Graduation thesis on international payment method of letter of credit at sacombank

this is the best graduation thesis on LC payment method at Sacombank.it is for the last year student for reviewing their knowledge., it is also for graduated persons who are working in a bank. This thesis mainly talks about how to improve the efficiency of international payment method of Letter of Credit at Sacombank Tan Binh branch.

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

INTERNATIONAL BUSINESS SCHOOL

GRADUATION THESIS:

“HOW TO IMPROVE THE EFFICIENCY OF LC PAYMENT METHOD AT

SACOMBANK- TAN BINH BRANCH”

GUIDED BY: PRO DOAN THI HONG VAN

GRATITUDE

After four years of studying precious knowledge at the University of Economics Ho Chi Minh city, trained, instructed, taught by respectful lecturers, I have learned and accumulated so much knowledge and experience for my self that are very important for my future career path Within the internship period, I have got acquainted with new environment, learned a great deal of realistic knowledge and experience as well as how to

go from academics to reality

Sacombank- Tan Binh branch was the first practical environment I have ever been During the time, I was being instructed heartedly by Professor-Doctor Doan Thi Hong Van- lecturer of the faculty of Commerce, Tourism and Marketing, associated with enthusiastic supports from officers working

at international payment division of Tan Binh branch

This thesis is built from the basis of association between theory and actual result of my internship period at the branch Through this, I would like to express honest thanks to the board of lecturer, respectful lecturers of the University, lecturers of the faculty, that have dedicatedly directed over the time, especially Professor –Doctor Doan Thi Hong Van who directly instructed to complete this thesis The professor devotedly directed and created every chance for me to finish the thesis successfully

I would also like to bring my thanks to all those officers working at international payment division of Tan Binh branch

Finally, I would like to give all of you a great wish for health, happiness, and success in your career paths and your lives

HCMC, 30th, March, 2012

Tran Thanh Tuyen

 SACOMBANK-TAN BINH RBANCH COMMENT 

HCMC,…… date , month , 2012

 INSTRUCTOR’S COMMENT 

HCMC,…… date , month , 2012

SUMMARY

*********@*********

In the tendency of deep globalisation of the world economy nowadays, international trade has been playing a vital role in the global economic system In order to enhance the efficiency of transactions among nations worldwide, one of the most important issues must be improved first is international payment methods among which documentary credit payment is

a very important and common used one all over the world With understanding of its role, after contacting and learning realistic knowledge and experience at Sacombank-Tan Binh branch during the internship period there, I chose the matter of “Solutions to enhance documentary credits

payment activities at Sacombank-Tan Binh branch” to be my thesis topic This thesis will introduce you to the deeply basic theory for the payment method and the actual information about Sacombank in general and Tan Binh branch in particular as well as the situation of the payment method activities at the branch, and finally some empirical solutions will be introduced to help the bank improve the the payment activities Specifically, Chapter 1 talks about theory from the definition of the payment method to common factors affecting the payment activities Next, Chapter 2 firstly introduces information about Sacombank and Tan Binh branch, and then chapter 3 talks about the actual situation of the payment activities at the branch Lastly, Chapter 4 is to present some practical solutions that are resulted from related information and database collected from the bank to enhance the method activities

I hope that this thesis will reflect how hard I have worked on my study at the University as well as my internship at Tan Binh branch, simultaneously could contribute somewhat to the method improvement at Sacombank in general and at Tan Binh branch in particular

