The effectiveness of international payment by documentary credit at vietnam joint stock commercial bank for industry and trade – dong ha noi branch

BANKING ACADEMY OF VIETNAM FACULTY OF FOREIGN LANGUAGES ---o0o--- GRADUATION THESIS THE EFFECTIVENESS OF INTERNATIONAL PAYMENT BY DOCUMENTARY CREDIT AT VIETNAM JOINT STOCK COMMERCIAL

BANKING ACADEMY OF VIETNAM FACULTY OF FOREIGN LANGUAGES

-o0o -

GRADUATION THESIS

THE EFFECTIVENESS OF INTERNATIONAL PAYMENT BY

DOCUMENTARY CREDIT AT VIETNAM JOINT STOCK

COMMERCIAL BANK FOR INDUSTRY AND TRADE

– DONG HA NOI BRANCH

Student: Ngo Thuy Linh Class: K23ATCC

Student code: 23A7510070 Supervisor: Dr Can Thuy Lien

Hanoi, May 2024

BANKING ACADEMY OF VIETNAM FACULTY OF FOREIGN LANGUAGES

-o0o -

GRADUATION THESIS

THE EFFECTIVENESS OF INTERNATIONAL PAYMENT BY

DOCUMENTARY CREDIT AT VIETNAM JOINT STOCK

COMMERCIAL BANFOR INDUSTRY AND TRADE

– DONG HA NOI BRANCH

Student: Ngo Thuy Linh

Class: K23ATCC Student code: 23A7510070 Supervisor: Dr Can Thuy Lien

Hanoi, May 2024

CERTIFICATE OF ORIGINALITY

The graduation thesis topic: “The effectiveness of international payment by documentary credit at Vietnam Joint Stock Commercial Bank for Industry and Trade - Dong Ha Noi Branch” by student Ngo Thuy Linh performed under the

guidance of supervisor Can Thuy Lien

I confirm the thesis is my own research and is not copied from any other person’s research

The data and statistics are accurate and have never been published before

Thesis author

Ngo Thuy Linh

ACKNOWLEDGEMENTS

First of all, I would like to express my sincere and thorough gratitude to my supervisor Ms Can Thuy Lien - Dean of the Faculty of Foreign Languages, who advised and supported me to complete my thesis I would like to thank the lecturers

at Banking Academy for providing me with the background knowledge to apply to

my thesis

Furthermore, I would like to express my gratitude to the staff at the Transactions Department at Dong Ha Noi branch for providing research data and practical knowledge to help me complete my thesis

Finally, I want to thank my friends for coming with me and for their responses

to my inquiries They were very encouraging and provided me with helpful suggestions as I was finishing my thesis

The thesis cannot avoid restrictions despite my research effort, thus I hope to receive honest suggestions from teachers and professionals to complete the thesis successfully

Thank you sincerely!

TABLE OF CONTENTS

CERTIFICATE OF ORIGINALITY i

ACKNOWLEDGEMENTS ii

LIST OF ABBREVIATIONS vi

LIST OF TABLES vii

LIST OF FIGURES viii

ABSTRACT ix

CHAPTER 1: INTRODUCTION 1

1.1 Introduction 1

1.2 Background of the study 2

1.3 Objectives of the study 3

1.4 Significance of the study 4

1.5 Scope and limitations of the study 4

1.6 Definition of terms 5

CHAPTER SUMMARY 5

CHAPTER 2: LITERATURE REVIEW 7

2.1 Literature review 7

2.2 Theoretical framework 10

2.2.1 The international payment by documentary credit method 10

2.2.2 The effectiveness of international payment operation 16

2.2.3 Criteria to evaluate the effectiveness of L/C payment 17

2.2.4 The factors affecting the effectiveness of documentary credit method 19

2.3 Conceptual framework 22

CHAPTER SUMMARY: 23

CHAPTER 3: RESEARCH METHODOLOGY 24

3.1 Locale of the study 24

3.2 Research methodology 24

3.3 Data collection 26

3.4 Validity and Reliability of data analysis 27

CHAPTER SUMMARY: 27

CHAPTER 4: FINDINGS AND DISCUSSIONS 28

4.1 The business performance of VietinBank - Dong Ha Noi Branch 28

4.1.1 General introduction about VietinBank - Dong Ha Noi Branch 28

4.1.2 Assessing the business situation of VietinBank - DHN Branch 28

4.2 The indicators affecting the effectiveness of international payment operations by documentary credit 32

4.2.1 Qualitative indicators 32

4.2.2 Quantitative indicators 37

4.3 Evaluation of the effectiveness of international payment operations by documentary credit at VietinBank - Dong Ha Noi Branch 48

