LV thạc sỹ_Solutions to enhance the quality of international payment services using letter of credit in BIDV

Scope of the research...2 PART II: MAIN CHAPTERS...3 CHAPTER I: INTRODUCTION OF BIDV THANH HOA BRANCH AND INTERNATIONAL PAYMENT USING LETTER OF CREDIT...3 1.1 Introduction of BIDV and BI

TABLE OF CONTENTS

ACKNOWLEDGEMENT i

TABLE OF CONTENTS ii

LIST OF ABBREVIATIONS iv

LIST OF FIGURES iv

EXECUTIVE SUMMARY v

PART I: INTRODUCTION 1

1 Introduction of the research topic 1

2 Research questions 1

3 Research methodology 2

4 Scope of the research 2

PART II: MAIN CHAPTERS 3

CHAPTER I: INTRODUCTION OF BIDV THANH HOA BRANCH AND INTERNATIONAL PAYMENT USING LETTER OF CREDIT 3

1.1 Introduction of BIDV and BIDV Thanh Hoa branch 3

1.2 The role of BIDV Thanh Hoa branch in the L/C payment process of BIDV 4

1.3 Background of International payment using L/C in BIDV Thanh Hoa branch 4

1.4 Key terms definitions 5

CHAPTER II: THEORETICAL FRAMEWORK OF INTERNATIONAL PAYMENT USING LETTER OF CREDIT 7

2.1 L/C definition 7

2.2 Process of L/C payment 8

2.3 Criteria to assess L / C payment of a bank 9

2.3.1 The qualitative indicators 10

2 3.2The quantitative indicators 11

2.4 Factors affecting the effectiveness of L/C payment in the bank 12

2.4.1 External factors 12

2.4.2 Internal factors 13

2.4.2.3 Level of technology 14

CHAPTER III: ANALYSIS AND FINDINGS OF INTERNATIONAL PAYMENT USING LETTER OF CREDIT IN BIDV THANH HOA BRANCH 15

3.1 Reality of L/C payment in BIDV Thanh Hoa branch 15

3.2 Assessments of L/C payment in Thanh Hoa branch 17

3.2.1 Overall assessment about the quality of international payment service using L/C 17

3.2.2 Excellence of service provision 18

3.2.2 Assessments of the quality international payment L/C payment in Thanh Hoa branch 19

3.3.2 Limitations 19

CHAPTER IV: SOLUTIONS TO ENHANCE THE QUALITY OF INTERNATIONAL PAYMENT SERVICES USING LETTER OF CREDIT IN BIDV THANH HOA BRANCH 21

4.1 The goal of offering solutions 21

4.2 Solutions to enhance the quality of international payment services using L/C 21

4.2.1 Increasing the bank’s capital and control the foreign currency that international payment needs at the same time 21

4.2.2 Implementation of risk prediction 21

4.2.3 Modernizing the organization and enhance the training of staff fully qualified and professional ethics to meet the needs of payment 22

4.2.4 Upgrading technology 23

4.2.5 Diversifying the types of L / C to match the operating characteristics of customers 23

4.2.6 Marketing mix strategy 23

4.3 Recommendations 24

4.3.1 To the BIDV 25

PART III: CONCLUSION 26

REFERENCES 27

LIST OF ABBREVIATIONS

BIDV Bank of Investment and Development of Vietnam

ICC International Chamber of Commerce

Table 1.1: Results of business activities

Figure 2.1: The process of L / C payment

Table 3.1 Sales of L/C payment in the period of 2008 to 2010

Table 3.2: The amounts of import L/C in the branch

Table 3.4: The comparison of prices in some transactions of international payment using L/C of BIDV with VIETCOMBANK and EXIMBANK

EXECUTIVE SUMMARY

This report, with more than 30 pages in 4 chapters, analyses and re-evaluatesthe reality of international payment using Letter of Credit in the Bank forInvestment and Development of Vietnam (BIDV) Thanh Hoa branch On that basis,

I propose some solutions and recommendations to help the branch improve thesituation

In order to achieve the above-captioned objectives, this report focuses on somefundamental issues as follows:

* Analysis the reality of international payment using L/C in BIDV Thanh Hoabranch in the period of 2008 to 2010

* Figure out the factors affecting the quality of international payment using L/C

* Come up with solutions and recommendations which are sensible to solvethose problems

About the structure, apart from the Introduction and the Conclusion, the maincontent is divided to 4 chapters Firstly, an overview about the BIDV Thanh Hoabranch and International payment using Letter of Credit is expressed in the chapter