TABLE OF CONTENT

INTRODUCTION 1

1 Problem Statement 1

2 Research objectives 2

3 Modus Operandi 2

4 Methodology 2

5 Structure of content 2

CHAPTER 1: 4

1.1 Overview of Documentary Credits Payment Method 4

1.1.1 Definition 4

1.1.2 Regulatory Basis 4

1.1.2.1 UCP 600 4

1.1.2.2 ISBP 681 5

1.1.3 Concerned Parties 5

1.1.4 Functional Procedure 6

1.1.5 Fundermental principles of Documentary Credits 9

1.2 Letter of Credit 10

1.2.1 Definition 10

1.2.2 Main content 10

1.2.3 Types of Letter of Credit 11

1.2.3.1 Basic Types of Letter of Credit 11

1.2.3.2 Special Types of Letter of Credit 12

1.3 Pros and Cons of Documentary Credits 13

1.3.1 Pros of Documentary Credits 13

1.3.1.1 To exporters 13

1.3.1.2 To importers 14

1.3.1.3 To banks 14

1.3.2 Cons of Documentary Credits 14

1.3.2.1 To exporter 14

1.3.2.2 To importer 14

1.3.2.3 To bank 15

1.4 Factors Influencing the payment activities 15

1.4.1 Belonging to The bank 15

1.4.2 Belonging to Customers 15

1.4.3 Objective Factors 16

1.4.3.1 Legal environment 16

1.4.3.2 Economic Environment 16

1.4.3.3 Natural environment 17

1.4.3.4 Technological Environment 17

1.4.3.5 Social and Cultural Envirnment 17

Conclusion 17

CHAPTER 2 18

2.1 Introduction about Sacombank 18

2.1.1 History of Establishement and Development 18

2.1.2 Recent Awards 21

2.1.3 Scope of Operations 22

2.1.4 Organisational Structure and human resource situation 22

2.1.5 Business Operation Result in the period of 2013-2015 24

2.1.6 Business Operation Efficiency Evaluation 30

2.2 Introduction about Tan Binh Branch 33

2.2.1 The Process of Establishment and Development 33

2.2.2 The Organisational Structure 34

2.2.3 Business operational Result Error! Bookmark not defined Conclusion 35

CHAPTER 3 35

3.1 The Situation of Documentary Credit Payment Activities 36

3.2 The Functional Process of Documentary Credit Payment for Import 41

3.2.1 LC issuing process 42

3.2.2 LC amending process 44

3.2.3 LC document execution process 46

3.2.4 LC payment execution process 49

3.2.5 LC termination process 50

3.2.5.1 Valid LC termination process 50

3.2.5.2 Expired LC termination process 51

3.2.6 Pros and cons of the process 52

3.2.6.1 Pros of the process 52

3.2.6.2 Cons of the process 53

Conclusion 54

CHAPTER 4 55

4.1 Development Direction for the next period 55

4.1.1 General Direction 55

4.1.2 Direction for Documentary Credit Payment Acitivities 55

4.2 The Solutions to enhance Documentary Credit Payment Activities 56

4.2.1 Objectives of building solutions 56

4.2.2 Basis for building solutions 57

4.2.3 Specific Solutions 57

4.2.3.1 Process Improvement 57

4.2.3.2 Customer Service Enahncement 59

4.2.3.3 Building a well specialised and knowledgeable workforce 60

4.2.3.4 Improvements for Organisational Mechanism and Business Expansion 61

4.2.3.5 Diversification for Letter of Credit 62

4.2.3.6 Analysing Competitors and Implementing Marketing into Documentary Credits Payment Activities 63

4.2.3.7 Bolstering Export Financing Acitivities 63

4.2.3.8 Fostering Internal Auditing Activities 64

4.2.3.9 Risk Management Improvement 64

4.3 Some other Recommendations 68

4.3.1 For import-export enterprises 68

4.3.2 For Sacombank 68

Conclusion 69 CONCLUSION 70

LIST OF TABLES AND FIGURES

1 LIST OF TABLES

Table 2.1: The situation of Turnover and Profit of Sacombank in the period of 2014-2016 24 Table 2.2: Sacombank’s raised capital against total capital in the period of 2013-2015 26 Figure 2.2: Sacombank’s raised capital against total capital in the period of 2013-2015 26 Table 2.3: Sacombank’s Debt balance classified by type of customer in the period of 2013-

2015 27 Table 2.4: Sacombank’s Debt balance classified by time in 2013-2015 28 Table 2.5: Sacombank’s business operation efficiency evaluation ratios in the period of 2014-2016 30 Table 2.6: Sacombank’s business operation efficiency evaluation ratios in the period of 2014-2016 (continued) 31 Table 3.1: The number of LCs executed at Sacombank-Tan Binh branch in the period of 2014-2015 36 Table 3.2: The revenue from LC at Sacombank-Tan Binh branch in the period of 2014-

2015 37 Table 3.3: The weighting of revenues from import LC and export LC at Sacombank-Tan Binh branch in the period of 2014-2016 38

2 LIST OF FIGURES

Figure 1.1: Diagram illustrating the process of Documentary Credit Payment 7 Figure 2.1: The situation of Turnover and Profit of Sacombank in the period of 2014-2016 25 Figure 2.2: Sacombank’s raised capital against total capital in the period of 2013-2015 26 Figure 2.3: Ratios reflecting Sacombank’s credit activities in the period of 2013-2015 29 Figure 2.4: Diagram of Tan Binh branch’s Organisational Mechanism 34 Figure 3.1: The number of LCs executed at Sacombank-Tan Binh branch in the period of 2014-2015 37

Figure: 3.2: The revenue from LC at Sacombank-Tan Binh branch in the period of

2014-2015 38

ABBREVIATTION AND ACRONYM LIST

Sacombank : Saigon Commercial Joint Stock Bank

B/L : Bill of lading

CAR : Capital Asset Ratio

C/O : Certificate of origin

D/A : Document Acceptance

D/P : Document Payment

D/C : Documentary Credits

LC : Letter of credits

ICC : International Chamber of Commerce

IPD : International Payment Department

ISBP : International Standard Banking Practice for Examination of Documents under Documentary Credit 681

P/L : Packing list

ROA : Return On Asset

ROE : Return On Equity

TT : Telegraphic Transfer

UCP : Uniform Customs and Practices for Documentary Credits

INTRODUCTION

1 Problem Statement

In recent years, Vietnamese economy has integrated deeply into the global economy As a result, international trade and international investment have increasingly become of very important activities in the world’s economy This, in turn, has promoted the role of international payment, so the international payment departments of banks have been required to work harder in professional way

International payment is vitally important for the efficiency of the process of trading products and services among countries Through the long history of international trade, there have been many methods used for conducting payments between trade partners internationally Among these methods, Documentary Credits Payment method is one of the most important ones and used commonly all over the world In the process of this method, commercial banks have a big impact on making payment activities become faster and more efficient and effective

Sacombank is one of the biggest commercial joint stock banks in Vietnam with high level of credibility and deep experience in foreign currency trading Furthermore, the bank always pursues the objective of “Convenience-Efficiency-Safety” In recent years, the bank has continuously innovated and enhanced its payment activities to serve customers better and better With foreign economic policy that has been more and more opened, export and import activities has more and more developed Sacombank always desires

to increase the efficiency of all international payment methods in general and Documentary Credits methods in particular to cope with higher requirement from customers and also to take advantage of the very large opportunity During an intern period at Sacombank- Tan Binh Branch I realise that Sacombank has capitalised on its strengths to offer Documentary Credits payment service However, Documentary Credits

payment has brought about not only economic benefit but also threats able

to lead to serious risks to the bank Therefore, improving the payment activities is vital to the bank With the similar purpose as mentioned above, I choose the matter “Solutions to enhance Documentary Credits Payment Activities at Sacombank- Tan Binh Branch” to be my graduation thesis topic

I hope my finished thesis will be able to contribute a little to the improvement

of the issue effectively at Sacombank in general and Tan Binh Branch in particular

Thirdly, pointing out advantages and disadvantages arising from the method

as well as assessing opportunities from global economy

Lastly, recommending some Solutions to promote Documentary Credits payment activities at the bank

3 Modus Operandi

The thesis will be focused on the situation of Documentary Credits payment activities, especially the payment process at Sacombank- Tan Binh Branch from which relevant figure will be taken and analysed

4 Methodology

The figure collected and collated from Tan Binh Branch will be aggregated and then analysed and evaluated based on the reality at the bank together with theory, information collected from newspaper, books, the bank’s reports and statements

5 Structure of content

The thesis encompasses four main chapters as follows:

Chapter 1: The Theoretical Basis of Documentary Credits Payment Method Chapter 2: Introduction of Sacombank and Sacombank-Tan Binh Branch Chapter 3: The Situation of Documentary Credits Payment Method Activities

at Sacombank- Tan Binh Branch

Chapter 4: The Solutions to enhance Documentary Credits Payment Activities at Tan Binh Branch

However, due to my limitation of theory and realistic experience, there will probably be some mistakes in my thesis I hope to receive toleration and directions from the lecturers as well as Sacombank professionals to improve the result of the thesis

CHAPTER 1:

THE THEORETICAL BASIS OF DOCUMENTARY CREDITS

PAYMENT METHOD 1.1 Overview of Documentary Credits Payment Method

1.1.1 Definition

A documentary credit is a document issued by a bank, which acts as

an irrevocable guarantee of payment to a beneficiary The payment is to

be realised once specific conditions of the documentary credit are met, meaning the beneficiary submits conforming documents to the issuing or negotiating bank In such the case, the bank is obliged to pay to beneficiary

or to order of this person, or to accept bill of exchange issued by the beneficiary irrespective of any instructions of the applicant to the contrary

In other words, the point of the documentary credit is that the obligation

to pay is shifted from the applicant to the issuing bank

1.1.2 Regulatory Basis

1.1.2.1 UCP 600

UCP stands for “The Uniform Customs and Practice for Documentary Credits” The first version of UCP was issued by ICC in 1933 with the aim of settling the conflict of regulations about Documentary Credit among nations

by building a uniform customs and practice for Documentary Credit According to experts, UCP is the most successful regulatory establishment

in trade field Nowadays, UCP is still a very important regulatory basis for international trade On 25, October, 2006, ICC issued the Uniform Customs and Practice for Documentary Credit numbered 600 (UCP 600) in replacement of UCP 500 UCP 600 took effect from 01, July, 2007

UCP 600 has some changes in comparison with UCP 500 as follows:

The first, UCP 600 was restructured into 39 articles ( compared with 49 articles of UCP 500), in which many definitions and explanations for new terminologies remaining in controversy in UCP 500 were supplemented e.g article 2 “ Definition in UCP 600 consists of a range of definition such as

Advising bank, Applicant, Beneficiary, Complying presentation, Confirmation, Confirming bank, Credit, Honour, Negotiation,

The second, UCP 600 stipulates that a time period for denying or accepting presented documents is a fixed one (5 banking days) In UCP 500, this time period was stipulated vaguely as reasonable time and with delay for inspecting presented document and advising discrepancies

The third, UCP 600 came up with a new stipulation that LC applicant’s address and beneficiary address in documents must be identical to those in

LC

The fourth, UCP 600, issuing bank is able to deny presented documents and then hand over the documents to applicants when receiving applicant’s acceptance of discrepancies

1.1.2.2 ISBP 681

In continuation with the publishment of UCP 600, ICC issued some instruction documents as attached That is “International Standard Banking Practice for Examination of Documents under Documentary Credit 681, 2007” in short word, ISBP 681 2007 in replacement for ISBP 645 2003 ISBP is a realistic supplement for UCP ISBP does not change UCP but explains more detail and clearly for the application of articles in UCP in daily transactions Therefore, it will reduce the unnecessary distance between general regulations stipulated in UCP and daily works of those who conduct payment by Documentary Credits

Through using ISBP, document examiner can execute their jobs corresponding with customs and practices used by the counterparts all around the world Thanks to it, there would be a reduction of denied documents presented for the first time due to differences in practice

1.1.3 Concerned Parties

Each LC transaction usually involves the following parties: applicant, issuing bank, advising bank, confirming bank, and beneficiary The

applicant (usually the importer) is a person/entity that applies for the LC with the issuing bank The issuing bank subsequently informs the advising bank of the LC issuance The advising bank then advises the beneficiary (usually the exporter) of the LC issuance This may be done directly by advising bank or through another intermediary bank In case of confirmed LCs, a confirming bank appears This may well be the same bank as the advising bank Its task is to guarantee the LC payment to the beneficiary Moreover, there are negotiating banks and payment banks that are any banks negotiating and making payment respectively for the presented documents

1.1.4 Functional Procedure

The LC procedure begins with the importer submitting an LC application

to his bank The application should contain such details as: applicant name, beneficiary name, type of documentary credit, payment terms, type of LC transmission, documents required, latest date of shipment, expiry date, information on transshipments and partial shipment, currency and amount of the LC, loading part, port of discharge, name of advising bank, confirming bank (if any), detailed description of goods Whereas most of the data listed above is clear, some of them require further explanations As regards payment terms, the LC amount may be paid to the beneficiary immediately on presentation of commercial documents conforming to the LC terms to the issuing bank (the so called

at sight payment) The other possibility is a deferred payment, meaning that the exporter is paid on draft maturity which is certain number of days from the date of transport document (for instance after 90 days of bill of lading date) As for the LC transmission type, it may be transferred by post or by electronic transfer (SWIFT) The documents that need to be submitted by the exporter to the bank in order to receive the LC proceeds are agreed upon by both parties in the underlying contract These are

usually: an invoice, packing list, certificate of origin, and a bill of lading It must be noted, however, that in case of discrepancy between the LC terms and the underlying contract, the bank will in no case take into account the conditions of the contract Regarding the latest date of shipment, it is the last date at which the goods may be loaded on board a vessel or a plane/truck In other words, this is the latest date which may appear on the transport document In case a later date is indicated, the bank will reject the document and the exporter will not receive the LC proceeds The latest date of shipment is usually 21 days before the LC expiry date This 21-day period is habitually accepted as the time which exporter needs to prepare documents and submit them to the advising bank Transshipment means that the goods which are in voyage from the port of loading to the port of discharge may be reloaded from one vessel onto another in an intermediate port