4.3.1 Positive outcomes 48

4.3.2 Shortcomings 49

4.4 Reasons for shortcomings 50

4.4.1 Objective reasons 50

4.4.2 Subjective reasons 51

CHAPTER SUMMARY: 52

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 53

5.1 Conclusion 53

5.2 Recommendations 53

5.2.1 Recommendations to the Government 53

5.2.2 Recommendations to the SBV 54

5.2.3 Recommendations to VietinBank – DHN Branch 55

CHAPTER SUMMARY: 57

REFERENCES 58

for Industry and Trade

Table 4.2: Sales of international payment activities under L/C 37

Table 4.3: Export-import L/C payment value for the period 2021 -

Table 4.6: Indicators to evaluate the effectiveness of international

payment activities according to L/C at VietinBank - DHN Branch

44

Table 4.7: L/C fee on total service fee at VietinBank – DHN Branch 47

Table 4.8: Number of customers participating in L/C payment 47

LIST OF FIGURES

Figure 4.1: Structure of average capital mobilization in the period

2021 – 2023

29

Figure 4.3: Structure of short-term debt and medium/long-term debt

Figure 4.6: Profit from foreign currency trading 35

Figure 4.7: Structure of export-import L/C payment value in 2021 -

2023

42

ABSTRACT

The title of the thesis: The effectiveness of international payment by

documentary credit at Vietnam Joint Stock Commercial Bank for Industry and Trade

- Dong Ha Noi Branch

Author: Ngo Thuy Linh (ID: 23A7510070), student of Faculty of Foreign

Languages, Banking Academy of Vietnam

Advisor: Dr Can Thuy Lien, the Dean of the Faculty of Foreign Languages,

Banking Academy of Vietnam

Keywords: Letter of credit, the effectiveness, solutions

Abstract: International payment is increasingly growing strongly in the period

of economic integration Therefore, international payment activities at banks are increasingly developing As a result, this thesis aims to evaluate the effectiveness of international payment activities at Vietnam Joint Stock Commercial Bank for Industry and Trade First, the author evaluated the branch's business situation through the average capital mobilization, the average total outstanding balance, and branch profit from 2021 to 2023 Then, qualitative indicators and quantitative indicators were used to evaluate the effectiveness of documentary credit payment activities Each indicator had different evaluation standards Then, solutions as well as limitations were indicated through the above assessment Finally, the author concluded and made recommendations for the Government, the State Bank of Vietnam, and VietinBank

CHAPTER 1: INTRODUCTION 1.1 Introduction

With the increasing trend of market integration, exchange, and trade between countries around the world plays an important role in the economic development of nations The trading activities between countries are expanding, leading to a growing demand for business with foreign companies Not only foreign businesses investing

in the Vietnamese market, but Vietnamese businesses also know how to grasp the integration trend The total import-export turnover of goods from 2010 to 2021 has increased 4.25 times, from $157.1 billion to $668.5 billion, indicating an increasing demand for import-export of goods in Vietnam

Banks, as financial intermediaries, with a network of agents in most countries globally, have become important entities in international payment activities Most international payment transactions between importers and exporters must go through banking activities Thanks to this, the Government can control the import-export situation as well as the total import-export turnover of our country Thereby, the Government can synthesize, analyze, and propose solutions to promote economic growth and development This shows that international payment at banks plays an extremely important role in the economic development process Among the current international payment methods, the documentary credit method is the most chosen - accounting for over 80% of the total payment methods provided by banks, occupying the majority proportion of banks

The documentary credit payment activities of VietinBank have brought the bank stable profits over the years Although it has achieved many successes, documentary credit payment activities still have certain limitations, which reduce the effectiveness and quality of international payment activities at the bank Therefore, I decided to choose the topic: "The effectiveness of international payment by documentary credit method at Vietnam Joint Stock Commercial Bank for Industry and Trade – Dong Ha Noi Branch" as the topic for my thesis

1.2 Background of the study

International payments are becoming increasingly important, a solid stepping stone for countries around the world to participate in the bustling commercial market

to develop the country's economy Safe and stable international payment activities can help the country's economy develop through the exchange of import and export goods

Due to our country's production incentive policies, more and more Vietnamese businesses have participated in the commodity exchange market To choose a suitable payment method for their business, business owners need to have clear knowledge of international payment methods and understand international payment processes, especially L/C methods This is the safest and most commonly used method in international payment transactions today

