Assignment international trade documentary credit method

DOCUMENTARY CREDIT OVERVIEW 1.1 DEFINITION The letter of credit L/C method is an agreement wherein a bank - the issuing bank of the credit - at the request of the customer - the applican

UNIVERSITY OF FINANCE —- MARKETING

FACULTY OF COMMERCE

TRUONG DAI HOC TÀI CHÍNH - MARKETING

ASSIGNMENT INTERNATIONAL TRADE DOCUMENTARY CREDIT METHOD

Lecturer: Dr NONG THI NHU MAI

Group members:

1 Nguyen Hong Nhu Binh 2121011668

2 Nguyen Lai Thu Binh 2121010706

3 Le Thanh Huy 2121002777

4 Trac Ngoc Tuyet 2121008111

HO CHI MINH CITY — JULY, 2023

JOB ALTERNATIVE TABLE

Nguyễn Hong | Team member |- Write content for 100%

Nhu Binh sections 1.1 and 1.2 + ,|

- Check and correct “AM —

Trac Ngoc Team member |- Write content for 100%

Tuyét chapter 4 Collect Documents

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CHAPTER 1 DOCUMENTARY CREDIT OVERVIEW 1.1 DEFINITION

The letter of credit (L/C) method is an agreement wherein a bank - the issuing bank of the credit - at the request of the customer - the applicant for the opening of the letter of credit will undertake to pay a certain amount

of money to another person - the beneficiary of the letter of credit or accept a bill of exchange signed by this person within the specified amount when this person presents a complying set of payment documents to the bank that are in accordance with the conditions of the letter of credit (L/C)

1.2 PAYMENT PROCESS

a 1 Sales contract

Exporter (Seller)

Importer (Buyer)

Collecting Bank

Image 1-1 The payment process of the Documentary Credit method

The payment process of the Documentary Credit method

(1) Based on the sales contract signed between the exporter and the importer (or proforma invoice), the importer writes and sends an application for credit to his bank to request credit for the beneficiary The importer

in this case is Applicant

Source: OCBC Bank

documents, then require the importer to make a deposit A deposit for the credit is to guarantee the solvency of the importer However, the amount on deposit depends on the relation between the issuing bank and the importer

and is different in each case

(3) After receipt of the credit, the advising bank will examine its superficial veracity, and then advise and send the original credit to the beneficiary

(4) The exporter delivers the goods to the delivery point if he agrees on the credit’s contents Or else, the

exporter can request the issuing bank to amend the credit to make it suitable with the contract

(5) After the delivery of goods, the exporter will make and present a set of payment documents under the credit to the advising bank

(6) The advising bank will examine the documents’ faces carefully and reasonably

(7) The issuing bank examines a presentation to determine, based on the documents alone, whether or not the documents appear on their face to constitute a complying presentation If a presentation is complying, it must honor, or else it may refuse to honor and return the documents to the exporter

(8) The issuing bank forwards the documents to the importer The importer then examines the documents

to determine whether or not the documents are complying If the documents are complying, the importer shall

honor them and vice versa

(9) The advising bank credits the exporter's account or forwards the accepted bill of exchange to the exporter

or gives notice of refusal

1.3 TYPES OF DOCUMENTARY CREDIT

As international trade steadily grows over the world, the issue of securing payments from traders arises Among other payment methods, a Letter of Credit is a more commonly used medium than before The document serves as an assurance between the parties that payments will be made There are several types such as:

O Revocable L/C

gq Irrevocable L/C

Irrevocable without resource L/C

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CHAPTER 3 BENEFITS, SHORTCOMINGS, AN]

Unit 3 - Writing - Thảo Nguyên

is a financially reputable company

More Favorable Payment Terms: The importer may be able to convince the exporter to work with deferred

payment terms instead of an at-sight payment via a letter of credit As the exporter can discount the credit any time after the complying presentation, deferred payment should not be a big issue for him The most frequently used deferred payment options under the letters of credit are 30 days, 60 days, or 90 days after the bill of lading date

Timely Shipments: Importers can determine the shipment period by using a letter of credit If the exporter can not ship the goods on time, he may face a late shipment discrepancy

3.1.2 To the Exporters

LI Reach out to New Customers: It is difficult to find a new buyer who is ready to make an advance payment

to an untested exporter By offering a letter of credit, the exporter can increase the chance of securing the order

Widen Export Coverage: Exporters can increase their export coverage by regional means if they use letters

of credit For example, a letter of credit is the main payment option for the majority of Middle East countries

Mitigates Default Risk of the Importer: By using a letter of credit, the exporter can replace default risk from the importer to the importer’s bank, because the letter of credit is a conditional payment undertaking

of the issuing bank

Eliminates Importing Country’s Political Risks via Confirmation: By adding confirmation, the exporter can eliminate importing country’s political risks

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issuing bank or confirming banks determines that the letter of credit documents are complying, the respected bank can discount the credit

