International payment service by opening Letter of Credit at Vietnam Eximbank Hanoi Branch.doc

International payment service by opening Letter of Credit at Vietnam Eximbank Hanoi Branch

For much of improvement during the time when I took my apprentice atVietnam Eximbank-Hanoi Branch along with a well-spring of helps andencouragements from all people around me, this 2009 internship report has beencompleted on time

First of all, I would like to express my gratitude to the Business EnglishFaculty for providing best conditions for me during my study in Foreign TradeUniversity for four academic years and now giving me a chance to practice myacademic knowledge, skills and profession in reality in this final internship

I also wish to give my special thank to Ms Nguyen Thi Diem Ha, mydedicated instructor for her invaluable suggestions and continuing supports whilethis report was in progress She was always available to input her constructiveideas and better edition to make my writing become more enjoyable

My heartfelt gratitude also goes to Ms Le Kim Lien – Manager of theinternational settlement department and all staff there who gave me a goodopportunity to use my economic knowledge and face with the real facts anddifficulties at the banking environment Throughout my internship here, theyhave treated me as their real colleague, they are always ready to assist me tofinish my task and supply me with valuable materials related to my report

Hanoi, May 4, 2009

StudentMai Thi Hai Yen

ACKNOWLEDGEMENTS……….………i

LIST OF ABBREVIATION iv

LIST OF FIGURES AND TABLES… v

INTRODUCTION vi

PART 1: LITERATURE REVIEW OF IMPORT AND EXPORT L/C 1

I INERNATIONAL PAYMENT BY LETTER OF CREDIT 1

1 Letter of credit 1

1.1 Definition of Letter of Credit 1

1.2 Role of Banks in Documentary Letters of Credit 3

1.3 The Documentary Credit Cycle 3

2 Import LC 5

3 Export LC 7

II HISTORY AND DEVELOPMENT OF EXIMBANK 8

1 General information 8

2 Development process 8

3 Vietnam Eximbank Services 9

3.1 Vietnam Eximbank -Hanoi Branch 9

3.2 Services of Vietnam Eximbank Hanoi Branch 9

PART II: THE CURRENT SITUATION OF LETTER OF CREDIT PAYMENT IN VIETNAM EXIMBANK – HANOI BRANCH 11

I THE CURRENT SITUATION OF L/C PAYMENT IN HANOI BRANCH 11

1 Payment method by Import L/C in Vietnam Eximbank 12

1.1 L/C Issuance… 12

1.2 B/L endorsement/guarantee issuance 12

1.3 Documents Processing and Payment 13

2 Procedures of Export LC settlements 14

3 Development of L/C payment in Vietnam Eximbank 14

3.1 Analysis on the current Import L/C payment activities at Hanoi Branch 15

3.2 Analysis on the current Export L/C payment activities at Hanoi Branch 18

II ESTIMATION OF L/C PAYMENT SERVICES IN HANOI BRANCH 19

1 Vietnam Eximbank’s strengths in L/C payment services 19

1.1 Predominant credit & Wide operation network 19

1.2 Leading technology & Advanced technology level 20

1.3 Abundant service content 20

2 Limitations in L/C payment services 21

2.1 Document problems 21

2.2 Ineffective marketing activities 21

2.3 Limited working conditions 22

PART III: DEVELOPMENT ORIENTATION AND PROPOSALS TO IMPROVING INTERNATIONAL PAYMENT SERVICE AT EXIMBANK HANOI BRANCH 23

I DEVELOPMENT ORIENTATION OF HANOI BRANCH 23

1 Opportunities and challenges in new context of Vietnam’s economy 23

1.1 Opportunities 23

1.2 Challenges 24

2 Vietnam Eximbank Hanoi Branch’s development orientation to 2010 24

2.1 General orientation 25

2.2 Economic development targets 25

II PROPOSALS FOR IMPROVING THE QUALITY OF LC SETTLEMENT AT EXIMBANK HANOI BRANCH 27

1 Bettering the working conditions & improving the capabilities of the staff and efficiency of its transactions 27

2 Simplifying the documents and payment process 28

3 Upgrading IT system to develop the international payment 29

4 Promoting Hanoi Branch’s band name, products and services 29

5 Combining Export-Import Package Service 30

CONCULSION 31

REFERENCES 32

LIST OF ABBREVIATION

1 L/C: Letter of Credit 2

