A study on instruments of trade financing in vietnamese commercial banks

MINISTER OF EDUCATION AND TRAINING FOREIGN TRADE UNIVERSITY MASTER THESIS A study on instruments of Trade financing in Vietnamese commercial banks Major: International Trade Policy and Law Full name : Duong Thuy An SUPERVISOR : Asso Prof, Dr Nguyen Thu Thuy Hanoi - 2016 ACKNOWLEDGEMENT Firstly, I would like to send my profound regards to my supervisor, Asso Prof, Dr Nguyen Thu Thuy, for all of her remarks and guidance so that I can continue doing my research and complete this on time I also would like to thank my friends working with me in trade financing field for their strong support Without them, the study would not be accomplished Lastly, I would like to take this chance to express my deepest gratitude to my dear family, who always supports me no matter what happens for all the time I study I would like to sincerely thank my parents, for giving me unconditionally loving and encouraging me through my hardest time; my sister, for truly understanding and sympathizing with me I would never have finished this without you TABLE OF CONTENTS LIST OF FIGURES ABSTRACT CHAPTER 1: INTRODUCTION 1.1 Relevance of study 1.2 Research questions 1.3 Data and methodology CHAPTER 2: THEORETICAL FRAMEWORK OF TRADE FINANCING INSTRUMENTS 2.1 Methods of settlement 2.2 Methods of secondary payment 14 2.3 Methods of finance for customers 16 2.4 Methods of finance for banks 27 CHAPTER 3: LEGAL FRAMEWORK OF TRADE FINANCING INSTRUMENTS 31 3.1 National law 31 3.1.1 General law 31 3.1.2 Specific law for each kind of trade financing instrument 32 3.2 International law 35 3.3 Relationship between national law and international law of trade financing instruments 38 3.4 Effect of law in trade financing instruments 39 CHAPTER 4: DEVELOPMENT AND IMPACT OF TRADE FINANCING INSTRUMENTS TO VIETNAMESE COMMERCIAL BANKS 43 4.1 Development of Trade financing instruments in Vietnamese commercial bank………… 43 4.1.1 Financing by issuing or confirming Letter of credit 43 4.1.2 Discount/negotiation 44 4.1.3 Guarantee/Standby L/C 46 4.1.4 Express discount 47 4.1.5 L/C used for financial purpose 48 4.1.6 Usance L/C at sight basis 50 4.1.7 Internal L/C 58 4.1.8 Products for loaning purpose between banks 61 4.1.9 Factoring 62 4.1.10 Forfaiting 65 4.1.11 Supply chain 69 4.2 Impact of trade financing instruments to banking business 74 CHAPTER 5: ANALYSIS ON THE CURRENT SITUATION OF TRADE FINANCING INSTRUMENTS AND RECOMMENDATIONS FOR DEVELOPING TRADE FINANCING INSTRUMENTS IN VIETNAMESE COMMERCIAL BANKS 78 5.1 Analysis on the current situation of Trade financing instruments in Vietnamese commercial banks 78 5.2 Success and shortcomings of trade financing instruments in Vietnamese commercial banks 84 5.3 Recommendations for Vietnamese banks in developing trade financing instruments … 87 CHAPTER 6: CONCLUSION 93 REFERENCES 94 LIST OF ABBREVIATIONS ADB Asian Development Bank Agribank Vietnam Bank for Agriculture and Rural Development AML Anti-Money Laundering BIDV Bank for Investment and Development of Vietnam BPO Bank payment obligation CCC Commodity Credit Corporation CDCS The Certificate for Documentary Credit Specialists DOCDEX Documentary Instruments Dispute Resolution Expertise Exim bank Vietnam Export Import Commercial Joint - Stock Bank EPLC Early payment letter of credit FMCG Fast moving consumer goods GSM 102 Export Credit Guarantee Program 102 ICC International Chamber of Commerce IFC International Finance Corporation IFC International Finance Corporation IMO International Maritime Organization ISBP 745 International Standard Banking Practice for the Examination of Documents under Documentary Credits 745 ISP 98 International Standby Practices 98 KYC Know your customer L/C Letter of credit MB Military Bank OCR Optical character recognition RM Relationship Manager RMA Relationship Management Application SCF Supply chain finance SCM Supply chain management SLA Service Level Agreement SWIFT Society for Worldwide Interbank Financial Telecommunication TMA Transaction Matching Application TPP Trans Pacific Partnership TSU Trade Services Utility UCP600 Uniform Customs and Practice for Documentary Credit 600 UPAS L/C Usance payable at sight letter of credit URBPO 750 Uniform Rules for Bank Payment Obligations 750 URC522 Uniform rules for collection 522 URDG 758 Uniform Rules for Demand Guarantees 758 URF 800 ICC Uniform Rules for Forfaiting 800 URR725 Uniform rules for bank to bank reimbursement 725 USDA U.S Department of Agriculture Vietcombank Joint Stock Commercial Bank for Foreign Trade of Vietnam Vietinbank Vietnam Joint Stock Commercial Bank for Industry and Trade VP bank Vietnam Prosperity Joint-Stock Commercial Bank LIST OF FIGURES Figure Bank payment obligation transaction flow 10 Figure Documentary credit without confirmation of advising bank 13 Figure Payment secured by a bank guarantee (or Standby letter of credit) 15 Figure Close 3-corner Supply chain flow 21 Figure Open 4-corner Supply chain flow 23 Figure Basic forfaiting transaction 25 Figure Comparison between methods of finance 