1

Secondly, the chapter 2 explains the theoretical framework of internationalpayment using Letter of Credit and makes clear about key terms definitions used inthe report Thirdly, the chapter 3 shows anlysis and findings of the quality ofinternational payment services using Letter of Credit in BIDV Thanh Hoa branchthat I have examined in the period of internship time

Lastly, the chapter 4 brings out solutions to enhance the quality of

international payment services using Letter of Credit in BIDV Thanh Hoa branch with the hope of giving suggestions to improve the situation

PART I: INTRODUCTION

1 Introduction of the research topic

When trade between countries goes international, international paymentmethods become useful tools to facilitate international trade process Among ofwhich, L/C payment is the most popular because of its convenience and safety forboth importers and exporters For commercial banks, L/C payment is importantbecause of the profit it brings up So, the research to find methods to improve thequality of L/C payment is necessary to attract more customers and establish firmrelations with agent banks all over the world

BIDV Thanh Hoa branch is one of the first-level branches of BIDV system Inrecent years, the branch is seeking new customers and the new direction of marketaccess to enhance creativity in business However, in the period of 2008 to 2010,the revenue from international payment services using L/C is fluctuating andunstable The first cause is due to the economic crisis occurred worldwide in 2009has led to the bankruptcy or the difficulties of many enterprises It leads to thereduction of import and export activities The other cause comes from the branchitself The system which is not responsive to market changes and lack of effectivebusiness strategies now just focuses on the traditional business In this situation, thebranch should immediately find out ways to improve the quality of internationalpayment services to attract new customers as well as to develop a reputation andtrust in their loyal customers to survive in a dynamic competitive environmentbetween financial institutions

Accordingly, I have chosen “Solutions to enhance the quality of internationalpayment services using Letter of Credit in the Bank for Investment andDevelopment Thanh Hoa branch” as my topic for the report with the hope of givingsuggestions to help the branch improve the situation

2 Research questions

During the internship period in the BIDV Thanh Hoa branch I have observedand analyzed the operations to find answers for these questions:

“What is the reality of L/ C payment in the BIDV Thanh Hoa branch?

“What are the fundamental factors influencing the quality of International payment services using import L / C there?

“What should the branch do to enhance the quality of import L/C payment activities?”

3 Research methodology

The research is conducted by using comparing, analyzing and synthesizingapproaches to find out objective and subjective factors which directly influence therevenue from L/C payment

In this research the writer has used some methods to collect primary andsecondary data The primary data are gathered through observations in dailyoperations of the branch and interviews with some officers The secondary data arecollected through facts and figures filed in the branch as well as those collectedfrom many websites, books, newspapers and other related documents in the library

of the National Economics University and Faculty of Foreign Languages

4 Scope of the research

The research concentrates on the reality of international payment using L/C inthe branch through the period of 2008 to 2010 together with analyzing facts andfigures to find its strengths and weaknesses From which, the writer comes to givingsolutions to solve the problems

PART II: MAIN CHAPTERS

CHAPTER I: INTRODUCTION OF BIDV THANH HOA BRANCH AND INTERNATIONAL PAYMENT USING

LETTER OF CREDIT

1.1 Introduction of BIDV and BIDV Thanh Hoa branch

Bank for Investment and Development of Vietnam (BIDV) is the secondlargest commercial bank and the fourth largest enterprises in Vietnam, calculated onthe total assets as reported by UNDP in 2007 BIDV was established on April, 26th

1957 under the name Bank for Construction of Vietnam and then it changed intoBank for Investment and Development of Vietnam in 1990 Its mission is todiversify businesses, multi-disciplinary financial, monetary, credit, banking servicesand non-bank in accordance with the law, constantly improve the profitability ofbanks, thus contribute to the national monetary policy and economic development

to serve country BIDV has business relations with more than 800 banks around theworld It is a member of the Asian bankers Association, Bankers Association of TheAssociation of Southeast Asia Nations (ASEAN), the Association of DevelopmentFinance Institutions in Asia – Pacific (ADFIAP) and Association of Bank ofVietnam

BIDV has been growing and improving its reputation on providing bankingproducts as well as confirming its brand values on the sector of serving projects andprograms of the country

BIDV Thanh Hoa branch is derived from the point of the building bank ThanhHoa, founded in May 1957, on the basis of an allocation of financial department,with the task: "in time to serve the mission of recovery and improvement for thenation’s economy after the French resistance.”