Besides, the strong outbreak of COVID-19 in 2020 has greatly affected the world economy in general and Vietnam in particular In Vietnam, in early 2021, the COVID-19 epidemic showed signs of spreading quickly and widely, the Government had to use the budget to spend on disease prevention activities, and support the purchase of medical equipment to serve patients, All efforts to prevent the spread

of the epidemic have caused many difficulties for the Vietnamese economy Businesses have had to reduce their staff and production of goods In 2021, the number of enterprises temporarily suspending business for a certain period of time was nearly 55 thousand, an increase of 18% compared to the previous year; 48.1 thousand businesses stopped operating and waiting for dissolution procedures, an increase of 27.8%; 16.7 thousand enterprises completed dissolution procedures, down 4.1%, including 14.8 thousand enterprises with a capital of less than 10 billion VND, down 4%; 211 enterprises had capital of over 100 billion VND, down 20.7% Thus, the impact of the COVID-19 epidemic had seriously affected the business operations

of enterprises, especially small-scale enterprises Businesses shutting down also caused a significant decrease in goods exchange activities, which affected the effectiveness of international payment operations of banks

With the post-pandemic integration situation, in 2022, the country had 208,300 newly registered businesses (148,500 businesses) and return to operation (59,800 businesses), an increase of 30.3% over the year A large number of businesses that had resumed operations had limited capital scale Therefore, commercial banks needed to have business financing policies, preferential loans, or develop a variety of international payment products using documentary credit methods to attract business customers At the same time, banks also needed to evaluate businesses carefully before providing financing services to minimize possible risks for the bank

International payment is currently an activity provided by all commercial banks, creating great competition among banks Competition in international payments is not only aimed at profit but also to increase the reputation of banks in the international market The larger the successful international payment transactions are, the more appreciated the bank's reputation and financial potential Therefore, the bank should expand relationships with banks in the world and expand domestic and foreign branches

1.3 Objectives of the study

The study aims to evaluate the effectiveness of international payment by documentary credit method at Vietnam Joint Stock Commercial Bank for Industry and Trade, thereby finding out the limitations and solutions to overcome and develop international payment activities by L/C The specific objectives of the thesis include:

Evaluate the business performance of the Dong Ha Noi Branch and indicate whether the branch has operated effectively or not

Assess the qualitative indicators affecting the effectiveness of international payment by documentary credit method at Vietnam Joint Stock Commercial Bank for Industry and Trade – Dong Ha Noi Branch through the following criteria: the number of L/C products, foreign currency trading operations and the import-export credit activities

Evaluate quantitative indicators affecting the effectiveness of international payment by documentary credit method at Vietnam Joint Stock Commercial Bank

for Industry and Trade – Dong Ha Noi Branch through the criteria International payment sales according to L/C method, the proportion of L/C payment sales over total international payment sales, the proportion of L/C revenue over total international payment revenue, the proportion of L/C cost over L/C revenue, the proportion of L/C profit over L/C revenue, the proportion of L/C fees over the total service fees, and the number of customers participating in L/C payment

1.4 Significance of the study

This research was conducted at VietinBank – Dong Ha Noi Branch, based on the bank's statistical data to evaluate the effectiveness of documentary credit payment activities at VietinBank Commercial Joint Stock Bank – Dong Ha Noi Branch Therefore, the first beneficiary is the Dong Ha Noi Branch As a result, the branch can use the outcome of the research to improve the quality of the branch's international payment activities In addition, the next beneficiaries are students and researchers who are learning about international payment issues through documentary credit methods at banks, especially VietinBank The thesis contributes

to enriching international payment knowledge at banks, providing an objective and multi-dimensional view of this research topic

In addition, research on documentary credit payment methods also helps me understand this operation at the bank, and grasp the process as well as the risks this operation brings In addition, some useful solutions to develop documentary credit payment activities can be provided through the analysis of data and the support of staff and experts in this field In addition, reading from books, and electronic newspapers along with receiving guidance from instructors also contribute to orienting the research topic and practicing critical thinking as well as presentation skills when students defend their thesis before the scientific council

1.5 Scope and limitations of the study

The scope of the research is the effectiveness of international payment by documentary credit method at Vietnam Joint Stock Commercial Bank for Industry and Trade - Dong Ha Noi Branch, thereby pointing out limitations and solutions for developing international payment activities by documentary credit method Due to

time limitations, the study only focuses on documentary credit payment methods Data on this method is collected at Vietnam Joint Stock Commercial Bank for Industry and Trade - Dong Ha Noi Branch from 2021 to 2023

1.6 Definition of terms

L/C (Letter of credit): is a document sent from a bank or financial institution

that guarantees that a seller will receive a buyer’s payment on time and for the full amount

Quantitative indicators: are numerical, objective, and easy to measure and

compare They can include data such as sales, revenue, productivity, customer satisfaction, retention, and quality

Qualitative indicators: are descriptive, subjective, and harder to measure and

compare They can include feedback, opinions, perceptions, attitudes, behaviors, and skills

UCP (The Uniform Customs and Practice for Documentary Credits): is a set

of rules on the issuance and use of letters of credit The UCP is utilized by bankers and commercial parties in more than 175 countries in trade finance Some 11-15% of international trade utilizes letters of credit, totaling over a trillion dollars (US) each year