2 D/C: Documentary Credit 2

3 UCP: Uniform Customs and Practice for Documentary Credits… 2

4 T/T: Telegraphic Transfer 10

5 D/P: Document Against Payment – D/P 10

6 D/A: Document Against Acceptance 10

7 B/L: Bill of Lading 13

8 AWB: Airway Bill 13

9 WTO: World Trade Organization 16

10 GDP: Gross Domestic Products 19

11 SWIFT: Society for Worldwide Interbank Financial Telecommunication 20

12 STP: Straight-Through Processing 20

13 HR: Human Resource 21

14 MA: Master of Arts 21

LIST OF FIGURES AND TABLES

1 Figure 1: The Documentary Credit Cycle 4

2 Figure 2: The operation flow of opening Import LC 7

3 Figure 3: The official logo of Vietnam Eximbank 8

4 Table 1: The total volume of Import L/Cs payment mode recently 15

5 Table 2: Volume of Import L/Cs in comparison with the total value of Export Import international settlement services 17

6 Table 3: Volume of Export L/Cs in comparison with the total value of Export/Import international settlement services 18

For several recent years, Vietnam economy has much developed along withmany domestic and international significant events, especially become theofficial member of WTO The amount of trading with foreign companies has got

a sharp increase, and the volume of imported and exported goods and serviceshas also increased considerably Therefore, the international payment withforeign companies becomes very important for settling a long time businesstrading Acknowledging these requirements, Vietnam Eximbank has made astrong focus on its international settlement department to help the foreign tradecarry out as quickly and smoothly as possible

After a short time as an intern at Vietnam Eximbank Hanoi Branch, I havegained a lot of practical experiences and learnt that the international payment byopening Letter of Credit is the most favorable method to be transacted betweenVietnamese companies and other foreign companies through Hanoi Branch ofEximbank’s services

Being aware of the importance of international settlement in international

business, I have decided to choose topic “International payment service by opening Letter of Credit at Vietnam Eximbank Hanoi Branch” for my field study

report

The main focus of this report is designed in three parts:

Part I: Literature review of Export and Import LC and Overview of Hanoi Branch.

Eximbank-Part II: The current situation of L/C payment at Eximbank-Hanoi Branch Part II: Development orientation and proposals to improve the international settlement services of Eximbank Hanoi Branch

PART I

LITERATURE REVIEW OF IMPORT AND EXPORT L/C

I INTERNATIONAL PAYMENT BY OPENING LETTER OF CREDIT

1 Letter of credit.

1.1 Definition of Letter of credit

According to Wikipedia, the free encyclopedia http://en.wikipedia.org/: “the English name “letter of credit” derives from the French word “accreditation” which means a power to do something, and in turn is derivative of the Latin word “accreditivus” which means trust The application can use this like any defense relating to the underlying contract of sale This is as long as the seller performs their duties to an extent that meets the requirements contained in the LC.”

However, A.Asley (2003, p.155) explained more clearly about the term

“Letter of Credit” in Oxford Handbook of Commercial Correspondence as

follows: “Letters of Credit have been used for centuries in one form or another

to enable travelers to obtain money from foreign banks The process begins with the traveler asking their bank to open letter of credit in their favor (…) The bank then drafts a letter, which will allow the traveler to draw money on foreign banks with whom the traveler’s home bank has an agreement The foreign banks will then draw on the home bank to recover their payments For individual travelers, credit cards, eurocheque, and traveller’s cheques have largely replaced this method of obtaining money, but documentary credits (letters of credit accompanied by documents) are widely used in foreign trade.”