To be complied with the 888 decision, Thanh Hoa branch was upgraded to afirst-level branch, enhancing the retail expansion Therefore, in October 2010, thebranch has 3 transaction departments and 9 transaction points in Thanh Hoa City.The qualifications of the staff are relatively simultaneous, with more than 90% ofstaff with university or college degrees and the labor productivity is relatively high

1.2 The role of BIDV Thanh Hoa branch in the L/C payment process of BIDV

According to the Operating procedures of trade finance No 5051/QD –

TTTM August 31, 2009 of Department of Services for Enterprise customers ofBIDV, the branch is not allowed to carry out the international payment operationdirectly All international payment transactions after being verified by the branchmust be transferred to the International Payment Centre to ensure thecentralization of the process in the whole system of BIDV BIDV Thanh Hoabranch is only authorized to:

* Directly receive and check the legality of records from customers orfinancial institutions

* Perform the task correctly defined in the processing of transactions betweenTrade Finance Center (TFC) and the source branch

* Provide information relating to proposed transactions comply with TFCrequirements

* Send the records to the TFC

1.3 Background of International payment using L/C in BIDV Thanh Hoa branch

In the last 3 years, the social and economic situation has changed as ourcountry became an official member of the World Trade Organization (WTO).Especially in late 2007 and six first months of 2008 the world economic crisishappened and had a widespread impact directly on our country Although there aremany difficulties but the branch still fulfilled the criteria set out in business andeven very positively It is specific as follows:

Table 1.1: Results of business activities

Unit: billion VND

Source: Accounting Department of BIDV Thanh Hoa Branch

The total assets in 2009 have increased compared to 2008 It increases from

1005 billion to 1156 billion, up to 14.5% While total assets in 2010 is lower than in

2009 by 2.5% in early 2010 due to the impact of severe economic crisis, but sales

and profitability of the branch has achieved more than the year before, namely thehigher 2009 revenue in 2008 was 1.8 billion, up to 6%, while in 2010 higher than in

2009 with 11.2 billion, up to 35.3%, indicating the business of the branch is stillhighly effective

However, the revenue from international payment service using L/C hasdecreased and proved to be unstable during that period It can be seen that thebiggest external factor is the world economy crisis which made the import andexport activities face with difficulties In other hand, the internal factor comes fromthe bank itself It was not sensitive with the changes of market to make the rightdecision at the time The sensitiveness is very important in any business, now itproved to be more crucial to the bank’s performance Therefore, the bank needs to

be clear about its weaknesses and solve the problems from the rout

1.4 Key terms definitions

* International Chamber of Commerce (ICC): “The voice of world

business championing the global economy as a force for economic growth, job creation and prosperity".1 This is the agency to release the UCP (Uniform Customsand Practice for Documentary of Credits)

* UCP 600: is the latest revision of the Uniform Customs and Practice that

govern the operation of letters of credit (ICC, 2007)

* Issuing bank: the bank that issues a credit at the request of an applicant or

on its own behalf (UCP 600, ICC, 2007)

* Advising bank: the bank that advises the credit at the request of the issuing

bank It may be asked to confirm and/or pay the credit (UCP 600, ICC, 2007)

* Confirming bank: the bank that adds its confirmation to a credit upon the

issuing bank’s authorization or request (UCP 600, ICC, 2007)

* Beneficiary: the person in whose favor a credit is issued (UCP 600, ICC,

2007)

* Bill of exchange: a written order that binds one party to pay a fixed sum

of money to another party at a predetermined future date

*Revocable L/C: an L/C that can be modified or cancelled without noticing

to the beneficiary This type is only used in the delivery of goods between theparent company and its subsidiaries or the buyer and the seller who have goodrelations

1 Website: http://www.tradefinancemagazine.com/AboutUs/Stub/Glossary.html

* Irrevocable L/C: an L/C that cannot be cancelled This type is widely used

because it ensures the rights for both parties

* Deferred L/C: a kind of L/C which the applicant does not pay until a future

date determined in accordance with the terms of the L/C

* Acceptance L/C: a type of L/C that is paid by a time draft authorizing

payment on or after a specific date if the terms of the L/C have been complied with

* Red Clause L/C: a special type of L/C that permits the beneficiary to

receive funds for any purchase outlined in the L/C

* Transferable L/C: this type of credit allows the seller to transfer all or part

of the proceeds of the original L/C to a second beneficiary, usually the ultimatesupplier of the goods The second buyer bears the major risk

