INTERNATIONAL PAYMENT BY LETTER OF CREDIT AT SAIGON THUONG TIN COMMERCIAL JOINT STOCK BANK

ABBREVIATIONS Sacombank- Dong Da Saigon Thuong Tin Commercial Joint Stock Bank branch in Dong Da districtL/C Letter of Credit SWIFT Society for Worldwide Interbank Financial Telecommuni

Ministry of education and training Hanoi University of Business & TECHNOLOGY

JOINT STOCK BANK

Student: Le Thi Phuong

Group: TA14-02

Course: 2009-2013

Supervisor: Tran Thi Tuyet, MA

This graduation assignment could not have been completed without thehelp, encouragement and support from a number of people who all deserve

my sincerest gratitude and appreciation

First of all, I am heartily thankful to Mr Tran Anh Tho for hisencouragement and support He is like a guide, who helps the students in eachand every sphere of life, by giving the right advice

I am also deeply indebted to my supervisor, Mrs Tran Thi Tuyet, whoseencouragement, guidance and support from the initial to the final level helped

me to finish this graduation assignment

I would like to express my gratitude to the leaders of Sacombank branch

in Dong Da district for offering me an opportunity to do internship there.Additionally, I am greatly indebted all the staff members in the InternationalPayment sector of Sacombank- Dong Da for providing me with valuablereference documents to complete this report

Finally, I would love to express my sincere thanks to my family and myfriends who have helped and encouraged me to complete this graduationassignment

CONTENTS

ACKNOWLEDGEMENTS……… 2

CONTENTS……… 3

ABBREVIATIONS……… 5

LIST OF TABLES……….6

INTRODUCTION……….7

1 Background of the study……….7

2 The scope of the study………7

3 The methods of the study………7

4 Organization of the study………8

CHAPTER 1: THEORETICAL FRAMEWORK……….9

1.1 DocumentaryCredits………9

1.1.1 Definitions of documentary credit……… 9

1.1.2 Parties to Letters of Credit……….10

1.1.3 Process of L/C ……… 11

1.1.4 Types of Letter of Credit………12

1.2 Norms to reflect the efficiency of international payment by documentary credit ….…14 1.2.1 Financial norms………14

1.2.2 Non- financial norms……… 15

1.3 Factors to impact the efficiency of international payment by documentary credit… 15

1.3.1 The commercial bank factor……… 15

1.3.2 The customer factor……… 16

1.3.3 The business environment factor……… 16

CHAPTER 2 : ANALYSIST AND FINDINGS ……….17

2.1 An overview of Saigon Thuong Tin Commercial Joint Stock Bank……… 17

2.2 Saigon Thuong Tin Commercial Joint Stock Bank - branch in Dong Da district………18

2.2.1.The establishment and development of Sacombank- Dong Da Branch… 19

2.2.2 The organizational structure of Sacombank- Dong Da……… 19

2.2.3 An overview of international payment operations at Dong Da Branch……… 20

2.3 Performance of international payment in Sacombank- Dong Da……….21

2.4 The efficiency of international payment by documentary credit at Sacombank-Dong Da Branch……… 23

2.4.1 Financial norms ……… 23

2.4.2 Non- financial norms……… 26

2.5 An evaluation of international payment by L/C at Sacombank- Dong Da…….27

2.6 Causes of limitations in international payment by L/C at Sacombank- Dong Da Branch……… … 28

2.6.1 Subjective causes……… 28

2.6.2 Objective causes……….30

CHAPTER 3: RECOMMENDATIONS……….31

3.1 The orientation for the development of international payments at Sacombank-Dong Da from 2013 to2015……… 31

3.2 Recommendations to improve the efficiency of international payment by documentary credit at Sacombank- Dong Da……… 31

3.2.1 Diversifying types of L/C……… 31

3.2.2 Expanding the operation of export- import credits and support forms……32

3.2.3 Developing the service of customer consultancy………33

3.2.4 Improving the professional skills of staff……… 33

3.2.5 Managing risks in international payments……… 35

3.2.6 Strengthening technology infrastructure……… 36

CONCLUSION………37

REFERENCES 38

ABBREVIATIONS

Sacombank- Dong Da Saigon Thuong Tin Commercial Joint Stock

Bank branch in Dong Da districtL/C Letter of Credit

SWIFT Society for Worldwide Interbank Financial

TelecommunicationsIFC International Finance CorporationFMO Entrepreneurial Development Bank Of The