Additionally, the definition stated in an article by the famous website

http://www.investorwords.com/ has demonstrated “Letter of Credit” term at

other aspect: “Letter of Credit can be understood as a binding document that a

buyer can request from his bank in order to guarantee that the payment for

goods will be transferred to the seller Basically, a letter of credit gives the seller reassurance that he will receive the payment for the goods In order for the payment to occur, the seller has to present the bank with the necessary shipping

documents confirming the shipment of goods within a given time frame.”(Source: http://www.investorwords.com/2774/letter_of_credit.html)

A letter of credit is the most widely used trade finance instrument in theworld It has been used for the last several hundred years and is considered ahighly effective way for banks to transact and finance export-import trade and toeliminate risks such as unfamiliarity with the foreign country, customs, orpolitical instability The letter of credit is a formal bank letter, issued for a bank'scustomer, which authorizes an individual or company to draw drafts on the bankunder certain conditions It is an instrument through which a bank furnishes itscredit in place of its customer's credit The bank plays an intermediary role tohelp complete the trade transaction The bank deals only in documents and doesnot inspect the goods themselves Thus a LC (as it is commonly referred to) is apayment undertaking given by a bank to the seller and is issued on behalf of theapplicant like the buyer

A letter of credit is a document issued mostly by a financial institution, usedprimarily in trade finance, which usually provides an irrevocable paymentundertaking (it can also be opened under other conditions like revocable,unconfirmed, transferable, back to back, etc but the most common way isirrevocable/confirmed) to a beneficiary against complying documents as stated inthe Letter of Credit

Letter of Credit is abbreviated as an LC or L/C and often is referred to as aDocumentary credit, abbreviated as DC or D/C, documentary letter of credit, orsimply as Credit Documentary credits are governed by the InternationalChamber of Commerce code of practice, known as the Uniform Customs andPractice for Documentary Credits The current code is ICC publication No.500and is generally referred to as UCP 500 and UCP 600 and e-UCP600 in paymentvia the Internet

The LC can also be the source of payment for a transaction, meaning thatredeeming the letter of credit will pay an exporter Letters of credit are usedprimarily in international trade transactions of significant value, for dealsbetween a supplier in one country and a customer in another

The parties to a letter of credit are usually a beneficiary who is to receive themoney, the issuing bank of whom the applicant is a client, and the advising bank

of whom the beneficiary is a client The buyer is the Applicant and the Seller isthe Beneficiary The Bank that issues the LC is referred to as the Issuing Bankwhich is generally in the country of the Buyer The Bank that Advises the LC tothe Seller is called the Advising Bank which is generally in the country of theSeller Almost all letters of credit which are irrevocable can not be amended orcanceled without prior agreement of the beneficiary, the issuing bank and theconfirming bank

1.2 Role of Banks in Documentary Letters of Credit

Compared to other payment forms, the role of banks is substantial indocumentary Letter of Credit transactions

Firstly, the banks provide additional security for both parties in a tradetransaction by playing the role of intermediaries The issuing bank often worksfor the importer and the advising bank works for the exporter

Moreover, the banks assure the seller that he would be paid if he provides thenecessary documents to the issuing bank through the advising bank

And the banks also assure the buyer that his money would not be releasedunless the shipping documents evidencing proper and accurate shipment ofgoods are presented

1.3 The Documentary Credit Cycle

The specified bank makes the payment upon the successful presentation ofthe required documents by the seller within the specified time frame Note thatthe Bank scrutinizes the “documents” and not the “goods” for making payment.Thus the process works both in favor of both the buyer and the seller The Sellergets assured that if documents are presented on time and in the way that theyhave been requested on the LC the payment will be made and Buyer on the otherhand is assured that the bank will thoroughly examine these presented documentsand ensure that they meet the terms and conditions stipulated in the LC

There are many steps involved in opening an account for letter of credit Theletter of credit can be opened by mail or by cable When the letter of credit is

opened by mail, the buyer's bank sends the letter of credit and two carbon copies

of the letter to the importer The importer then dispatches the letter of credit tothe exporter in foreign country by mail or air mail One carbon copy of the letter

of credit is kept for record and the second after signing is sent to the bank by theimporter If an importer directs the bank to open letter of credit by cable thebuyer's bank sends a cable to the corresponding bank in the foreign country with

a request to notify the exporter of the letter of credit and the terms and conditionswhich are laid therein The expense of the telegram is met by the importer Thebank also mails the written confirmation of the cable to the corresponding bankfor forward delivery to the exporter The bank also sends a copy of the cable andthe written confirmation to the importer of the merchandise

Figure 1: The Documentary Credit Cycle

Typically the documents often requested in a Letter of Credit are the following:

- Commercial invoice

- Transport document such as a Bill of lading or Airway bill

- Insurance document

- Inspection Certificate

- Certificate of Origin

- Other documents

The LC could be “irrevocable” or “revocable” An irrevocable LC cannot

be changed unless both the buyer and seller agree In a revocable LC, changes tothe LC can be made without the consent of the beneficiary A “sight” LC meansthat payment is made immediately to the beneficiary/seller/exporter uponpresentation of the correct documents in the required time frame A “time” or

“date” LC will specify when payment will be made at a future date and uponpresentation of the required documents

A letter of Credit may be payable either at sight or at extended paymentterms (payment at a future date) A payment at sight means that the payment isdue upon the presentation and receipt of documents after shipment of the goodsand/or services are provided On the other hand, if the exporter (seller) allows theimporter (buyer) an additional period after presentation of documents to pay thecredit at a future date, then the credit is payable at 30, 60 or 90 days afterpresentation and acceptance of documents (Bill of Lading Date or whateverpayment terms have been agreed upon)

With an Import Letter of Credit, importers request that their bankguarantee payment for the goods, provided that certain documentary conditionsare met A fast and secure method of guaranteeing payment to suppliers toexpedite shipment from overseas, the Import Letter of Credit brings such featuresand benefits as giving variable terms and new products via access to foreign

suppliers, ensuring that buyer only be required to pay if conditions of credit aremet, improving cash flow management, minimizing financial risks to yourbusiness, and eliminating extensive credit investigations by the seller of theimporter.

A process of opening Import L/C can be undertaken through followingeleventh steps First of all, buyer and seller agree to conduct business The sellerwants a letter of credit to guarantee payment At the second step, buyer applies tohis bank for a letter of credit in favor of the seller Thirdly, buyer's bankapproves the credit risk of the buyer, issues and forwards the credit to itscorrespondent bank (advising or confirming) The correspondent bank is usuallylocated in the same geographical location as the seller (beneficiary) At the fourthstep, advising bank will authenticate the credit and forward the original credit tothe seller (beneficiary) And next, seller (beneficiary) ships the goods, thenverifies and develops the documentary requirements to support the letter ofcredit Documentary requirements may vary greatly depending on the perceivedrisk involved in dealing with a particular company At the sixth step, sellerpresents the required documents to the advising or confirming bank to beprocessed for payment After that, advising or confirming bank examines thedocuments for compliance with the terms and conditions of the letter of credit

At the eighth step, if the documents are correct; the advising or confirming bankwill claim the funds by debiting the account of the issuing bank or waiting untilthe issuing bank remits, after receiving the documents or else reimbursing onanother bank as required in the credit Next, advising or confirming bank willforward the documents to the issuing bank At the tenth step, issuing bank willexamine the documents for compliance If they are in order, the issuing bank willdebit the buyer's account Finally, issuing bank then forwards the documents tothe buyer and the buyer gets the consignment by presenting the shippingdocuments to the shipping company

Figure 2: The operation flow of opening Import LC

Import Letter of Credit is used when bank’s guarantee is needed to provide asense of comfort to the importer and the exporter in the trade transaction withpayments made upon receipt of the right set of documents including the title ofgoods; and the imported commodities are in the seller’s market, and the exporterinsists on payment on L/C; or current capital is not sufficient and the importerintends to make use of convenience of trade finance

3 Export LC

An Export Letter of Credit enables an exporter to substitute its buyer’s creditwith that of the buyer's bank, providing a higher level of assurance that paymentwill be received while protecting the title to their goods

An Export Letter of Credit makes doing business globally easier and moresecure When dealing with an unknown buyer or a buyer in a new or emergingmarket, an Export Letter of Credit provides a high level of assurance to anexporter that he or she will be paid for goods and services provided to a buyer.Export Letters of Credit will give the domestic enterprises the ability to sell in

new markets and to new customers; governed by internationally-accepted rules;can be confirmed by Exporter’s Bank, thus eliminating foreign risk completely

II HISTORY AND DEVELOPMENT OF EXIMBANK

1 General information

Vietnam Eximbank is one of the first commercial joint- stock banks inVietnam and it has a lot of strengths in settling export-import payment, doingbusiness in foreign exchange trading, and other financial product services