SBV (State Bank of Vietnam): is a ministerial agency of the Government of

Vietnam, perform the function of state management on currency, banking operations, and foreign exchange; perform the functions of the central bank on currency issuance, banking for credit institutions, and providing currency services to the Government

Funding Bank: The bank makes immediate payment to the exporter and

requests money from the Issuing Bank when the L/C is due

CHAPTER SUMMARY

Chapter 1 provided an overview of international payments by banks today as well as the context and reasons for choosing the topic Besides, chapter 1 also pointed

out the specific objectives of the research, the meaning of the research, the scope and limitations of the research as well as the terms related to the topic

CHAPTER 2: LITERATURE REVIEW 2.1 Literature review

The research namely “Solutions for developing international payment by documentary credit at LienViet Post Joint Stock Commercial Bank” was conducted

by Nguyen Mai Ly (2012) The author evaluated the effectiveness of the bank’s business operations through capital mobilization and credit activities, then she gave comments on whether the bank’s capital source was stable to carry out international payment activities and trade finance or not Next, she studied about the current status

of payment activities using the documentary credit method in two aspects: import letter of credit and export letter of credit In the business of issuing import letters of credit, the bank's customer is the importers, the bank plays a role of the Issuing bank, issues the letter of credit and makes payments to the importer's partners in another country The results of import L/C payment activities were evaluated by the author based on the synthesis of the number of items, the sales of L/C issuance and payment

of import L/C from 2009 to 2011 In the export L/C, the bank's customers are exporters, they announce their customers L/C and make L/C collection The results

of export letter of credit payment activities were evaluated by the author based on the total number of items and export L/C payment turnover in the period from 2009 to

2011 Thereby, the author pointed out the significant amount of documentary credit payment sales over the years, but at the same time, there was a large difference in sales between export L/C and import L/C Because our country has been still a trade deficit country, lacking raw materials to produce goods to serve daily needs, the proportion of imported L/C always accounts for the majority of payment activities by documentary letters of credit Besides, the author also highly appreciated the achievements that LienViet Post Joint Stock Commercial Bank achieved in terms of business processes in accordance with L/C payment process standards, and in terms

of service fees that were always competitive The branch had also succeeded in strictly controlling L/C processes because there have been no cases of L/C being refused to payment or document errors However, payment activities by documentary credit method still had many limitations due to objective reasons from the transaction customers One of the reasons from import-export enterprises in Vietnam who do not

have experience in preparing documents according to L/C that leading problems in document errors In addition, enterprises currently have limited financial potential and often rely mainly on bank loans Towards the bank, they had the difficulties in attracting and expanding market because they had to compete with large banks having full potential in capital and technology In addition, their L/C payment services had not been diversified Bank also had to face to the imbalance between export L/C and import L/C which caused difficulties in ensuring foreign currency supply and demand, the limited staff qualifications leading to inaccuracies and delays in processing At that time, the bank was newly established, so it had not gained trust from corporate customers yet Finally, the author purposed some solutions to develop documentary credit payment activities for banks and made recommendations to the Government and State Bank of Vietnam Some solutions mentioned in the research were having reasonable customer policies and strengthening competitor analysis, improving the capacity of payment staff, strengthening bank marketing activities, and promoting operational sponsorship of import-export activities, diversifying banking products and services, expanding operational networks, modernizing banking technology, etc The author also recommended that the Government need to improve the payment polices by documentary credit, have effective measures to stabilize the international balance of payments, and create a favorable business environment to attract foreign investors Moreover, the Ministry of Industry and Trade need to improve trade policies with an aim to promote strong export, Besides, the SBV needs to have legal documents for import-export payment transactions, complete and develop the interbank foreign currency market, and modernize banking technology

products throughout the system

Le Tran Ai Phuong (2019) researched the efficiency of documentary credit payment activities at Joint Stock Commercial Bank for Foreign Trade of Vietnam She found that three factors are closely related to each other and affect the efficiency

of documentary credit payment activities: the economy, commercial banks, and customers Then, she analyzed the efficiency of documentary credit payment activities through qualitative and quantitative indicators Qualitative criteria included the efficiency of L/C payment activities based on meeting customers' needs in terms

of payment time and document checking, and the efficiency of L/C payment activities based on supporting forex trading activities and import-export credit operations Quantitative indicators included the growth rate of the volume of L/C method, the proportion of the volume of L/C, etc Through analysis, she found that the proportion

of L/C revenue contributing to the bank is the largest among payment methods, and Vietcombank has been successful in controlling L/C costs However, the sales volume paid by L/C was smaller than the sales volume by the Remittance method The reason for that was the cheaper cost and the uncomplicated implementation process of the Remittance method Subjective reasons included Vietcombank being strict in using Key Performance Indicators (KPIs) to evaluate employees Besides, the quality of bank employees was not up to standard, and they still had no policies

