SHB to minimize and anticipate the risks that may occur when SHB conducts transactions with those institutions 4.2 Recommendations for further studies Very potentially, future research may again release different results from this research owing to the continuous changes of a developing banking system Hopefully, the following suggestions for further studies will be of a little help to those interested in the Vietnamese banks’ risk management in Documentary Credit or general international payment risk management This research study focuses on the risk management practices in international payment in documentary credit only, while in reality, risk is exposed in other methods of international settlement like collection, or remittance Further research on risk management in these methods will be extremely valuable to the banks Additionally, further studies could be conducted with importers, exporters in Vietnam and foreign countries to learn whether their risk management approaches are similar to, or different from, those used by banks Trần Thị Huyên 39 Banking Academy Graduation thesis REFERENCES Ardrey, William; Perryer, Chris; Keane, Michael & Stockport, Gary (2009) Prudential Supervision, Banking and Economic Progress: Implementation of Risk Management Procedures in Joint Stock Banks in Vietnam Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1463168 viewed on 17/04/2012 D'Arcy, L, Murray, C and Cleave (2000) Schmitthoff's Export Trade: The law and practice of international trade London U.K Sweet and Maxwell Gerhard Schroeck (2002) Risk management and value creation in financial institutions Canada John Wiley & Sons, Inc., Hoboken, New Jersey ICC Thailand (2002) Examination of documents waiver of discrepancies and notice under UCP500 ICC Thailand available at: http://www.iccthailand.or.th/article2.asp?id=9 viewed on 14/04/2012 ICC Commission on Banking Technique and Practice (2007) Uniform Customs and Practice for Documentary Credits 2007 Revision ICC publication No.600 S A., Paris, France ICC services ICC Commission on Banking Technique and Practice (2000) Incoterms 2000 S A., Paris, France ICC Publishing ICC Commission on Banking Technique and Practice (2007) International Standard Banking Practice (ISBP) for the examination of documents under documentary credits 2007 revision for UCP 600, No 681 Paris, France ICC Services International Standards Organization (2008) Draft International Standard ISO/DIS 31000 Available at: http://www.rmia.org.au/LinkClick.aspx?fileticket=AWkZuS%2BB6Wc%3D&tabid=85& mid=634 viewed on 07/04/2012 Trần Thị Huyên 40 Banking Academy Graduation thesis Joint Technical Committee OB-007 Risk Management (2004) Risk management AS/NZS 4360:2004 Australia Standards Australia/Standards New Zealand, Sidney, NSW 10 Mann RJ (2000) The role of letters of credit in payment transactions Michigan Law Review vol 98 no pp 2494-2547 11 Pr, PhD Nguyễn Văn Tiến (2007) International payment Hanoi Statistics publisher 12 Pr, Phd Nguyễn Văn Tiến (2003) Risk assessment and prevention in the banking business Hanoi Statistics publisher 13 Saigon-Hanoi Bank Annual reports 2009, 2010, 2011 available at: http://shb.com.vn/ viewed on 5/04/2012 14 Saigon-Hanoi Bank (2009) International payment process Hanoi Saigon- Hanoi Bank 15 SITPRO Ltd (2003) Report on the use of export letters of credit 2001/2002 SITPRO London 16 The State Bank of Pakistan (2003) Risk Management Guidelines for Commercial Banks & DFIs Available at: http://www.sbp.org.pk/riskmgm.pdf viewed on 02/05/2012 Trần Thị Huyên 41