Once the issuing bank receives such an LC application, it is checked carefully as regards its integrity and conformity with the contract between the parties If no errors have been detected, then the LC is opened The issuing bank arranges with the advising bank at the locality of the importer to negotiate, accept or pay (depending on the payment terms) to the exporter upon delivery of conforming documents The advising bank then informs the beneficiary on the issuance of the LC Subsequently, the exporter ships the goods, obtains a transport documents, and prepares all the other documents in strict conformity with LC instructions Once this has been done, the documents are submitted to the negotiating bank

In case they are deemed confirming, the beneficiary receives the LC proceeds (from the negotiating bank or advising bank depending on the type of credit) Following is the diagram illustrating the normal and simple Documentary Credit payment procedure

Figure 1.1: Diagram illustrating the process of Documentary Credit

Payment

Source: Dr Tran Thi Xuan Huong (2013), “International Payment”, Lao Dong-Xa Hoi Publisher

Illustration for the diagram:

(1) Importer fulfils LC application and then submits it to the issuing bank with relevant documents and makes prior deposit as required for the bank to issue LC

(2) The issuing bank issues LC in accordance with the LC application and hands it over to its agent bank (in this case, advising bank) in exporter’s country

(3) The advising bank sends original LC to exporter for evaluation execution capability and amendment recommendation if necessary

(4) The exporter ships the goods to the importer in conformity with the LC and amendments if any

(5) The exporter prepares all necessary documents complying with the LC and amendments (if any) and then presents it to the issuing bank in legitimate time

(6) The agent bank (advising bank) after examining the documents will send

it to the issuing bank if there is no discrepancy

(7) The issuing bank examines the presented documents:

 If the documents comply with the LC then the bank executes the payment or accepts bill of exchange (deferred LC)

 If the documents do not comply with the LC then the bank denies and sends it back to the exporter

(8) The issuing bank sends the documents to the importer and then sends remittance order to the importer

(9) The importer examines the documents:

 If the documents are complied with the LC then the importer go to the bank for payment procedure then the bank endorses the documents for the importer to receive the goods

 If the documents are not complied with the LC the importer then is able

to deny payment

(10) The exporter receives the LC proceeds

1.1.5 Fundamental principles of Documentary Credits

There are two fundamental principles of LC which distinguish it from other payment instruments, and in the same time render LC one of the most secure tools for exporters These are the principle of autonomy of the credit, and the doctrine of strict compliance According to the former, LC is separated and independent on the underlying contract of sales and any other agreement from which the LC stems As a result, the bank that checks documents is concerned only with whether these documents are in conformity with the instructions stipulated in the LC The bank does not take into account nature of the contract or any whereabouts of the agreement between the LC applicant and the beneficiary Its task is only to verify the conformity of the documents tendered by the beneficiary with the LC instructions of the applicant The only one exception when

bank may refuse to pay the LC proceeds to the beneficiary despite the documents being in conformity is when it is proved that the documents are forged and that the beneficiary was involved in the fraud It must be emphasised, however, that both these conditions must be met at the same time As regards, the doctrine of strict compliance, it is a rule whereby banks are entitled to reject documents tendered by the beneficiary which

do not strictly conform to the instructions of the LC applicant, even if the discrepancies are insignificant This rule stems from the principle of autonomy mentioned above, which says that banks are concerned with documents only and not with underlying contract or goods This rule is applied very strictly by banks and by courts of law Therefore, even very minor discrepancies may serve as a ground to refuse to pay the LC proceeds to the beneficiary These discrepancies may include, for instance, literal errors, lack of spaces or comas in goods description, difference in description of goods between the invoice and the bill of lading, and many other very minor errors

1.2.2 Main content

 Signal number, location, date of opening LC

 The type of LC

 Name and address of concerned parties

 The amount of money of LC

 Legitimate time for LC’s effect, payment, shipment

 The required documents

 The issuing bank’s commitment to pay LC proceeds

 Other special terms and conditions

 Signature of the issuing bank’s employee

1.2.3 Types of Letter of Credit

1.2.3.1 Basic Types of Letter of Credit

1.2.3.1.1 Revocable Letter of Credit

This type of LC allows the applicant to amend or cancel it at any time The instruction to this effect needs to be simply communicated to the issuing bank This means that the exporter (beneficiary) cannot be sure that that

LC terms will remain unaltered until such an LC expires A revocable LC is

a negation of the basic feature of LC, meaning the principle of autonomy Therefore, this form is nowadays very rarely used in trade transactions

1.2.3.1.2 Irrevocable Letter of Credit

This is the basic type of LC It cannot be cancelled or in any manner amended unless both buyer and seller agree to this Pursuant to UCP 600, each L/C is regarded as irrevocable unless otherwise specified In view of this, irrevocable letters of credit are very attractive to exporters as even in case the importer refuses to fulfill its obligations, the importer bank will still

be obliged to satisfy the exporter

1.2.3.1.3 Confirmed Irrevocable Letter of Credit

If the exporter cannot or does not wish to bear the credit risk associated with the issuing bank or if the country where the issuing bank is located is economically, legally or politically unstable, then he can request that the L/C be confirmed Confirmed LCs provide the exporter with additional security as this is the exporter bank which now takes the responsibility for making payments, even if no call is received from the issuing bank on due date Additionally, in case of any dispute arising in connection to

the realisation of the LC obligations, the exporter has the right to litigate against the confirming bank The confirming bank is usually located in the exporter country, which renders the litigation and enforceability of court verdicts much cheaper, quicker and simpler

1.2.3.2 Special Types of Letter of Credit

1.2.3.2.1 Revolving Letter of Credit

With a revolving letter of credit, the issuing bank restores the credit to its original amount once it has been used or drawn down Usually, these arrangements limit the number of times the importer may draw down its line over a predetermined period

1.2.3.2.2 Reciprocal Letter Of Credit

This type of LC is used in case the exporter and importer have a payment relationship of processing products This LC only takes effects when there

is another reciprocal LC opened

1.2.3.2.3 Standby Letter of Credit

This type of letter of credit serves mainly as a payment or performance guarantee used primarily in the United States Such LCs are often called non-performing letters of credit because they are only used as a backup

in the event the importer fails to effect payment as agreed Hence, a stand-by letter of credit allows the importer to show that he can fulfill its payment commitments towards the exporter Standby letters of credit are used, for example, to guarantee repayment of loans, to ensure fulfillment

of a contract, and to secure payment for goods delivered by third parties The beneficiary to a standby letter of credit can cash it on demand Stand-

by letters of credit are generally less complicated and involve far less documentation requirements than irrevocable letters of credit