26 Figure UPAS L/C mechanism 54 Figure Bank spending on block chain 71 Figure 10 Market adoption of BPO 72 Figure 11 The revenue potential from supply-chain 73 Figure 12 Non-interest income 76 Figure 13 Global trade finance revenue 78 Figure 14 Mix trade finance product 79 Figure 15 Trade-related revenues for banks 80 Figure 16 Techcombak’s volume of Trade finance instruments 82 ABSTRACT The academic research analyzes some trade financing instruments’ processes and focuses on modern trade financing instruments like L/C for financing purpose, Forfaiting, Supply chain, which are developed in the world but limited in Vietnamese commercial banks In addition to bringing out the impact of trade financing products on business of Vietnamese commercial banks, the study also points out success and shortcomings of trade financing activities in Vietnamese banking business and proposes suggestions to increase trade finance in Vietnamese banking system Moreover, this dissertation would like to mention all recent national laws and international rules for each product and also indicates their affect to trade financing processes in Vietnamese commercial banks So that, bankers can get a whole view on a legal aspect of trade financing instruments This paper will approach a different view with previous researches by deeply focusing on specific trade finance products and study with the scope in Vietnamese commercial banks like Vietcombank, Techcombank, MB, VP bank,… in comparison with international banks Thus, this paper would like to be a useful source for bankers, especially trade financing officers, RM to develop trade financing procedures as well as operate them efficiently CHAPTER 1: INTRODUCTION 1.1 Relevance of study Nowadays, trade finance business has become one of the most important portfolios in Vietnamese commercial banks According to the ICC Global Survey on Trade finance 2016, Growth in trade finance transactions both in volume and value terms is no longer predominantly driven by China An increase in activity in South-East Asian countries is noticeable, with Vietnam in particular powering ahead As per Vietcombank’s the first six-month business report in 2016, Vietcombank’s Trade finance value reached 24.802 million USD, Vietinbank gained 17 million USD and BIDV got 10 million USD, which is significant revenue in comparison with import-export volume-159.9 million USD1 The developing trend of Vietnamese commercial banks in trade finance field is diversification of products since it is an important factor that creates difference among banks Trade finance products not stop at traditional way but more efficient way In tradition, to finance, banks can use their capital (namely negotiation of exporting documents or lending loan to customers for payment under L/C) or their credit to finance customers (like issuing L/C, Standby L/C or Guarantee) However, nowadays, banks offer more modern products like express negotiation which is based on normal negotiation but it is more efficient to help companies get money quickly Therefore, with a wide range of trade finance products, it is a hard job for banks to offer suitable products for their customers since enterprises only care about trading process and leave financing issues for banks Moreover, the need of enterprises from banks is more complicated in the booming period of trade and enterprises are usually customers of different banks Hence, companies can compare trade financing instruments between banks As a result, it is a pressure for banks to continuously update information on new products Vietcombank (2016), The first six-month business report in 2016 and develop its own instruments For example, UPAS L/C is so familiar to Vietnamese commercial banks thanks to its win-win mechanism (UPAS L/C is payable sight basis to the seller (beneficiary), while the payment settlement from the applicant (buyer) to the issuing bank will made at the end of usance term) However, although used in other countries long time ago (i.e Korea), at the time of 2011, UPAS L/C was an exclusive product of Techcombank It took almost five years for this kind of L/C become popular in Vietnamese commercial banks The same situation applied with Draft by back L/C which has same mechanism with UPAS L/C but the issuing bank has the role of reimbursement bank Till now, only Techcombank and MB offer this product Moreover, some products like Supply chain, Forfaiting have not been developed in Vietnam Since Vietnamese legal structure is so complex with a lot of Circulars, Decisions, Official notices… which are revised or replaced in each period of time, it is required that banks must update new rules governing their trade financing products So that, they are able to build up or update their procedures in compliance with new regulations Researches on trade financing instruments are done in various ways from theoretical view and practical view For example, Mustafa (2010), Ahn & JaeBin (2011) and Grath (2013) provide all theories of trade finance There are some papers in a practical aspect like Henri (2013) indicating