CHAPTER 4 PRACTICAL USAGE SITUATION OF USING DOCUMENTARY CREDIT IN

VIETNAM 4.1 THE PRACTICAL PROCESS OF PAYMENT BY DOCUMENTARY CREDIT METHOD AT BANK

Step Branch Transaction Office Related departments

Submit to the management

1 Receipt of applicant for issuance of board with a record beyond Customer departments of the head L/C and amendment of L/C authorization Judgement office approve or submit to the

Council for approval to issue documentary credits exceeding the

Reject the set of Docs

Return Docs when there is an instruction from transaction fear

12 Print debt statement/

Tax invoice V.A.T

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Image 4-1 The professional process of payment by Documentary Credit method at Vietinbank

Souce: Vietinbank 4.2 PRACTICAL CASES OF RISKS IN PAYMENT BY DOCUMENTARY CREDIT METHOD

Case 1:

Enterprise Z, which specializes in exporting seafood products, is a long-time customer of MB Phu Nhuan Branch On May 2, 2019, MB received MT700 electricity from Kookmin Bank with Beneficiary as Company Z with these contents:

“40A: Form of Document Credit: Irrevocable

31C: Date of Issue: 190502

31D: Date and Place of Expire: 190531 At Negotiating Bank

32B: Current Code, Amount: USD48,800.00

42C: Drafts at sight

43P: Partial Shipments: Not Allowed

43T: Transhipment: Not Allowed

44E: Port of loading: Hochiminh Port

44F: Port of Discharge: Busan, Korea

44C: Latest Date of Shipment: 190531

45A: Description of Goods and/or Services

+ Terms: CFR Busan, Korea

+ Goods: Frozen baby octopus

4T7A: Additional Conditions

Ũ Documents must be presented after 25 days of the B/L date but within 30 days from the B/L date

and expiry date.”

board on May 6, 2019, and documents were presented on May 10, 2019, at Military Bank After checking the documents, MB considered it appropriate, except that the presentation deadline is early if according to the contents

of the LC, the presented goods are only correct on May 31, 2019 This makes it difficult for businesses when presenting too late but the goods have been sent, in addition, customers cannot control the transit time of

documents The customer asked MB to still make a cover to send the documents to Kookmin Bank and add the content: "IN CASE, OUR PRESENTATION REACH YOUR BANK'S COUNTER BEFORE 31 MAY 2019, KINDLY HOLD THE PRESENTATION AND TREAT THE ACTUAL RECEIVING DAY AS 31 MAY 2019"

to eliminate early presentation errors Then, on May 16, Kookmin Bank sent a telegram to refuse the payment and return the documents with the reason of "late shipment”

MB quickly telegraphed to clarify the above difference and disagreed because according to the content of the LC, the latest delivery date is May 31 and the delivery date is May 6 At the same time, continue to send documents to Kookmin Bank for payment This time documents have been accepted by the partner and the bank for payment

- Cause: Due to weak negotiating capacity, company Z let Applicant add unfavorable terms for LC, specifically here is the time to present the documents In addition, the error caught by the issuing bank also causes the payment to be delayed

- Level of impact: It has a great impact on the company when the export products here are frozen, easily damaged, and the costs of transferring and returning documents and warehousing costs are incurred

Case 2:

Company A in Thua Thien-Hue province signed a contract to export rubber to Pakistan In order to ensure safety in international payment, the company has agreed with customers to use the payment method of documentary credit (Letter of Credit-L/C) After delivery, company A makes payment procedures However, the bank refused to pay on the grounds that the documents were not in accordance with the provisions of the L/C With no other way, Company A is forced to contact the customer directly to offer to accept payment At that

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very low As a matter of course, the Pakistani customer refused to accept the payment Company A tries to find

a way to resell the shipment to a new customer but fails The company decided to move the shipment back to Vietnam, but it was also unsuccessful because the law of Pakistan stipulates that the re-export of an imported shipment that has opened a customs declaration must be approved by the old customer, but the old customer is trying to make it difficult for company A to accept to sell the shipment at a cheap price Company A is facing the risk of loss, even loss of shipments

In the case of Company A mentioned above, the paying bank did not promptly detect errors when the enterprise presented the payment documents L/C requires that in addition to the bill of lading (Bill of Lading- B/L), the seller must present an additional certificate signed and stamped by the shipping company However, after delivery, the shipping company only grants company A a certificate signed without a seal of the shipping company for the reason that according to the provisions of international law applicable in the field of sea transportation

CHAPTER 5 SOLUTIONS TO MAKE FULL USE OF DOCUMENTARY CREDIT 5.1 TO THE BUSINESSES (APPLICANT AND BENEFICIARY)

Documentary credit, also known as a letter of credit, is a widely used payment method in international trade

It provides a secure payment mechanism for both the applicant (importer) and the beneficiary (exporter) Here are some solutions to make full use of documentary credit for both parties:

To the applicant:

1 Choose the right type of documentary credit: There are different types of documentary credit, such as unconfirmed, confirmed, and revolving The applicant should choose the type that best fits their needs and minimizes non-payment risk

2 Provide complete and accurate information: The applicant should provide all necessary information to the issuing bank to avoid document discrepancies and payment delays

3 Understand the terms and conditions: The applicant should carefully review the terms and conditions of the documentary credit, including the expiry date, the documents required, and the inspection and shipment

deadlines

4 Communicate with the Beneficiary: The applicant should communicate with the beneficiary to ensure that all documents are prepared correctly and promptly