* Back to back L/C: “Two letters of credit normally involving the same bank

which cover a single shipment of goods, involving a middleman The second letter

of credit is issued only because its issuing bank is happy that the first letter of credit represents goo security In practice this can be hazardous and many banks are unwilling to be involved in back – to – back transactions.” 2

* Standby L/C: “an L/C which a bank issues on behalf of its customer to serve

as a guarantee to the beneficiary of the L/C that the bank's customer will perform a specified contract with the beneficiary If the customer defaults, the beneficiary may draw funds against the L/C as penalties or as payments, whichever the terms of the credit provide.”3

2 Website: http://www.tradefinancemagazine.com/AboutUs/Stub/Glossary.html

3 Website: http://www.teachmefinance.com/Financial_Terms/standby_letter_of_credit.html

CHAPTER II: THEORETICAL FRAMEWORK OF

INTERNATIONAL PAYMENT USING LETTER OF CREDIT

2.1 L/C definition

There are many ways to define the concept “L/C” in international payment.The definition accepted widely is set by International Chamber of Commerce (ICC):

“Credit means any arrangement, however named or described, that is

irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation

a To pay at sight if the credit is available by sight payment

b To incur a deferred payment undertaking and pay at maturity if the credit

is available by deferred payment

c To accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance” 4

This definition not only defines what L/C is but also gives three circumstancesfor L/C settlement

Another definition of L/C payment is “Contractual agreement between a

bank, known as the issuing bank, on behalf of one of its customers, and another bank, known as the advising or confirming bank, authorizing the latter to make payment to the beneficiary The issuing bank opens the L/C upon the request of its customer and commits to honor withdrawals made as a part of the credit agreement subject to presentation of specified documentary evidence by the confirming bank The beneficiary is often a provider of goods and gets paid by the confirming bank against evidence that he has indeed shipped the required goods to the purchaser The same documentary evidence is presented by the confirming bank to the issuing bank for payment.” – Joseph Martial Ribeiro (2009)

It can be seen that, in this definition, the L/C is divided into 2 major kinds:commercial letters of credits and stand-by ones The commercial letter of credit isthe primary payment mechanism for a transaction, whereas the standby letter ofcredit is a secondary payment mechanism

Edward G.Hinkelman, in “A short course in International Payments” ( 2002)

said: “ A documentary L/C is a bank’s promise to pay a seller on behalf of the buyer

4 http://www.docstoc.com/docs/22550456/Uniform-Customs-and-Practice-for-Documentary-Credits

so long as the seller complies with the precisely defined terms and conditions specified in the credit” It is a very short definition and easy to understand with

enough fundamental information about L / C

With these three definitions, the overview of the L/C content has become moreclearly To sum up, defined in any way, it can be understood that L/C is thecommitment to pay for the beneficiary of the bank on behalf of its customer so thatthe benefits of the two parties in the trade can be guaranteed The bank here playsthe role of intermediary, the bridge to facilitate the process of trading between theseller and the buyer in different countries

2.2 Process of L/C payment

There are 8 main steps in the L/C payment process and the process can be seen

as in the following diagram5:

Figure 2.1: The process of L / C payment

1 Issuing Bank issues a Letter of Credit according to the applicationsubmitted by an Applicant and send it to the Advising Bank, which is located inBeneficiary’s country, to formally advise the L/C to the beneficiary

2 Advising Bank advises the L/C to the Beneficiary

3 Once Beneficiary receives the L/C and if it suits his/ her requirements, he/she prepare the goods and hands over them to the carrier for dispatching to theApplicant

4 He/ She then hands over the documents along with the Transport

5 Website: http://e-articles.info/e/a/title/Letter-of-Credit:-information;-types;-advantages-and-limitations

Document as per L/C to the Negotiating Bank to be forwarded to the Issuing Bank.

5 Issuing Bank reimburses the Negotiating Bank with the amount of the L/Cpost Negotiating Bank’s confirmation that they have negotiated the documents instrict conformity of the L/C terms Negotiating Bank makes the payment to theBeneficiary

6 Simultaneously, the Negotiating Bank forwards the documents to theIssuing Bank to be released to the Applicant to claim the goods from the carrier

7 Applicant reimburses the Issuing Bank for the amount, which it had paid tothe Negotiating Bank

8 Issuing Bank releases all documents along with the titled TransportDocuments to the Applicant

The above is the process of international payment using L/C This is commonand applied in many countries and the banks in the world From this diagram, it isclearer about the role of the bank during the payment operation