1.2.3.2.4 Transferable Letter of Credit

This type of credit allows the exporter to transfer all or part of the proceeds of the original letter of credit to a second beneficiary, usually the

ultimate supplier of the goods The letter of credit must clearly state that it

is transferable to be considered as such This is a common financing tactic for middlemen and is most popular in East Asia This arrangement is particularly beneficial for the exporter who acts as an intermediary He can use the LC issued by his customer to satisfy the obligations toward his supplier In that case, the amount of “transferred”

LC will be slightly lower than the amount of LC received from the issuing bank (usually less the intermediary exporter commission) Owing to this the exporter bears no financial burden and risk of financing the purchase

1.2.3.2.5 Back to back Letter of Credit

The purpose of a back-to-back LC is the same as the transferable LC It

is a new letter of credit opened based on an already existing LC which is non-transferable, meaning it is not allowed to transfer it to any third parties

In this case the existing LC acts as collateral for the new back-to-back LC

1.2.3.2.6 Red Clause Letter of Credit

The purpose of red clause letters of credit is to provide the exporter with certain funds prior to the shipment of cargo The reason for that is to allow the exporter production financing of the goods (e.g purchase of raw materials) Such LCs functions as a kind of advance payment on demand

It can usually be realised against a simple receipt or a statement from the beneficiary agreeing to return the funds in the event of non-shipment However, most of such LCs requires the advance payment to be made against the presentation of a payment guarantee The importer's issuing bank may advance some or all of the funds The importer, in principle, extends financing to the exporter and bears the risk for all advanced credits

1.3 Pros and Cons of Documentary Credits

1.3.1 Pros of Documentary Credits

1.3.1.1 To exporters

The exporter is guaranteed for the payment if the presented documents are

conformed Making payment is independent of the importer The exporter presenting documents complying with terms and conditions in LC will be paid regardless of the importer payment capability Therefore, the exporters can turn back their capital very quickly and their capitals are not held up during the payment period

1.3.1.2 To importers

LC payment method helps the importers be able to widen their source of good supply without wasting time, effort for seeking credible partner Because most of the documents are examined by the partner’s bank which

is responsible for arising defects The importers are guaranteed that the exporter ships the goods before they pay money Moreover, deposit for LC also has interest according to regulations

1.3.1.3 To banks

In conducting this payment responsibility, the bank gains procedure fee Furthermore, the bank also attracts a large amount of money (if deposit required) When executing this activity the bank also conducts other activities such as export loans, guarantees, foreign exchange transaction Moreover, through this function the credibility and the role of the bank in the international financial market are enhanced

1.3.2 Cons of Documentary Credits

1.3.2.1 To exporter

If after shipping the goods to the importer and the exporter wants to receive the money by presenting conformed documents, but the importer has not paid the money to the issuing bank or advising bank, then the exporter has

to negotiate the documents or take a loan with condition of the documents mortgaged Therefore, the exporter’s profit will be reduced due to LC related fee and the document negotiation fee or interest paid to bank

1.3.2.2 To importer

The goods are shipped to importer already and the importer has made

payment already If the goods in reality are conformed to the LC it is good However, if the goods are not complied with those described in LC then the importer has to bear the risk

1.3.2.3 To bank

In Documentary Credit method, the bank is responsible for making payment directly, in some cases the importer’s bank has not sent money to the exporter’s bank but the presented documents are content If the exporter wants money immediately, the exporter’s bank based on the beneficiary’s requirements will negotiate the documents or make a loan to the beneficiary with the documents mortgaged

1.4 Factors Influencing the payment activities

1.4.1 Belonging to The bank

 Export-import support activity:

It is possible to say that import-export payment support activities such as import- export loans, guarantees… etc affect directly to the efficiency of the bank’s international payment activities The bank can support customers through making loans for deposits, negotiating presented documents, guarantees for goods receipt or guarantees for deferred LC

 The capability of the bank’s staff in the process of interacting with customers plays an important, active role, reflected through communication style, impression making style, self-confidence, functional professionalism

 The bank’s facilities are physical aspects through which customers are easy to realise the modernness of the bank They are represented by transaction procedures, customer service facilities such as internet, computers, payment machines etc those facilities have become the main factors for all the banks to enhance service quality, credibility, information quality to customers

1.4.2 Belonging to Customers

 Their capability of participating in the process of service offering, which

is reflected by the ability to express sufficiently, correctly, clearly their needs and wants to the bank as well as their comprehension of functional process

 Customers’ credibility: customers’ credibility here means their persistence of conducting all commitments in contracts Dealing with customers of high credit rating helps the bank reduce risks, otherwise the bank will face plenty of risks when customers intentionally try to cheat or deny accountability

 Customers’ business knowledge and experience

It is definite to say that this is a very important element supporting the entire process of service offering of the bank Even the importer is very reputable, but the business operation result of his enterprise is very bad, then he will not be a good potential customer in terms of financial issue

1.4.3 Objective Factors

1.4.3.1 Legal environment

There are big changes in legal system, especially unstable legal systems in some nations In reality, usual changes in laws such as quota, tariff, and technical requirements make exporter, importer, banks be unable to conduct their commitment in LC which then will be canceled, leading to loss for the parties

1.4.3.2 Economic Environment

Big fluctuation of foreign exchange rate and huge economic uncertainty can lead to large amount of loss to concerned parties The concerned parties when participating in the payment process have to consider carefully all the possible aspects in not only their domestic economy but also their counterpart’s economies Once one realises that there would be likely a big fluctuation in exchange rate that person could and should use exchange rate hedging methods Then all parties are able to do their business

comfortably without thinking so much about economic crisis or largely fluctuated exchange rate