to attract customers

Nguyen Minh Trang (2014) with the research topic "Improving the effectiveness of international payment activities by documentary credit at Joint Stock Commercial Bank for Investment and Development of Vietnam - Thanh Do Branch", introduced the concept of international payment effectiveness, thereby deriving the concept of international payment effectiveness by documentary credit Then, she evaluated the performance of L/C payment activities based on two indicators: qualitative indicators and quantitative indicators The qualitative indicators mentioned were the diversity of L/C products, L/C payment time, import-export credit activities, and foreign currency trading operations The quantitative indicators shown in the research were international payment sales by L/C method, the proportion of international payment sales by L/C method, international payment revenue by L/C, profit from L/C payment activities, the ratio between profit and revenue according to L/C, the ratio between costs and revenue according to L/C Then, the author pointed out objective reasons that affect the effectiveness of documentary credit such as the economic situation, socio-political environment, monetary policy at each time, and currency used in payment, In addition, she also mentioned subjective reasons such as customer policies, professional qualifications

of payment staff, relationships with foreign correspondent banks, In the next chapter, she evaluated the branch's business performance through capital

mobilization activities, outstanding loans, and branch profits over the years She found that BIDV used mobilized capital very well to increase profits nearly 4 times

in 2013 Next, she evaluated the qualitative and quantitative indicators mentioned above and concluded the branch results The branch's achievements in documentary credit payment activities included improving branch profits, providing a variety of products according to L/C, a team of highly qualified young staff, modern technology, Besides the achievements, the branch's L/C payment activities still had limitations Those limitations were an imbalance between export and import payment activities and slow transaction processing Moreover, L/C payment activities had not built its brand to attract customers and the number of enterprises coming to transact was still small From those limitations, she proposed several useful solutions to improve L/C payment effectiveness such as diversifying services related to L/C payment, improving the capacity of payment officers, receiving the needs and advice

of corporate customers, implementing preferential policies on service fees, Finally, she made recommendations to the SBV, branch and its customers As for the SBV, the bank needs to improve the legal basis for international payment according to the documentary credit, innovate foreign exchange management policies, and increase foreign currency reserves For BIDV, the Head office needs to promulgate regulations

on international payment activities, loan mechanisms to finance import and export, and related instructions Finally, customers when participating in international trade need to strictly comply with the regulations of this activity, verify the legal status and financial capacity of partners carefully, and promptly grasp information about price, market, etc

therefore constitutes a definite undertaking of the issuing bank to honor a complying presentation” (Nguyen Huy Hoang, Partner, Bross & Partners, 2024)

b Characteristic

Documentary credit is a safe and effective payment method because there is a firm commitment to pay from the issuing bank This ensures that the exporter will not be denied payment if the appropriate documents are presented and the importer has a basis for confidence that the issuing bank will not pay before the exporter delivers the goods, because L/C terms require the exporter to present a set of delivery documents Thus, L/C has guaranteed the benefits of both parties participating in the payment process

c Classification

 According to the reversible nature:

+ Revocable L/C: A type of letter of credit that after being opened, its additions, corrections, or cancellations can be made unilaterally Banks rarely use this type of L/C

+ Irrevocable L/C: A type of letter of credit that after being opened, its modifications, additions or cancellations must be made by the bank according to the agreement of all involved parties This is the most commonly used type of L/C in documentary credit payments

 According to payment terms:

+ L/C at sight: A type of L/C in which the exporter will receive payment within

5 days after presenting a set of documents by the terms in the L/C (The exporter issues a sight draft to request payment)

+ Deferred L/C: A type of irrevocable L/C, in which the issuing bank commits

to pay the beneficiary at the specific time specified by the L/C after receiving the documents and not need bill of exchange

 According to the operational nature of letters of credit:

+ Transferable L/C: An irrevocable letter of credit in which the paying bank will fully or partially pay the L/C to one or more people according to the order of the first beneficiary

+ Back-to-back L/C: A newly opened letter of credit based on an existing L/C After receiving the L/C opened by the importer for his benefit, the exporter uses this L/C as collateral to open another L/C for another beneficiary with content similar to the original L/C However, the original L/C and back-to-back L/C have differences such as the back-to-back L/C value must be smaller than the original L/C, this difference is borne by the intermediary to pay for their costs and commission, the delivery term of the back-to-back L/C must be earlier than the original L/C

+ Revolving L/C: A type of L/C when its validity period expires, automatically has the same value and recurs until the total value of the contract is fulfilled The revolving letter of credit must clearly state the final expiry date, the number of recirculations, and the minimum value of each period