The Vietnamese name in commercial trading is “Ngân Hàng Thương Mại

Cổ Phần Xuất Nhập Khẩu Việt Nam” while its English name is “Vietnam Export Import Commercial Joint Stock Bank”, and this name is shortened to “Vietnam Eximbank”

The Bank’s head office is located at 07 Le Thi Hong Gam St., Dist 1, Ho ChiMinh city The bank has 29 nationwide branches Its commercial website is on

http://www.eximbank.com.vn This website has officially been in order fromJuly 2001 to supply its customers with all information about the bank in bothVietnamese and English And the logo of bank is very popular and easy foreverybody to remember

Figure 3: The official logo of Vietnam Eximbank

2 Development process

Vietnam Eximbank was established on May 24th, 1989 under the decision

No 140/CT signed by the Chairman of the Council of Ministers under the name

of VIETNAM EXPORT IMPORT BANK and being one of the first joint-stockcommercial banks of Vietnam VIETNAM EXPORT IMPORT BANK officiallycame into operation on January 17th, 1990

On April 6th- 1992, under license No 11/ NH-GP signed by the Governor

of the State Bank of Vietnam, the Bank was allowed to operate with a term of 50years and its charter capital registered at 50 billion VND (equivalent called 12.5million USD) and its name changed to VIETNAM EXPORT IMPORTCOMMERCIAL JOINT-STOCK BANK (shortly called VIETNAMEXIMBANK)

Since December 2007, Eximbank’s chartered capital amounted to2,800,000,000,000 VND Vietnam Export Import Commercial Joint-Stock Bankhas a nationwide network with its Head Office located in Ho Chi Minh City and

64 Branches in Ha Noi, Da Nang, Nha Trang, Can Tho city, Quang Ngai, Vinh,Hai Phong city, Quang Ninh, Dong Nai, Binh Duong, and Ho Chi Minh city.VIETNAM EXIMBANK has established correspondent banking relationshipswith over 735 banks in 72 countries worldwide

3 Vietnam Eximbank – Hanoi Branch and its services

3.1 Vietnam Eximbank -Hanoi Branch

Vietnam Eximbank has one head office in Ho Chi Minh City and 27Branches with 39 Transaction Offices across the country Among them,Eximbank Hanoi Branch in Hanoi city is one of the most successful branchesand always exceeds their goals

The trading name of Hanoi Branch in Vietnamese is “Ngân hàng thương mại CP xuất nhập khẩu Việt Nam-CN HàNội” and in English is “Vietnam Export Import Commercial Joint-Stock Bank-Hanoi Branch” The short name of branch

is “Vietnam Eximbank-Hanoi Branch” The office is located at 19 Tran Hung

Dao St., Hoan Kiem Dist., Hanoi City

3.2 Services of Vietnam Eximbank Hanoi Branch

Hanoi Branch of Vietnam Eximbank provides its customers with the samemain banking services as its Vietnam Eximbank head office

Firstly, the traditional services of Hanoi Branch are mobilizing, savingsdeposits, demanding deposits from individuals and entities in VND; providingshort, medium and long term loans; syndicating loans, overdraft loans,

consuming loans, and credit limits in VND, foreign currencies, and gold withfavorable conditions and simple formalities; doing foreign exchange and goldtrading by SPOT, SWAP, FORWARD, and Currency Option

Secondly, Hanoi Branch is also very famous in settling, financing import activities, and negotiating export documents Various forms ofsettlements by L/C, D/A, D/P, T/T, cheque are handled safely and quickly viaSWIFT at reasonable fee

export-Next, this branch also makes issuing and settling domestic andinternational credit cards such as EXIMBANK MasterCard, EXIMBANK Visacard, EXIMBANK card, acquiring VISA, MasterCard, and JCB, etc., makingpayment online by cards This service goes with providing cash services such assalary payment, collection, on-site collection and payment, foreign exchange,domestic and overseas remittance

In addition, Hanoi Branch is also notable for some modern services such

as issuing Bank Guarantee in favor of domestic clients and clients abroad(payment guarantee, tax payment guarantee, performance bond, bid bond,offerings, warranty bond, advance payment bond, etc.); financing packageservices for overseas study, providing advisory services for monetary-financialinvestment; providing various kinds of real estate services like Home-Bankingand Telephone-Banking, etc

PART II

INTERNATIONAL PAYMENT METHOD BY OPENING LETTER

OF CREDIT IN VIETNAM EXIMBANK HANOI BRANCH.