practical process in trade financing unit from the perspective of corporate banking employees or Sindberg (2011) and Oramah (2016) providing financing activities in international trade In the financial crisis, trade financing activities were researched increasingly like Rochet (2010), Chauffour & Malouche (2011), Chor & Manova (2012), all of which shown the fact that because of crisis, bank-intermediated trade finance fell in value significantly In addition, analyses on development of trade finance are also mentioned by many authors namely Clark (2014) and Garralda& Vasishtha (2015) Moreover, the importance of trade finance in trading activities is also proved in a variety of researches namely Wandhöfer (2012) and Prete & Federico (2014) 85 for their respective target market and as the needs of the consumers mature which excel in cash management and trade finance services, instead of simply basic With this eagerness for growth, one can expect further sophistication in trade finance offering from the banking industry in Vietnam Developing a wide range of products also help banks to offer customers substitute options Moreover, Vietnamese banks have also provided qualified services for customers by update technology, centralization system which helps banks operate professionally Moreover, a big success some Vietnamese banks obtain in trade finance field is recognition from foreign organizations Nowadays, not mention to three big banks (i.e Vietcombank, Vietinbank, BIDV), more and more Vietnamese commercial banks get famous awards in trade finance field For instance, Vietnam Export Import Commercial Joint Stock Bank (Exim bank) received the best trade finance bank in Vietnam award from The Asian Banker magazine in Hong Kong in 2015 IFC, a member of the World Bank Group, has awarded the “Best Trade Partner Bank in East Asia and Pacific” to Vietnam International Bank (VIB) under the global trade finance program (GTFP) This is a reputable award, aimed honor banks which made significant contributions in GTFP The program helps to expand and improve local banks’ capacity of trade finance for exporters and importers in emerging markets, including Vietnam In addition, Techcombank has recently received a number of awards from prestigious international financial organizations like “Vietnam’s Best Bank in 2016” and “Platinum Award for Best Domestic Bank” from Finance Asia as well as “Best Bank in Vietnam 2007-2016”, “Best Trade Finance Bank in Vietnam” and “Best Bond House in Vietnam” from Alpha Southeast Asia magazine That proves Vietnamese banks, in a view of foreign parties, have provided qualified services, which makes beneficiary or foreign banks recognize and Vietnamese banks in international trade finance Moreover, the wellknown credit rating agency Fitch recently classified Vietnam’s outlook as “stable” and reaffirmed Vietnam’s credit rating at BB- This rating validates the stable base that carries the Vietnamese banking industry today 86 Another success of Vietnamese banks in trade finance field is that almost banks set up a legal division updating and consulting legal and compliance issues in trade finance Moreover, some banks namely Techcombank, VP bank, have built up a hi-tech system allowing trade financing staff check regulations related to underlining transaction It may be a big step of banks in comparison with the past period when legal issues especially national ones are incomprehensible to trade finance officers Therefore, Vietnamese banks can control trade finance transactions in compliance with regulations  Shortcomings of trade financing instruments in Vietnamese commercial banks Still in developing phase, Vietnamese commercial banks in comparison with foreign ones may not reach the same level in high technology Therefore, some digital instruments like Supply chain with BPO or Supply chain with Block chain system have not developed in Vietnamese commercial bank Moreover, some complicated products like forfaiting are still new for all Vietnamese banks Not mention to factoring service, it although exists in some banks but does not develop since banks is still not familiar with this products Moreover, some banks are afraid of risks and may not handle risks when offering trade financing products for customers, which lead to the fact that some products are not limited to customers For example, since Vietnamese banks not have wide network to gather enough information of foreign parties like applicant, issuing bank, they are not willing to offer discount with recourse for sellers In addition, some banks like Techcombank, VP bank only offer administration of ledger and ledger keeping service in factoring for sellers since they not have means to control risks of buyers to offer advanced payment services It is the fact that while there a lot of Vietnamese banks awarded and recognized by international organization, there are also a lot of banks new and not high rated to foreign parties Therefore, not mention to not being chosen for transactions, it will cost time and money when operating transactions since they 87 must