+ Standby L/C: A type of L/C that represents the issuer's commitment to the beneficiary to repay the amount of money that the L/C applicant borrowed during the transaction in which the seller does not comply with the contract The bank will compensate the seller when the applicant does not fulfill his obligations In addition,

in case the opener cannot pay, someone else will pay the exporter

+ Red clause L/C: A letter of credit that the issuing bank allows the bank to notify the advance of all or part of the payment to the beneficiary to purchase goods and raw materials for production but must have a receipt and commit in writing to present documents before the L/C expires This L/C is often used in trading relationships between the parent company and its subsidiaries or sponsored goods and is a special method used for capital support for the seller

 According to the payment of the letter of credit:

+ L/C at sight: The person opening the L/C agrees to pay the seller immediately upon presenting the appropriate set of documents

+ UPAS L/C: To meet the seller's need for early payment and the buyer's late payment, there will be a third party who commits to prepay the exporter and loan this amount to the importer

d Participants

- The Applicant: The importer or buyer who instructs the bank to open an L/C

- The Issuing Bank: The bank that accepts the importer's request to open a letter of credit and issues the L/C

- Beneficiary: The exporter, seller of goods, or any other beneficiary designated by the exporter

- Advising Bank: The correspondent bank of the Issuing Bank in the exporter's country, and is responsible for advising the L/C to the beneficiary

- Confirming bank: Can be the Advising Bank or another bank designated by the exporter because the exporter does not trust the Issuing Bank The Confirming Bank has the role of jointly committing to payment with the Issuing Bank The Issuing Bank must pay a very high confirmation fee and deposit in advance The Confirming Bank is usually large and reputable in the market

- Nominated Bank: The Confirming Bank or any other bank authorized by the bank to make payment upon receipt of a set of documents which suitable for the provisions of the L/C Then, these banks will demand money from the Issuing Bank

e The process of documentary credit payment

10

Figure 2.1 Documentary credit process

(1) The importer and exporter sign a foreign trade contract, which stipulates payment by documentary credit

(2) Based on the signed foreign trade contract, the importer sends a request to open an L/C to the Issuing bank and deposits to ensure payment ability

(3) The Issuing Bank reviews L/C and if deemed reasonable, they will open the L/C and send a letter of credit to the bank to notify the exporter of benefits

(4) The Advising Bank sends notification documents to the exporter

(5) The exporter carefully checks the content of the letter of credit and, if accepted, delivers the goods to the importer, at the same time prepares a set of payment documents according to the requirements of the letter of credit and sends them to the Advising Bank

(6) The Advising Bank sends money to the exporter after receiving enough documents in accordance with the provisions of the L/C

(7) The Advising Bank transfers a set of valid documents to the Issuing Bank

(8) The Issuing Bank checks the documents and notifies the importer of the results If found to be consistent with the letter of credit, the Issuing Bank makes payment to the Advising Bank

(9) The Issuing Bank sends a set of documents to the importer

(10) The importer receives the documents from the Issuing Bank and checks them, if deemed appropriate, they will make or accept payment

f The international legal frameworks of documentary credit operation

- The Uniform Customs and Practice for Documentary Credits (UCP)

This is a set of regulations on the issuance and use of letters of credit The latest revision called UCP600 was officially put into use by the International Chamber of Commerce (ICC) on July 1, 2007 UCP is applied by banks and commercial participants in over 175 countries This is an arbitrary legal document, the participating parties have the right to choose whether or not to use the UCP to regulate credit payment activities When the parties agree to apply the UCP, the applicable terms of the UCP will bind the parties' obligations and responsibilities

One thing to note is that the UCP issued later does not negate the contents of the previous UCP That means UCP 600 does not completely replace UCP 500 but only adds content to UCP 500 Therefore, the parties can agree to choose which UCP

to apply in L/C Only the original English UCP has legal value to resolve disputes, other translations are for reference only

- International Standard Banking Practice for Examination of Documents Under Documentary Credits (ISBP)

This document is used to check documents according to the letter of credit version No 681, issued by ICC in 2007 This document was created to specify the provisions of UCP 600, showing consistency with UCP as well as the views and decisions of the ICC Banking Commission This document does not amend the UCP, but simply explains clearly how the UCP is implemented for practitioners involved

in documentary credits

2.2.2 The effectiveness of international payment operation

When evaluating the effectiveness of a bank's international payment activities,

it is necessary to consider comprehensively all three perspectives: the economy, the bank and the customer because they are closely related to each other

For the economy: The effectiveness of international payment activities is assessed through promoting import-export payment activities, promoting direct and indirect foreign investment activities, promoting and expanding service activities such as tourism, international cooperation, increasing attraction of remittances and other financial resources, increasing budget revenue, creating jobs, contributing to improving the balance of payments and stabilizing the economy

For commercial banks: The development of banking operations, encouraging the growth of international trade, expanding operating markets outside of Vietnam, diversifying revenue sources, boosting revenue from international payment services, and increasing bank revenue are all factors taken into consideration when evaluating the effectiveness of international payment operations for commercial banks In addition to fees, banks offering international payment services can profit from foreign exchange trading or currency conversion when involved parties require buying, selling, or converting Alternatively, the bank can use the deposit capital of the business for other profitable uses, like short-term investment