NetherlandsADB Asian Development Bank

Proparco Investment and Promotions Company for Economic

Cooperation

INTRODUCTION

1 Background of the study

International payment activity is more and more important to banks Itcan be said that the development of international trade depends a lot on thequality of international payment However, this activity is very complicated

As one of the best options, documentary credit is the most commonly used inthe international payment activity Expanding international payment operation

by L/C is getting some trouble for banks, especially, Saigon Thuong TinCommercial Joint Stock Bank branch Dong Da Derived from that practicealong with the process of internship in the International Payment Sector of theSacombank, Dong Da branch, recognizing the importance of this method ofpayment for international trade, the author would like to carry out the research

“International Payment by Letter of Credit at Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) Dong Da Branch -Overview and Recommendations”.

2. The scope of the study.

It is impossible for this report to deal with every aspect of international

payment operations in depth The author chooses to focus on researching andanalyzing problems Sacombank- Dong Da met within its internationalpayment method by L/C in order to make some recommendations to improvethe effiency of Sacombank- Dong Da’s international payment operations

3 The methods of the study

To carry out this study, the author of the report has chosen a quantitativemethod By examining Sacombank- Dong Da’s reports on the generalperformance and international payment of the bank, the author collected data which were then analyzed and presented in the forms of tables and charts

4 Organization of the study.

The Graduation Assignment is in 3 chapters:

Chapter 1: Theoretical framework

This chapter gives basic knowledge about documentary credits as the

definitions, parties to L/C, process of L/C and types of L/C

After that, this chapter also points out norms to reflect the efficiency ofinternational payment by documentary credit as well as some factors to impactthe efficiency of international payment by documentary credit

Chapter 2: : Analysist and Findings

This chapter will provide a brief presentation on the establishment and

development of Saigon Thuong Tin Commercial Joint Stock Bank, SaigonThuong Tin Commercial Joint Stock Bank in Dong Da district and introduceabout international payment operations of the bank and its documentary creditmethod Also, some information about International Payment sector ofSacombank- Dong Da is presented

international payment operation by L/C of Sacombank Dong Da, theresearcher focuses on giving analysis and findings of its problems

Chapter 3: Recommendations

international payment activity by L/C.

CHAPTER 1: THEORETICAL FRAMEWORK

1.1 Documentary Credits

1.1.1 Definitions of documentary credit

International payment is one of the banking performances transactingthe payment of the value of the shipment between the buyer and the seller inthe field of foreign trade And Documentary Credit is the most popular andeffective measure in international payment beside measures such as AdvancePayment, Open Account, Remittance, Collection.

A documentary credit is a separate contract from an export contract.The parties to a documentary credit deal with documents, not the goods thatthe documents relate to Documentary credits are a common method ofpayment in the international trade of goods as they offer some protection toboth you and your buyer There are different classification of letter of credit,including revocable or irrevocable letter of credit, at sight or deferred payment

or transferable letter of credit, etc

A documentary credit—also called a letter of credit—is a conditionalguarantee of payment in which an overseas bank takes responsibility forpaying you after you ship your goods, provided you present all the requireddocuments (such as documents of title, insurance policies, commercialinvoices and regulatory documents)

The name “letter of credit” derives from the French word

“accréditation”, a power to do something, which in turn derives from the Latin

“accreditivus,” meaning trust This applies to any defense relating to theunderlying contract of sale This is as long as the seller performs their duties

to an extent that meets the requirements contained in the letter of credit

(source : http://en.wikipedia.org/wiki/Letter_of_credit )

1.1.2 Parties to Letters of Credit

According to Nguyen Van Tien (International Payment Book-2007, page291-321), some key terms can be definite below:

Commercial bank: Commercial bank shall mean an enterprise, established in

accordance with the Law On Financial Institutions and other applicable laws,conducting monetary business and providing banking services in the form ofreceiving deposits and using the same to extend credits, provide paymentservices

Applicant: is the buyer/ importer and also the person requesting to issue the

letter of credit

Beneficiary: is the seller/ exporter or the other third party for those benefits

the letter of credit is opened

Issuing bank: is the bank responsible for issuing the letter of credit at the

request of the applicant as well as making the payment for the perfectcommercial document

Advising bank: is the bank to notify the credit at the request from the issuing

bank

Confirming bank: is the bank who commits to coordinate with the issuing

bank to pay for the beneficiary at their presence of perfect commercialdocument

Accepting Bank: By accepting the draft, the Drawee Bank signifies its

commitment to pay the face amount at maturity to anyone who presents it atmaturity After accepting the draft, the Drawee Bank becomes the AcceptingBank

Exporter/Beneficiary/Seller: The party that has contracted to sell goods Importer/Applicant/Buyer: The party that has contracted to buy goods.

1.1.3 Process of L/C

According to Export Finance Navigator- a guide to finance for SME

exporters, the diagram below shows the main steps in a typical documentarycredit transaction:

Note to diagram:

(1) The buyer and the seller set out the terms and conditions of the

transaction in a contract of sale The issuance of a documentary credit will beone of the requirements

(2) The importer requests his/her bank to establish the documentary credit

and must ensure that:

• The bank has granted sufficient facilities to cover it If the bank feels that thefinancial risk is too high, it may require additional security in the form of surety

• The transaction complies with the relevant exchange control rulings or has aReserve Bank approval reference number

(3) The bank issues the documentary credit in conformity with the

applicant’s instructions and sends it to its overseas correspondent (the advisingbank)

Advising Bank

(5 )

(1)

(8) (8)

(4) The advising bank hands the documentary credit to the beneficiary (5) The beneficiary of the credit ships goods and prepares the

documentation Payment under documentary credits is called for when thebeneficiary submits the documents, which conform to the terms andconditions of the credit, to the negotiating bank

(6) On receipt of a drawing that meets the requirements of the

documentary credit, the negotiating bank pays the beneficiary

(7) The negotiating bank submits the documents to the issuing bank and

claims reimbursement The issuing bank will check and confirm thecompliance of the documents against the documentary credit

(8) Once the buyer's issuing bank receives and reviews the documents, it

either pays if there are no discrepancies; or forwards the documents to thebuyer if there are discrepancies for its review and approval

1.1.4 Types of Letter of Credit

According to many factors such as date of payment, businessrelationship, common nature or some special situation, Letter of Credit isclassified into some following types:

(1) Revocable L/C : may be revoked or modified for any reason, at

any time by the issuing bank without notification It is rarely used ininternational trade and not considered satisfactory for the exporters but has anadvantage over that of the importers and the issuing bank

(2) Irrevocable L/C – It is not possible to revoked or amended a

credit without the agreement of the issuing bank, the confirming bank, and thebeneficiary Form an exporters point of view it is believed to be morebeneficial An irrevocable letter of credit from the issuing bank insures thebeneficiary that if the required documents are presented and the terms andconditions are complied with, payment will be made

(3) Confirmed L/C- is a special type of L/c in which another bank

apart from the issuing bank has added its guarantee Although, the cost ofconfirming by two banks makes it costlier, this type of L/c is more beneficialfor the beneficiary as it doubles the guarantee

(4) Revolving L/C: It is suited to importers who purchase goods on a

recurrent basis where delivery of goods takes place in installments Uponpayment, the issuing bank reinstates the amount of each shipment drawnunder the documentary credit Revolving credits must be worked carefully toavoid mistimed shipments and payments

(5) Transferable L/C- is a type of credit under which the first

beneficiary which is usually a middleman may request the nominated bank totransfer credit in whole or in part to the second beneficiary This type of L/C

is used in the companies that acts as a middle man during the transaction butdon’t have large limit In this transferable L/C is a right to substitute theinvoice and the whole value can be transferred to a second beneficiary