1.4.3.3 Natural environment

Natural environment can lead to some force majeures such as fire, disaster, etc which then make concerned parties be unable to execute their own accountabilities, so affecting directly the payment activities among them

1.4.3.4 Technological Environment

If the levels of technology among concerned parties’ nations are very different, then it is difficult for them to conduct the process of payment It may take banks far more time to process data and then send it to relevant parties The exporter and importer may have to wait for a longer time for the receipt of commodity and LC proceeds

1.4.3.5 Social and Cultural Environment

With different practices and habits in doing business among concerned parties, there would be a number of possible problems arising from conducting their tasks in the process of payment For instance, the different way of writing the amount of money between French style and English style could lead to misunderstandings that then could lead to seriously bad result

Conclusion

This chapter has provided us relatively entirely theoretical basis about Documentary Credit payment method and some common factors influencing the situation of the method activities However, this is only theoretical In order to understand how it is implemented into reality and how we could promote the payment activities at Sacombank we need to go

on to the next chapters to see the actual facts at Sacombank- Tan Binh Branch

CHAPTER 2 INTRODUCTION OF SACOMBANK AND SACOMBANK-TAN BINH

BRANCH 2.1 Introduction about Sacombank

2.1.1 History of Establishment and Development

2.1.1.1 History of Establishment

The name of the bank:

SAI GON THUONG TIN COMMERCIAL JOINT STOCK BANK

The shortened name: SACOMBANK

Head office: 266-268 Nam Ky Khoi Nghia, Ward 8, District 3, HCMC

Account number: 453100804 at the state bank of Vietnam, Ho Chi Minh Branch

Tax code: 0301103908

Sacombank was established through the decision 05/GP-UB on 03/01/1992

of SGHCMC and operated according to the decision 0006/NH-GP on 05/12/1991 of the state bank of Vietnam Sacombank has officially been operated since 21/12/1991, based on the merger of GoVap Economic Development Bank and three community credit institutions: Tan Binh, Thanh Cong, and Lu Gia Sacombank has developed from a small bank with the chartered capital of 3 VND billions, 100 staff

After 20 year operation to 31/12/2016 Sacombank has become one of the largest commercial joint stock banks in Vietnam with:

 VND 10,739 billions Chartered Capital

 408 transaction points, among them are 69 branches, 337 transaction departments, one branch in Laos and one branch in Cambodia

 12/07/2006 Sacombank is the first bank in Vietnam, listing officially at HCMC stock exchange

 10,550 agents belonging to 312 banks in 81 nations in the world for international transaction

2.1.1.2 History of development

 1991: Formed from the merger of community credit institutions Sacombank was among the first joint stock banks incorporated in Hochiminh City

 1993: Opened its branch office in Hanoi It was the first bank to provide express call service between Hanoi and Hochiminh City The service has greatly reduced physical cash transactions in Vietnam’s two largest cities

 1995: Held the unusual general shareholder meeting to restructure the Bank and drew up its first 5-year Strategic Plan Mr Dang Van Thanh was appointed as the Chairman This event marked a significant milestone for Sacombank

 1997: Issued shares at par value of VND200,000 per share, and became the first bank to make public offering The Bank’s shares attracted almost

9,000 shareholders, and increased its chartered capital to aroundVND71 billion

 1999: Inaugurated its Head Office at 278 Nam Ky Khoi Nghia, District 3, HCMC.

 2001: Dragon Financial Holdings (UK) took a 10% equity stake of the bank This paved the way for subsequent capital contributions, from the International Finance Corporation (IFC) of World Bank in 2002, and ANZ Bank in 2005 The bank was able to leverage from the management experience, banking technology, risk management, staff training and development through its cooperation with these strategic shareholders

 2002: Set up its first subsidiary, namely Sacombank Asset Management (Sacombank-SBA), initiating the first cross-selling of package banking services

 2003: It is the first company to receive permission to establish a Join Venture Securities Investment Fund (VietFund Management– VFM) It is

a join venture between Sacombank (51% ownership) and Dragon Capital (49% ownership)

 2004: Signed a contract with Swiss-based Temenos Company to use the T24 core banking system in all its branches to improve the Bank’s operation, management, and e-banking service provision.

 2005: Opened Eighth of March Branch, Vietnam’s first bank for women entrepreneurs

 2006: First Vietnamese bank to be listed on the HOSE with a chartered capital of VND 1,900 billion More subsidiaries were set up, namely Sacombank Call Express (Sacombank-SBR), Sacombank Leasing (Sacombank-SBL), and Sacombank Securities (Sacombank-SBS)

 2007: Set up the Hoa Viet Branch to serve Vietnam’s Chinese speaking community Expanded its operation network in the Southwest, Southeast, Southern, Central Region & Western Highlands

 2013: In March, the Bank built the region’s most advanced data centre to store computerized records and files In May, Sacombank Group was formed to provide financial solutions for corporations and individuals In November, Sacombank Jewelry (Sacombank-SBJ) was set up In December, a branch was opened in Laos Sacombank was the first Vietnamese bank to have an overseas office

 2014: In May, Sacombank was rated a “gold” stock by the financial market It has been a blue-chip stock since listing on the HOSE and has attracted many local and foreign investors In June, a branch was opened in Phnom Penh The bank achieved its aim of expanding into Indochina to support cross border enterprises of Vietnam, Laos, and Cambodia In September, the bank upgraded the core banking system from T24 to T24 R8 in all its transaction offices

 2015: It has successfully completed all 2001-2015 targets, with a growth rate of 64% per year Building a firm foundation while making necessary changes in the restructuring process, the Bank is now taking actions to achieve the 2016 - 2020 targets

 2016: it has started to realise the operation plan set for the period of 2016-2015 by the board of directors It has successfully met almost all targets planned for the first year of the period

2.1.2 Recent Awards

 2013:

- Award of “The best bank in Vietnam” Global Finance

- Award of “ The Best Domestic Bank for Vietnam 2014” by The Asset

 2014:

- Award of “ The Best Foreign Exchange Provider Vietnam 2014” by Global Finance

- Award of “ The Best International Payment Provider in Vietnam 2014”

by Citigroup and Standard Chartered

 2015:

- Award of “ the Best Retail Bank in Vietnam 2015” by Asia Banker

- Award of “ The best Cash Management Bank in Vietnam ” by The Asset

Sacombank is allowed to conduct:

• Deposit taking, receiving foreign capital, funding business capital requirements;

• Local and international payments, transactions, and funds transfers;

• Trading and investing in gold, foreign currency, and securities;

• Other services offered by foreign banks in line with those allowed by the State Bank of Vietnam

2.1.4 Organisational Structure and human resource situation

2.1.4.1 Organisation Structure

 Chairman: Mr Dang Xuan Thanh

 Chief Supervisor: Mr Nguyen Tan Thanh

 General Director: Mr Tran Xuan Huy

 Chief Accountant: Ms Nguyen Thi My Hanh

Sacombank’s organisational structure is organised as follows:

 Shareholder Council: this is Sacombank’s most powerful organisation deciding issues belonging to its duties and authorities stipulated by laws and the bank’s charter

 Board of Directors: Members of Sacombank’s Board of Director (BOD) are elected to a five-year term Four main roles of a member of the Board are planning, organizing, leading, and supervising Serving in the Board are

Chairman, 2 Vice Chairpersons, and 5 Members (1 member works full time and the other four members work part time) There is one mandatory meeting in each quarter, and there might be additional meetings for important occasions “Majority rule” is the Board’s principle Early in the term, the Board will elect its Chairperson by ballot voting After the Chairperson is determined, the Board will then decide its standing members Then, each member’s roles will be assigned accordingly

 Board of Supervisors: The Board of Supervisors is voted by the General Shareholders’ Meeting, independent from the Board of Directors with the following tasks:

- Supervising operations and capital management

- Supervising service business

- Supervising investment activities

- Supervising business results

- Supervising and managing the Bank’s assets

- Supervising the compliance with accounting Policies

- Supervising the internal checking and auditing system

 Board of Management: this comprises one General Director and eight Deputy General Directors The General Director is responsible for managing and controlling all the bank business operation activities in compliance with government laws, banking sector regulations, Sacombank’s charter and other regulations Simultaneously, it plays as a consultant for the Board of Directors on planning goals, objectives, and policies

2.1.4.2 Human Resource Situation

In order to serve customers with better services and improve the bank’s competitive capability as well as trademark of one of the top commercial banks in Vietnam, the bank always concentrates its effort on educating, training, developing to enhance the staff quality, capacity, professionalism The number of the official workforce of the bank in 2015 was 8354 persons,

increasing 16.03% in comparison with that of 2014 Among them, the number of university educated staff was 4833 persons, accounting for approximately 58% of the total staff The average salary person in 2015 was VND 87.6 millions

In parallel with staff quality enhancement, the bank also paid sufficient attention to staff diversification and building of next generations that are able

to take over and operate works through education policy, preferential policy

to attract high quality human resource to work for the bank

2.1.5 Business Operation Result

2.1.5.1 The situation of Turnover and Profit

In the year of 2016, the global economy slightly recovered from the 2013 financial crisis, but still remaining many uncertainties In spite of having to face both internal and external difficulties, Vietnam still achieved the GDP growth rate of 6.18% and met almost all the targets set up In banking sector, the total of raised capital and lending capital increased 28.3% and 29.1% respectively The total of payment means rose 24.5% in comparison with the year before In a situation with plenty of changes in macroeconomic, Sacombank strived to overcome all difficulties and challenges, still remained high growth rate and basically met almost all the targets planned for 2016 Bellows are the business situation of Sacombank in the period of 2014-2016:

Table 2.1: The situation of Turnover and Profit of Sacombank in the period of 2014-2016

Unit: VND billion

Compare 2015/2014

Compare 2016/2015 Abs

Through the table above, we realise that Sacombank’s profit tends to grow

year on year with a very high rate, of which Revenue is raising bigger and

bigger, meanwhile, Cost and Reserve have been unstable in rising with very

different speeds over the years

Figure 2.1: The situation of Turnover and Profit of Sacombank in the

Source: 2014, 2015, 2016 Financial Statement of Sacombank

 Revenue: in 2014 Sacombank’s total turnover was VND 8489 billions, in

2015 reached VND 14315 billions, raising VND 5826 billions, 68.63%

equivalently In 2016, that number reached VND 18616 billions, raising

VND 4301 billions in comparison with that of 2015, 30.05% equivalently

 Cost and Reserve: in 2014 it was VND 6588 billions, moving on to 2015,

that number was VND 11889 billions, raising VND 5301 billions

compared to that of 2014, equivalently 80.46% In 2016, it was VND

15876 billions, rising VND 3987 billions in comparison with that of 2015,

equivalent to 33.54%

 Profit before tax: in 2014 Sacombank’s total profit before tax was VND

1901 billions, moving on to 2015, that number reached VND 2426 billions,

raising VND 525 billions compared to that of 2014, equivalently 27.62%

In 2016 it was VND 2740 billions, going up by VND 314 billions

compared to that of 2015, equivalent to 12.94%

2.1.5.2 Capital raising activities

Always putting sufficient attention to capital raising activities, in the period

from 2014 to 2016 Sacombank’s total raised capital was continuously

increasing, accounting for about 80% of the total capital of the bank

Specifically, in 2014, the bank’s total raised capital was VND 86335 billions,

accounting for 87.67% of the total capital of the bank Moving on to 2015,

that number continuously increased with the growth rate of 46.18%,

reaching VND 126203 billions, however, moved Sacombank raised capital

market share from 5.2% to 4.8% due to Vietnamese economic difficulties

and fierce competition from other banks With the recovering economy and

the certainty of financial system in the years, the growth rate of raised

capital in 2015 was higher than that of 2014 Moving on to 2016, with high

inflation, the bank had to face a lot of difficulties in the capital raising

process However, the bank’s total raised capital still remained higher than

those of other banks, specifically reached VND 111513 billions, going down

by 11.64% compared to that of 2015 and accounting of 79.57% total capital

At the end of 2016 the bank total raised capital was 4.6% of the market

Table 2.2: Sacombank’s raised capital against total capital in the

Compare 2016/2015 Abs

Rel (%) Abs

Rel (%)