For customers: In order to evaluate the efficacy of commercial banks' foreign payment operations, the enterprise's overall import-export turnover is promoted Additionally, the transactions are completed promptly, securely, and accurately, improving the business's reputation

Researching the effectiveness of international payment operations based on economic efficiency assessment standards, demonstrating the optimal relationship between the results obtained and the costs spent to obtain those activities According

to author Le Thi Phuong Lien (2006), doctoral thesis in economics: "The efficiency

of international payment activities of commercial banks is an economic category that reflects the business results of banks in the field of international payment It is

measured by the difference between the revenue brought by international payment activities and the costs spent to conduct international payment activities"

Based on that concept and previous studies, the concept of effectiveness of the documentary credit method is defined as “Effectiveness of international payment activities by documentary credit method is an economic category that reflects the business results of banks in the field of international payment by documentary credit

It is measured by the difference between the revenue by documentary credit and the costs spent to conduct this method”

2.2.3 Criteria to evaluate the effectiveness of L/C payment

The effectiveness of international payment operation by L/C supports foreign currency trading operations

International settlement under the documentary credit requires payment in foreign currency when dealing with international customers At that time, businesses opening L/C at branches often have to execute foreign currency to pay overseas partners

The effectiveness of international payment operation by L/C supports export credit activities

import-When opening an import L/C, businesses often deposit a part of the value of the foreign trade contract with their own capital (about 20 - 30% of the contract value), and the rest will be used as a bank loan

For the documents presented under export L/C, businesses can ask the bank to discount the documents at the branch As bank credit activities increase for import-export enterprises, payment activities by documentary credit method will also increase correspondingly

2.2.3.2 Quantitative indicators

International payment sales according to L/C method

International payment turnover by L/C method = Export L/C collection value + Import L/C payment value

International payment turnover by L/C method is the total value of international payment accounts by L/C method at the branch This indicator shows the effectiveness of international payment activities according to the L/C method of the branch The higher the international payment revenue by documentary credit method, the higher the number of items as well as the value of L/C payment items Therefore, it shows that the bank increase in gaining customers' trust, attracting many customers with large transactions

The proportion of L/C payment sales over total international payment sales

The proportion of L/C payment sales= 𝐿/𝐶 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑠𝑎𝑙𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑠𝑎𝑙𝑒𝑠

This indicator reflects the contribution of payment activities by documentary credit to international payment activities The higher this ratio shows the more customers trust and the more they use this payment method for their transaction contracts This also shows the importance of L/C payment in international payment when gaining the trust of customers If the proportion of the L/C does not fully meet the customer's requirements, they will be willing to switch to using other alternative payment methods

The proportion of L/C revenue over total international payment revenue The proportion of L/C revenue= 𝐿/𝐶 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

The bank's revenue created by documentary credit payments comes from fees such as L/C issuing fee, L/C notification fee, L/C payment fee, L/C confirmation fee, The larger the fee collected is, the more effective the bank's L/C payment activities are

The proportion of L/C cost over L/C revenue

The proportion of L/C cost over L/C revenue= 𝐿/𝐶 𝑐𝑜𝑠𝑡

𝐿/𝐶 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

This indicator shows the profit earned per unit of international payment revenue by documentary credit The higher this index shows that the bank's

international payment activities using the L/C method are more effective

The proportion of L/C profit over L/C revenue

The proportion of L/C profit over L/C revenue= 𝐿/𝐶 𝑝𝑟𝑜𝑓𝑖𝑡

𝐿/𝐶 𝑟𝑒𝑣𝑒𝑛𝑢𝑒

This indicator shows how much costs must be spent per unit of L/C payment revenue This indicator also reflects the ability to adjust the relationship between output and input The smaller this ratio is, the more effective it will be

The proportion of L/C fees over the total service fees

The proportion of L/C fees over total service fees= 𝐿/𝐶 𝑓𝑒𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝑠𝑒𝑟𝑣𝑖𝑐𝑒 𝑓𝑒𝑒𝑠

This indicator shows the profit earned from L/C fee compared to the profit earned from total service fee It shows the importance of L/C fees contributed compared to the total bank fees collected

The number of customers participating in L/C payment

This indicator shows the number of customers using L/C method at the branch The high number of customers will prove that L/C method is trusted and chosen by customers, bringing profits to the bank

2.2.4 The factors affecting the effectiveness of documentary credit method

2.2.4.1 Objective factors

The situation of the domestic economy

A growing and stable economy will have safer and more effective banking practices The bank may invest credit with confidence, fostering the growth of new services and facilitating foreign payments through the use of documentary credit