(6) Back-to-back L/C: It is used when an agent can source goods from

a party to fulfill the order of the buyer, but he wants to conceal the identity

of the buyer from the seller and screen his commission earnings Theprocedure adopted involves the buyer issuing a documentary credit in favor

of the agent who, in turn, uses the document as security to obtain anindependent (counter), for example, independent seller, etc

There are different types of documentary credits The exporter andimporter should consider and agree on suitable type, and on its terms beingconducting a transaction They would be well advised to seek advice fromtheir bankers when they draw up sales contract

(Source:http://www.eximguru.com/exim/guides/export-finance/ch_3_letter_of_credit_1c.aspx)

1.2 Norms to reflect the efficiency of international payment by documentary credit

1.2.1 Financial norms

According to Nguyen Van Tien (2007), financial norms reflect theefficiency of international payment by documentary credit include: sales, cost,risks and revenue

Sales is an indicator for the possibility of the bank in the field ofinternational payment High sales prove that the quantity of L/C paid well.Moreover, sales also is an indicator on which the bank depends to takepayment charges Payment charges are usually applied on the value of L/C Cost for international payment operations by L/C includes all costs whichthe bank must take to serve, and develop international payment operations byL/C, such as cost for equipment, cost for staff, etc

Revenue earned from international payment by L/C is the remaining sum

of money the bank obtains after deducting the costs for this activity Revenue

is the most important indicator reflecting the level of surplus value or businessperformance by the bank from international payment by L/C

In international payments, banks may face risks because importers cannot afford the payment, or refuse to pay When risks occur, the bank's costsincreases, and profits reduce So when using L/C, deposits is very important.Banks ought to clearly assess the financial situation, capacity of the importer.When the bank checks documents and make payments but importers stilldetect errors and refuse the payment, the bank must bear full costs

1.2.2 Non- financial norms

According to Nguyen Van Tien (2007), non- financial norms include :the quantity of L/C paid, the network of agent banks, the number of disputes

in payment by L/C

The quantity of L/C paid through banks is the important target of thebank It’s proved that the bank has large reputation and financial capacity canattract many customers, and create trust for the importers Therefore, to havepacks of L/C with large payment value, the customer ought to be an enterprisewith good financial situation, and strong import and export activities

To implement international payment by L/C, the bank should develop anumber of agent banks in different countries around the world With anetwork of agent banks, the bank can easily and quickly get accurateinformation about the business and financial performance of the clients whoare applying for L/C in order to ensure that goods will be delivered on timeand money will be completely

No one refuses the fact that if risks happen in the process of paying L/C,disputes among involved parties may appear This leads to a reduction in therevenue of the bank and its reputation will be lost in the market

1.3 Factors to impact the efficiency of international payment by documentary credit

1.3.1 The commercial bank factor

The bank can attract more big customers if it create a reasonablemarketing policy Nowadays, the number of import and export enterprises is very large So the bank need to implement marketing methods to expand its market, create its reputation for the customers The bank which has a powerfinancial capacity can ensure the security for process of international paymentactivity

The process of L/C payment need to be quick and accurate This processmust be uniform and flexible to make favorable conditions for customers.The human is the most important factor in international payment by L/C andother banking operations The staff’s ability and working style decide theefficiency of payment

1.3.2 The customer factor

To ensure payment requirements, both of the importer and exporter must

be powerfully financial businesses To be more specific, the importer musthave experience and knowledge in settling the documentary credit pack whilethe exporter must quickly complete the documentary credit pack according tothe international rules

1.3.3 The business environment factor

International payments are carried out among different parties fromdifferent countries So this activity is impacted by the business environmentfactor such as international rules, legal system, political regime along witheconomics fluctuation in each country

CHAPTER 2 : ANALYSIST AND FINDINGS

2.1 An overview of Saigon Thuong Tin Commercial Joint Stock Bank

On 21st December 1991, Saigon Thuong Tin Commercial Joint StockBank (Sacombank ) was founded as a premier bank consolidated by mergingwith Go Vap Bank for Economic Development and three credit cooperatives :Tan Binh, Thanh Cong and Lu Gia Cooperatives, with initial charter capital ofVND 3 billion Its head office is at 266-268 Nam Ki Khoi Nghia Street,District 3, Hoc Chi Minh City Sacombank was established with a mission ofmaximizing economic value for customers, staff, investors and uphold itshighest commitment to Corporate Social Responsibility The bank puts thetarget to be the first modern multi-functional retail bank in the region.