2.3 Criteria to assess L / C payment of a bank

To help the operations of quality management in enterprises be unified andeasily, the International Organization for Standardization (ISO) 9001 has adopted

the definition of quality Accordingly, quality is the satisfaction level of a set of

attributes for the requests.6 Requests here are the needs and wishes of customerswhich can be showed or not to be showed

Due to international business activities is in the field of banking services,which are intangible products so the quality of it is inconsistent and very difficult tomeasure There is currently no official document showing specific concepts andrules stated clearly on the quality of international payments It can only be inferredfrom the common problems of the service sector

Accordingly, the quality of international payments of the bank is the levelthat the bank can meet the needs of customers in the performance of internationalpayments, to ensure rapid and timely, accurate, safe and private services withaffordable rates and making a good impression to customers.Product qualitybecomes an important strategy to increase the competitiveness of the bank because

it makes appeals to customers, increase sales and profits for the bank Improved

6 Luận văn “ Nâng cao chất lượng hoạt động thanh toán quốc tế tại chi nhánh ngân hàng Công thương Đống

Đa, Hà Nội”, tác giả Phạm Thị Phương Hiền, Ngân hàng 45, 2007

quality helps customers save time and effort They get a lot more convenient, fasterresponding, more fully and avoid risks from international payment partners.

Improving the quality of the international payment activities is an importantbasis for promoting development in the process of integration and expansion ofrelationship banking Assessing the quality of international payments in terms ofqualitative indicators and quantitative targets reflect the demand satisfaction ofcustomers who are using international payment services of the bank

2.3.1 The qualitative indicators

From the results of behavioral research and evaluation of the customer, theAmerican scholars A.Zeithaml, V.A Parasuraman and Leonard L.Berry gave 5criteria for assessing service quality based on the views of customers They are:reliability, responsiveness, assurance, tangibles and empathy (RATTER)7

2.3.1.1 Reliability of the international payment operations

It is the ability to perform the services promised reliably and accurately Thisindicator is proportional with the quality of international payment services of thebank This indicator assessment is classified into three levels: high, medium andlow Reliability criteria can be divided into five small targets These are: theconsistency of the bank staff in the implementation of international paymenttransactions, the proper implementation and proper function of the promises ofbanks, the accuracy in the banking business that offers the secure internationalpayment services In which the first three indicators have three levels: veryfrequent, regular and occasional

2.3.1.2 Assurance of the operation of international payment

They are the knowledge and behavior of employees and the ability to buildconfidence and trust on customers This indicator has 3 levels: high, medium andlow If this criterion is a high it means that the quality of banking services is goodand vice versa Employees ‘capacity are skills and knowledge needed to do the job.Proper behavior is the politeness and respect to the customers in doing internationalpayments operations It creates an impression of professionalism in the eyes ofcustomers

7 Tạp chí Phát triển KH & CN, tập 9, số 10 -2006

2.3.1.3 Tangibility of the bank

It is the evidence of services, facilities, equipment and tools to conductservices and material such as machinery and infrastructure If the material symbol

of the bank as the logo or facilities is thorough, robust and high aesthetic, the bankwill attract the attention of customers Customers will be assured of service andhave a better impression on the bank In contrast, the bank can hardly provide goodinternational payment services with the poor and obsolete equipment andconsequently it also cannot receive the appreciation of customers

2.3.1.4 The bank's empathy

It is the employees’ understanding of the interest and personal note to eachcustomer's If the employee has empathy then the quality of services is high andvice versa The good care is expressed on the efforts to understand customer needsand find out their problems and then the employee can give them the best means ofpayment and help them solve the problems Also it shows in the consultation andexplanation of the employees on the business process to help customers understandclearly

5 Responsiveness off the staff

It is the availability to help customers and provision of quick services Thestaff must be available to provide timely services If the employees are responsible,they will provide services at the right time and contribute to appreciation of qualityinternational payment activities

It also expressed in the enthusiasm of employees The enthusiasm makesthem be responsible for the high intensity at work, quick response customer'srequirements and pay attention to explore solutions to help them They will receivegood remarks from customers And in opposite, when the customers get theignorance of the staff, they will not be satisfied with banking services

2 3.2The quantitative indicators

2.3.2.1 The fluctuation of the amount of foreign currency for the business activities of the bank

If the amount of foreign currency of the bank increases over the years, it isproved that its quality generally increases The bank then not only can meet theneeds of international capital payment of customers, but also build trust andcredibility on customers and keep and attract more businesses joining foreigncurrency transactions with the bank