-statement

Figure 2.2: Sacombank’s raised capital against total capital in the

period of 2013-2015

Source: Sacombank’s 2014, 2015, 2016 financial statement

2.1.5.3 Credit Activities

Although Sacombank’s 2016 financial statement has been launched already,

it is still extremely difficult to seek out for information about details of the

bank’s business operation, especially information of Credits activities in the

year of 2016 Therefore, hereafter the author will only use those related

information of the period of 2013- 2015 to analyse the situation

At the end of the year of 2007, the world’s economy became facing difficult

situation due to the US economic recession Moving on to 2013, the global

economic crisis led to economic turmoil in many nations and its effect to

Vietnamese economy became clearer as the country officially became WTO

member In 2013, the event that inflation situation accidentally turned into

deflation situation brought a lot of difficulties to the economy of Vietnam

Therefore, Vietnamese enterprises faced a great number of hardships in

doing business and demand for credits also decreased because of high

In banking field, in order to enhance the liquidity capability amid the problem

of high interest rate, Sacombank chose the way of reducing Debt balance to minimise credit risk Specifically, in 2013 the total fund lended to customers reached VND 33,708 billions lower the set target of VND 45,000 billions Nevertheless, that number was quite higher than those of other banks In

2014, thanks to the recovering economy resulting from the rescue package

of the government, Sacombank’s credit growth rate was 64.64% Sacombank’s Debt balance was mainly generated from customers of enterprises and citizens, whereas that aspect for credit institutions was very small At the end of 2015, credit growth rate was slower than that of 2014 owing to difficult economic situation on course of recovery The bank’s Debt balance in 2015 end was VND 77486 billions, increasing VND 21,989 billions, equivalently 39.62% and accounting for 3.6% the banking sector’s total debt balance

Table 2.4: Sacombank’s Debt balance classified by time in 2013-2015

Unit: VND billion

ST

Compare 2014/2013

5 19279 77.08% 33195 74.95%

Source: Sacombank’s 2013, 2014, 2015 audited financial statements

Moreover, Sacombank’s structure of debt balance constantly was improved

by diversifying relevant products and services, as well as expanding the market based on territory, type of customers, industries Thanks to these, the bank could disperse credit risk and pursued its direction of development

as “retail-multifunctions-mondernest bank in Vietnam” According to table 2.5 above short term debt was the main part of the structure, but mid-long term had a tendency of going up Specifically:

 Short term debt: in 2013 it was VND 18764 billions, and in 2014 was VND 34564 billions raising VND 15800 billions, equivalently 84.2% Moving on to 2015, that number reached VND 47266 billions, going up VND 12702 billions, equivalently 36.75% in comparison with that of 2014

 Mid-long term debt: in 2013 it was VND 6247 billions, in 2014 was VND

9726 billions, rising VND 3479 billions, equivalently 55.69% Moving on

to 2015, that number reached VND 30219 billions, increasing VND

20493 billions compared to that of 2014, equivalently 210.7%

Figure 2.3: Ratios reflecting Sacombank’s credit activities in the period of 2013-2015

Source: Sacombank’s2013, 2014, 2015 annual Financial Statement Additionally, Sacombank always put substantial attention to credit management activities, proactively conducting extremely and entirely tasks

through divisions and departments to forbid and deal with overdue debt at each unit Thanks to it, the bank’s credit quality was continuously enhanced, reflected through overdue debt ratio and non performance loan ratio which were 0.56% and 0.52% respectively, much lower that of the banking sector and the bank’s set target planned for 2015 With a far corporate vision and a direction to expand its business into regional market, the standard for credit safety and international practice complied activities had been implemented since 2007 Therefore, although the bank operates in a very difficult economic condition, Sacombank met almost all safety standards (CAR>= 9%)

2.1.6 Business Operation Efficiency Evaluation

2.1.6.1 Business Operation Efficiency Evaluation through relevant ratios

As analysed above, despite being affected badly by depressed economy, Sacombank still managed to have profit increased over the years with relative high growth rates Followings are presentation about some aspects

to evaluate the bank’s business operation efficiency Specifically:

Table 2.5: Sacombank’s business operation efficiency evaluation

ratios in the period of 2014-2016

Unit: VND

billion

Compare 2015/2014

Compare 2016/2015 Absolut

Source: Sacombank’s 2014, 2015, 2016 annual Financial Statement

 Return on Asset (ROA): Sacombank’s ROA in 2014 was 0.018, moving

on to 2015 that number reached 0.015 decreasing 0.0029, equivalently

16.2% We can see that although profit had continual increase, but total

asset had bigger growth rate, ROA in 2015 went down a little bit

compared to that of 2014 In 2016 that number was 0.017, rising 0.002

compared to that of 2015, equivalent to 13.33%, due to the remaining

total asset and the increase of profit before tax in the year

 Return on Equity (ROE): the bank’s ROE in 2014 was 0.204, moving on

to 2015 was 0.241, increasing 0.037, equivalently 18.14% in comparison

with that of 2014 In the year of 2016 that number was 0.202, decreasing

0.039 compared to that of 2015, equivalent to 16.18% The reasons

leading to this situation are similar to those leading to the ROA situation

 Profit against turnover ratios: it in 2014 was 0.224, meaning that one

Dong of revenue could bring about 0.224 Dong of profit, moving on to

2015, that number was 0.1695 decreasing 0.0545, equivalently 24.32%

compared to that of 2014 In 2016, it reached 0.147 decreasing 0.0223 in

comparison with that of 2015, equivalent to 13.15%

Table 2.6: Sacombank’s business operation efficiency evaluation

ratios in the period of 2014-2016 (continued)

Unit: As in the table

STT Name 2014 2015 2016

Compare 2015/2014

Compare 2016/2015

13.15%

15.42%