Socio-political environment

International economic circumstances for a developed nation are enhanced by socio-political stability Political stability raises investment safety, making business dealings more secure for both foreign and domestic investors This opens up potential

to grow the market for import-export companies As a result, there is a growing demand for banks to handle capital transfers in and out of foreign currencies, which also increases the efficiency of international payment activities

Regulatory environment

All business activities beyond borders must comply with and be governed by the laws of that country or the host country's laws and even international practices and customs as well as international laws and conventions International settlement under the documentary credit method is not only governed by domestic law and host country law but also by international mechanisms, rules, and standards such as UCP

600, ISBP,…

Monetary policy of each country at a certain period

The exchange rate policy is one of the monetary policy management tools that directly impacts import and export payment operations By limiting the ability to make international payments through banks, the State Bank can influence import and export policies and growth rates of international payment revenue

Payment currency

The commercial effectiveness of import-export companies is significantly impacted by the stability of the foreign currency used by participating parties as the payment currency in import-export operations Export-oriented operations will be impacted if the currency used for payment depreciates, and import-oriented activities will be impacted if it appreciates The poor performance of businesses' export

operations is followed by a decrease in the growth rate of bank-based international payment activities

Knowledge of foreign trade operations of import-export enterprises

Import-export businesses are the customers of commercial banks, so knowledge of foreign trade operations of import-export businesses plays an important role in speeding up progress and limiting risks during implementation transactions between commercial banks and import-export enterprises

2.2.4.2 Subjective factors

Foreign policy of commercial banks

The bank's foreign policy involves expanding its connections with international banks, facilitating international payments, etc If the bank has the right foreign strategy, it will support the bank in keeping its maintain and deepen ties with overseas banks to support the bank's efforts to enhance internal operations, draw in both local and international clients, boost income, and ensure its continued existence and growth

Customer policy

A reasonable and flexible customer incentive policy helps the bank retain familiar customers as well as attract and develop relationships with many new customers, especially customers with payment needs, thereby improving the efficiency of the bank's international payment activities

Professional qualifications of the auditor

Payers are people who directly perform operations related to international payment activities in general and international payment by L/C method in particular Commercial banks will process payments more quickly if their payment staff members are skilled in foreign languages, business processes, and overseas trade strategies They will also be more compliant with legislation pertaining to L/C procedures Quick transactions with excellent accuracy and safety are guaranteed Therefore, bank will get a great deal of client pleasure and trust, which enables

commercial banks' foreign payment operations using the L/C technique to be extremely successful and profitable for the bank

Commercial banks' relationships with foreign correspondent banks

In today's banking operations, agent connections are critical Each bank must build agent connections with financial institutions and banks abroad, particularly in developing nations, to conduct international banking activities, particularly international payments A trade agreement between the two countries exists The first step in developing foreign collaboration between Commercial Bank and another bank that exchanges legal papers and SWIFT CODE to support international payment activities is creating an agency connection Creating an agent connection enables simple, quick, and efficient payments between two banks in the same or other nations For mutual benefit, two banks can trade and make use of each other's products and

services

2.3 Conceptual framework

Taking advantage of Nguyen Minh Trang's study, the researcher used qualitative indicators and quantitative indicators to evaluate the effectiveness of documentary credit payment activities at VietinBank – Dong Ha Noi Branch The researcher used data on the bank's business situation, especially the international payment situation by documentary credit to analyze, compare, and evaluate the branch's performance To provide solutions for documentary credit payment activities, the author selected and synthesized from previous research topics mentioned above In addition, the researcher also relied on the current status of VietinBank's international payment activities, the current economic context as well

as references to books, newspapers, and digital documents to draw conclusions and make recommendations

The model applied in this thesis is IPO (Inputs => Process => Outputs)

Input:

The secondary resources are collected at Administration Department of VietinBank – DHN Branch in 2021 – 2023 and on website VietinBank

CHAPTER SUMMARY

According to the literature review chapter, three studies provided a research model suitable for the thesis Among these studies, the research of Nguyen Minh Trang is the most valuable for this topic All data used in this research are secondary data collected from the Administrative Department of DHN Branch and the website

of Vietinbank The results of the thesis include providing solutions and recommendations for the Government, SBV and DHN Branch

3.2 Research methodology

The method used in the thesis is statistic, comparation and analysis based on qualitative and quantitative indicators Based on that, the researcher drew conclusions about the effectiveness of documentary credit payment activities at DHN Branch Finally, solutions and recommendations were presented based on analyzed data, the branch's business situation, economic situation and some reasons impacting on documentary credit activities such as society, geography, etc

Qualitative indicators:

The number of L/C products

-Foreign currency trading

payment sales over total

international payment sales

international payment activities

The higher these indicators are, the more effectively the documentary credit operate

umber of L/C pr