To the beneficiary:

1 Understand the terms and conditions: The beneficiary should carefully review the terms and conditions

of the documentary credit to ensure that they can comply with all requirements

2 Prepare the documents carefully: The beneficiary should prepare all required documents accurately and

in compliance with the terms and conditions of the documentary credit

3 Communicate with the applicant: The beneficiary should communicate with the applicant to ensure that all documents are prepared correctly and promptly

4 Consider using a confirming bank: If the beneficiary is not sure about the reliability of the issuing bank, they can consider using a confirming bank to minimize the risk of non-payment

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the terms and conditions, providing complete and accurate information, preparing documents carefully, and communicating effectively with each other and the banks involved

5.2 TO THE BANK (ADVISING BANK AND ISSUING BANK)

In addition to the applicant and beneficiary, the bank plays a crucial role in ensuring the smooth operation

of documentary credit Here are some solutions that can help the advising and issuing banks make full use of documentary credit:

To the advising bank:

1 Provide accurate and timely advice: The advising bank should provide accurate and timely advice to the beneficiary regarding the terms and conditions of the documentary credit

2 Verify the authenticity of the credit: The advising bank should verify the authenticity of the documentary credit with the issuing bank to ensure that it is genuine and can be honored

3 Communicate effectively with the beneficiary and issuing bank: The advising bank should communicate effectively with the beneficiary and the issuing bank to ensure that all documents are prepared correctly and promptly

4 Provide additional services: The advising bank can offer additional services such as document checking, translation, and negotiation to facilitate the transaction

To the issuing bank:

1 Issue the credit promptly: The issuing bank should issue the documentary credit promptly to avoid delays

in the transaction

2 Provide clear and detailed instructions: The issuing bank should provide clear and detailed instructions

to the applicant regarding the terms and conditions of the documentary credit and the documents required

3 Verify the documents carefully: The issuing bank should verify the documents carefully to ensure that they comply with the terms and conditions of the documentary credit

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effectively with the applicant and advising bank to ensure that all parties are aware of the progress of the

transaction

By following these solutions, the advising and issuing banks can make full use of documentary credit and ensure a smooth and secure payment mechanism for international trade

5.3 TO THE STATE BANK

The State Bank plays an important role in facilitating international trade by providing policies and regulations that support the use of documentary credit Here are some solutions that can help the State Bank make full use of documentary credit:

1 Develop policies and regulations that support the use of documentary credit: The State Bank should develop policies and regulations that encourage the use of documentary credit as a secure payment mechanism

for international trade

2 Provide training and education: The State Bank can provide training and education to banks, businesses, and individuals on the benefits and effective use of documentary credit

3 Monitor and evaluate the use of documentary credit: The State Bank should monitor and evaluate the use

of documentary credit to identify any issues or areas for improvement

4 Encourage innovation and technology adoption: The State Bank can encourage innovation and the adoption of technology using documentary credit to improve efficiency and reduce costs

5 Collaborate with other regulators and international organizations: The State Bank can collaborate with other regulators and international organizations to develop best practices and standards for the use of documentary

credit

By following these solutions, the State Bank can promote the use of documentary credit and facilitate international trade, while ensuring the security and reliability of payment transactions

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REFERENCES [I VIETNAMESE:

Dinh, X T (2006) Giáo trình thanh toán quốc tế NXB Lao động - Xã hội

Nguyễn „ T T T (2012) Hoàn thiện phương thức tính dụng chứng từ trong hoạt động thanh toán quốc tế

tại chi nhánh 11 thành phố Hồ Chí Minh - Vietinbank Đại học Kinh tế Thanh phố Hồ Chí Minh

Nguyễn, T T T (2019) Rủi ro trong quá trình kiểm tra chứng từ theo phương thức tín dụng chứng từ tại Ngân hàng TMCP Quân đội Việt Nam Đại học Kinh tế Thành phố Hồ Chí Minh

Nông, T N M (2022) Giáo trình thanh toán quốc tế NXB Tài chính

ENGLISH:

ICC (2007) Uniform Customs and Practice for Documentary Credits - UCP Paris: ICC

ICC (2013) International Standard Banking Practice - ISBP Paris: ICC

ICC (2020) Incoterms® 2020 International Rules for the Interpretation of Trade Terms

ICC (2020) UCP 600 : Uniform Customs and Practice for Documentary Credits International Chamber Of Commerce

Nong , T N M (2020) International settlement curriculum University of Finance - Marketing

OCBC Business Banking (2021, May 25) Export Letter of Credit — How this versatile tool can help SME

exporters OCBC Bank https://www.ocbc.com/business-banking/articles/export-letters-of-credit-benefits Revocable Letter of Credit: Everything you need to know about its uses (2022, October 9) Amazon

https://sell.amazon.in/grow-your-business/amazon-global-selling/blogs/revocable-letter-of-

credit?fbclid=IwAROEdWesT4vA4EeMUEhWHXLPeV gV OPbecQM4H6C-f{MLmSqgzVehmBT LhyRE