use services from other banks like advising L/C, confirming L/C, issuing L/C,…In addition, some transactions like trade loan, refinancing are not processed since banks not meet credit requirements of counter-party banks To provide professional service for customers, more and more banks apply centralization model which means only one or two centers operating trade financing transactions for whole systems However, not only time of process is longer but also it is required time for banks to train officers in branches, who only focus on credit issue, have knowledge on trade finance sector Therefore, it is surveyed that no banks applying centralization model satisfy customers on time and consultant issues Moreover, there is still a shortcoming in building up process of trade financing instruments in Vietnamese banks Since almost banks have a separate division which does not operate transactions directly to create trade financing products and trade finance officers only focus on technical process, there is not enough cooperation among divisions Therefore, it is surveyed that almost new products have some shortcomings in practice 5.3 Recommendations for Vietnamese banks in developing trade financing instruments Improving quality of trade financing operation: the most important recommendation is that banks must keep improving quality of trade financing operation Even with traditional products, banks can satisfy customer’s need if they provide efficient service which save time and money Nowadays, almost banks have competitive price strategy and same quality in professional way So that, they are competing with each other in a time consuming aspect While almost banks have Service Level Agreement (SLA) which is agreement between banks and customers about a time banks need to accomplish a transaction However, they only have SLA for trade financing center not for all departments operating services Therefore, although trade finance department fulfill their commitment under SLA, with customers, from time they submit request to time the process finish does not meet 88 customers’ need So that, the dissertation offer a solution that SLA should be put in all departments related to the process namely the department receiving request, department operating credit facility…Nowadays, only Techcombank has applied this method but only for customers of its whole sales section and gets more satisfactions from its customers Focusing on human resource: increasing human resource in both quantity and quality is the common requirement of each bank It is especially in Trade Finance because Trade Finance is a very difficult professional because it relates both domestic and foreign clients/markets Human resource including: product staff, credit team, relationship managers, Trade sales, Trade Services… However, trade finance is a complicated field so that it is difficult for bankers in different positions to have the same training which may be not useful for their work Therefore, training projects should be divided into different subjects for different work For example, Relationship managers should be provided knowledge about useful features of each product, the different between the same kinds of products so that they can offer the most efficient products for customers’ need With trade finance officers, they should be trained about how to process products since their task is operating not selling like relationship managers Banks should endeavor trade financing staff to enhance their professional knowledge by passing CDCS exam which is recognized internationally Moreover, banks can develop training by elearning method which helps officers manage time to learn and reduce cost in comparison with physical training Almost big banks like Vietcombank, Vietinbank, BIDV or Techcombank, each year, have assigned trade finance officers to take CDCS exam In recent time, specific training programs for each position are only built up by Techcombank, which are online or physical Therefore, it is surveyed that the bank has a good human resource in trade financing field Improving technology: it is undeniable that Technology advances have already revolutionized the way banks manage and finance global trade Technology continues to provide solutions to the challenges that arise from expanding regulation, constantly changing compliance requirements, and the persisting 89 importance of cross-border risk mitigation even as open account transactions become the norm The holy grail of supply chain and working capital management – total, end-to-end visibility – was never closer Thanks to technology, age-old ways of financing trade transactions have evolved so rapidly that a new world of trade – much faster and laser-focused on efficiencies – has replaced the old in just a few years Therefore, developing technology is always one of the most important strategies of banks In each period of time, there are many changes, update project for technology from basic data transmission to core banking systems However, banks may face with some difficulty and risks from changing For