I THE CURRENT SITUATION OF L/C PAYMENT IN VIETNAM EXIMBANK

With a network of more than 750 correspondent banks in over 72 countriesworldwide, Eximbank Hanoi Branch ensures that the international settlementtransaction will be carried out swiftly and effectively The mode of payment byLetter of Credit is a very common mode of international payment in VietnamEximbank On behalf of the Importer or Exporter, the branch commits with theExporter’s/Supplier’s bank to make payment within a specified time when theExporter/Supplier presents documents as indicated in L/C that Eximbank Hanoihas opened upon the LC request (Application for opening L/C is provided.)This mode of payment assures the Importer that Hanoi Branch will, on behalf

of the Customer, make payment to the Exporter/Supplier only when the Exporter/Supplier performs his responsibilities stipulated in the L/C

By this mode, the customers have an effective access to international

settlement standards (at the time being: UCP500-the United Customs and Practices for Documentary Credit – issued by the International Chamber of Commerce – ICC).

By opening L/C at Vietnam Eximbank Hanoi Branch, customers couldquickly receive Eximbank’s advice about the best terms of payment, currency ofpayment, etc in accordance with international practices In this mode, the branch

in essence guarantees the payment of the customer will carry out quickly andsafely Therefore, Eximbank will implement several requirements of itscustomers’ assurance: cash cover, lending money, etc

Based on the customer’s payment capability and its reputation, EximbankHanoi Branch might apply various levels of cover announced by directors ofbranch within a specific period

Over the past years, the strict compliance with international settlementstandards has built up a complete confidence in Hanoi Branch of Eximbank’sservices by exporters& importers opening L/C at Eximbank and other bankpartners in Vietnam and over the world.

1 Documents requested for opening Import L/C at Vietnam Eximbank Hanoi Branch

In order to provide customers with the best payment methods, Hanoi Branchoften introduces two common modes of payment by L/C at the time being: L/C

at sight and deferred L/C

Supposing that in the Contract, parties agreed to pay by L/C, there are severaldocuments required for opening an Import L/C:

- A copy of sales contract or documents providing the contract

- Copy of insurance policy (for L/C not covering insurance and without sufficientdeposit)

- A copy of the trust contract (in case of import by consignment)

- Import license (for conditional import goods)

- A copy of business license and business code registration (for the firsttransaction)

1.2 B/L endorsement/guarantee issuance

In case of goods arrival to Vietnam earlier than documents to receive thegoods sent to Eximbank Hanoi Branch, and if the customer wants to promptly

receive goods (if the customer has the security deposit equivalent to the invoicevalue or backed by a guarantee from the Corporate Credit Department):

1 If the customer receives the B/L directly from the seller: Hanoi Branch willendorse B/L in accordance with the endorsement and discrepancy acceptancerequest of the document

2 If the customer does not have any B/L in hand and has request of goodsreceipt, the branch will issue letter of guarantee for it in Vietnamese or English Documents required for issuance of Letter of Guarantee are at least two originals

of Letter of Guarantee for Goods Receipt (Eximbank Hanoi Branch keeps theoriginal one) and a copy of Invoice, B/L or AWB

1.3 Documents Processing and Payment

Upon checking of the documents sent by a foreign bank, Eximbank HanoiBranch will advise the customer immediately:

For L/C at sight, if the documents fully comply with the L/C, they will bedelivered to the customer and payment will be effected to the foreign bank inaccordance with the L/C If the documents do not fully comply with the L/C,they will be delivered to the customer right after the customer has signeddiscrepancies and payment acceptance

For deferred L/C, if the documents fully comply with the L/C, they will bedelivered to the customer right after the customer has confirmed the maturitydate If the documents do not fully comply with the L/C, they will be delivered tothe customer right after the customer has signed discrepancies and paymentacceptance

On the due date, Eximbank Hanoi Branch will debit the customer’s account

to effect payment to foreign bank

Note: For those documents which are with B/L endorsed or which are

guaranteed by Hanoi Branch for goods receipt, the branch will keep the customernoticed of date of payment and will effect payment in accordance with the L/C