Sacombank has become a pioneering bank in many businessperformances, such as:

* The first bank to be listed on the Ho Chi Minh Stock Exchange inVietnam

*The first bank in Vietnam to expand its network to Laos and Cambodia *The leading bank in Vietnam to top into the niche market such as Bankfor Women (8 March Branch) and Chinese Community Bank (Hoa VietBranch)

* The first bank in Vietnam to receive funding allocations frominternational financial institutions such as IFC, FMO, ADB, etc to supportindividuals, small and medium sized enterprises

In 2011, Sacombank was recognized by the world community throughnumerous prestigious awards : Best Foreign Exchange Provider in Vietnam in2009,2010,1011 ; Best Cash Managing Bank; Best Retail Bank of Vietnam;Best Corporate Governance and Investor Relation Bank in 2011; BestInternational Payment Bank and Bank of the year 2011

strongest brands of Vietnam Award 2012 at the 9th prize-granting ceremony

held by Vietnam Economics Times and the Trade Promotion Agency underthe Ministry of Industry and Trade

After over 20 years of development, Sacombank has been matured invarious aspects, growing from the initial VND 3 billion of charter capital toVND 12,850 billion in 2012, and from 100 first employees to a strongworkforce of 10,000 successive employees of skills and passions In 2012,the total assets of Sacombank gained over VND 143 billion Sacombank iscurrently one of the top commercial banks of Vietnam with a wide network

of 408 transaction offices in all over Indochina, and relationships with 15,121agencies under 820 banks in 86 countries and territories in the world

Nowadays, Sacomabank is considered a pioneer among commercialjoint stock banks in Vietnam, being the first to reform its operations, expandits market and cooperate with international strategic partners Among thestrongest forces driving Sacombank’s development over the last 20 years tobecome one among the few strong commercial joint stock banks of Vietnamare the Bank’s highly motivated staff; the strong support from shareholders;the love, trust and loyalty of customers; and the leadership and great assistancefrom officials of the central and local regulatory agencies, the mass media, etc.All these have combined to create a great foundation for Sacombank to growconfidently and sustainable

2.2 Saigon Thuong Tin Commercial Joint Stock Bank - branch in Dong

Da district

2.2.1.The establishment and development of Sacombank-Dong Da Branch

Sacombank’s branch in Dong Da district was established on July 18th

2006 at 360 Tay Son Street, Dong Da District, Hanoi city, with more than 50employees At present, Sacombank- Dong Da has set up 5 transaction offices

in order to better serve its customers in the local area by being available for awider range of customers With the advantages of its location in Dong Dadistrict, the leaders of the branch define their target customers as companiesand individuals located in the area of Hanoi Capital Though Sacombank-Dong Da has just been established for over 6 years, it has developed not only

in terms of financial indicators but also in terms of services and productsprovided

Sacombank- Dong Da was set up in the context where all commercialbanks were eager to increase its market shares by expanding its number ofbranches in all districts of all cities/provinces nationwide Sacombank- Dong

Da branch, therefore, had to face with a tough competition among commercialbanks Being well aware of the challenges, difficulties and its advantages, theleaders of Sacombank- Dong Da have focused much on the internationalpayment practices in order to enhance the progress of market penetration andexpansion in the area

2.2.2 The organizational structure of Sacombank- Dong Da

Like many commercial banks, Sacombank- Dong Da is organized intodivisions In Sacombank Dong Da Branch, the leaders are the Director and histwo Deputy Directors They are responsible for the performance of all staff.The branch is divided into 6 functional divisions, namely the AdministrationDivision; Corporate Banking Division; Personal Banking Division; BusinessSupport Division, Accounting and Treasury Division; and TransactionDivision Figure 1 below will clearly show the structure of the branch:

Figure 1: The organizational structure of Sacombank- Dong Da

DIRECTOR