example, it is surveyed that at the early stage of change, the process in banks always is delayed since the new system does not work efficiently Hence, the solution is that before using new system, banks must experiment and test carefully by all departments from branches to head officer and must have a backup plan in any situation Vietcombank is an example for the method while the bank has spent almost one year to create, experiment and apply its transmission of data between branches and head office called Sharepoint system, which leads to smooth operation in practice Providing related services namely legal consultation: an effective processing approach enables banks and their clients to implement best of procedures by having service consistency with local and international compliance Most of trades financing procedures only contain guidance for operation with reference to ICC rules because almost national regulations govern substantive aspects which are related to sustainability of economy They may not provide trade finance officer knowledge about the change of national law, which may affect their work From this gap, almost banks have a legal department which not only updates change of national and international law but also handles compliance issues Therefore, whenever a department would like to give customers a service different from bank’s procedure, it is required that the legal division gives approval So that, the service is complied with legal regulations Nowadays, since Vietnamese companies are SME and they normally not get a legal division, they may be affected by the change of law and compliance Therefore, banks may provide legal services for enterprise 90 This will reduce risks from early stage instead of when enterprises and banks process trade financing activities Although it seems difficult for banks since they have a lot of customers, banks are able to provide legal information by dividing the task for each branch Vietcombank has offered a similar service for its customers in Hanjin bankruptcy case which effected importers and exporters significantly since Hanjin ships were not allowed to get by ports In this case, Vietcombank head office issued a notice on risks related to the bankruptcy and through its branches, all customers are alarmed to avoid risks From that action, Vietcombank is highly ranked Developing trade financing instrument by focusing need of customers: the most efficient way to develop trade financing instruments is finding out the needs of customers and build up products to satisfy their needs The cycle of the normal business of a client is Signing sales contract  buying raw material  manufacturing  shipment  prepare documents  present/send document - receiving fund Bank should understand client’s needs in each period of the selling goods to find the suitable product to offer For example, at the buying raw material period, bank may offer client pre – shipment finance; at the prepare documents period bank may offer export factoring … Bank must understand the need of fund of the client and their cash conversion cycle to offer suitable drawdown period (short terms, long terms…) namely offering UPAS Plus or Draft buy back Plus Building up products based on co-operation of all division and careful experiment: co-operation between all departments is necessary There is a fact that since trade financing developers not involve in practical process, new procedure may not efficient in practice Therefore, a new procedure should be created by trade financing developers and reviewed by branches, trade financing officer, technology staff, account staff, legal staff… Moreover, it should be experimented with some customers and some branches to get comments before applying for all systems It is surveyed that this method is applied efficiently in Techcombank Marketing strategy: to make trade financing instruments recognized by customers, marketing plays a very important role With the popularity of the 91 Internet, promoting trade financing instruments in the Internet with successful transaction will be an effective way Moreover, banks need to update their websites to make it easy to navigate, and allow users to view all information including descriptions of all products However, the most efficient way is to meet customers and promote the products directly since trade financing instruments are quite complicated It is surveyed that only MB has implemented this method MB creates a position named Trade financing relationship managers who have deep knowledge about trade financing products and selling skill Trade financing RM together with RM will advise, propose designed and implemented solutions and tailored products to each corporate customer Another way to market trade financing products is using workshops Workshops not only provide information for each group of customers to reduce time but also are instruments helping banks get closer to their customers For example, Vietcombank regularly hold workshops on trade finance for its customers to introduce new products and get feedbacks from customers in other products and services Setting up wide baking network: banking network or relationship is very important for a bank A bank cannot any business if lacking banking network, especially in trade finance In Trade finance, if a bank has a large relationship with domestic and foreign banks, it helps bank easier to business such as: advise L/C, confirmation, UPAS LC, negotiation… Relationship Management Application (RMA) is a service provided by SWIFT to manage the business relationships between financial institutions RMA operates by managing which message types are permitted to be exchanged between users of a SWIFT With banking system, having RMA with big banks will make trade financing activities processing efficiently since banks only enter RMA if they have finished RMA agreement with a lot of requirements like reputation, business activity,…Therefore, banks only operate trade financing activity with their RMA counter party bank Because there is a fact that some Vietnamese small banks are unable to obtain RMA, they can use network of other counter-party banks for their activity like issuing L/C, relay messages… It is a solution for small banks Many big banks with a wide network like 92 Vietcombank, Vietinbank, BIDV, Techcombank have provides these services like relaying messages, issuing or confirming L/C Corporation with counter-party bank: cooperating with other banks is a suggestion for banks to develop trade financing instruments since to succeed in processing required corporation from other banks For example, factoring always involve factoring agent to support banks with foreign parties or sometimes the client has a big project that need loan from the bank, however, if only bank, it may be difficult enough fund to satisfy the needs of the client, in this case, the bank can corporate with other banks to cover the project Moreover, with big counterparty, banks can learn from their modern products, procedure or technology to improve their business Sometimes, foreign banks can be a party who will get clients for banks like with Draft buy back, Wells Fargo can find beneficiary who requires this product for issuing bank (in practice, only Techcombank enters this transaction) In this case, beneficiary will be a party who accounts for Draft buy back interest Nowadays, Wells Fargo is one of the foreign banks in corporation with almost Vietnamese banks All in all, to develop trade financing instruments efficiently, Vietnamese banks may apply the above suggestions or other latest ones but the key point is the need of customers which will push banks to use all methods to improve their services including quality, technology and category of products Moreover, since a bank can not have all products that other bank has, it not only must develop new products but also offer another product which has same feature or corporate with other bank to provide services for customers’ need 93 CHAPTER 6: CONCLUSION The paper targets to address two major concerns put forward in the introduction regarding the development trend of trade financing instruments in Vietnamese commercial banks and suggestions for banks in the field By indicating some modern products applied in local and foreign banks, success and shortcomings of trade financing activities in local banks, national and international regulations and the impact of trade financing products to banking system, the paper points out some suggestions which may help Vietnamese commercial banks improve their trade financing instruments All in all, the author hopes that even not presenting significant matter, the paper will contribute to the development of trade financing products in Vietnamese commercial banks by its practical view Despite the fact that a great deal of concentration as well as seriousness is put in this dissertation, errors and limitations are still unavoidable Firstly, the given data still poor then the analyst still not cover all the fact of trade financing instruments in Vietnamese banking system since data in banks are always confidential Moreover, some national and regulations are not analyzed closely because of their complicated content Finally, the research does not point out practical case study of modern trade financing products like Supply chain with BPO, Forfaiting since they have not been applied in Vietnamese banking system During the process in the present research, future researches could make several extensions of current study to fill 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Effect of law in trade financing instruments 39 CHAPTER 4: DEVELOPMENT AND IMPACT OF TRADE FINANCING INSTRUMENTS TO VIETNAMESE COMMERCIAL BANKS 43 4.1 Development of Trade financing instruments. .. recent national laws and international rules for each trade financing instrument?  What is the impact of trade financing instruments on the success of Vietnamese commercial banks?  What are the... of trade financing instruments While national law is applicable in all transactions even when they not mention it, to apply international law, trade financing instruments must mention it In all