STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING BANKING ACADEMY OF VIETNAM FACULTY OF INTERNATIONAL BUSINESS --------------------------- Dang Thanh Trung Student ID: 18A4050252 DIFFERENT KINDS OF DOCUMENTARY CREDIT: REMARKS FOR EXPORT-IMPORT ENTERPRISES AND COMMERCIAL BANKS IN VIETNAM BACHELOR’S THESIS Hanoi, May, 2019 STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING BANKING ACADEMY OF VIETNAM FACULTY OF INTERNATIONAL BUSINESS --------------------------- Dang Thanh Trung Student ID: 18A4050252 DIFFERENT KINDS OF DOCUMENTARY CREDIT: REMARKS FOR EXPORT-IMPORT ENTERPRISES AND COMMERCIAL BANKS IN VIETNAM Major: International Business Code: 734.20 BACHELOR’S THESIS INSTRUCTOR: Dr. Nguyen Thi Hong Hai Hanoi, May, 2019 TABLES OF CONTENT ACKNOWLEDGEMENTS. Rationale of the research. Purpose of the Research and Research questions.
Objectives and Scope of the Research. Structure of the Research. 12 CHAPTER 2: THEORETICAL REVIEW FOR DOCUMENTARY CREDIT TRANSACTIONS. Basic features of a Documentary Credit transaction.
The Importance of Documentary Credit to groups of countries. Advantages and Disadvantages of Documentary Credit. Advantages of Documentary Credit. Disadvantages of Documentary Credit.
17 CHAPTER 3: ANALYSIS OF KINDS OF DOCUMENTARY CREDIT. Ordinary Letters of Credit. Revocable Letter of Credit. Irrevocable Letter of Credit.
Special Letters of Credit. Confirmed Letter of Credit. Red Clause Letter of Credit. Green Clause Letter of Credit.
Transferable Letter of Credit. Back-to-back Letter of Credit. Revolving Letter of Credit. Standby Letter of Credit.
Reciprocal Letter of Credit. Usance Payable at sight Letter of Credit. 35 CHAPTER 4: CRITICAL ISSUES AND RECOMMENDATIONS FOR VIETNAMESE ENTERPRISES AND BANKS INVOLVED IN THE DOCUMENTARY CREDIT TRANSACTIONS. Critical Issues and Recommendations for Vietnamese Exporters and Importers .1 Remarks on using Transferable Documentary Credit.
Remarks on using Back-to-Back Documentary Credit. Remarks on using Standby Documentary Credit. Remarks on using Reciprocal Documentary Credit. Remarks on using Revolving Documentary Credit.
Remarks on using Red Clause Documentary Credit. Remarks on using UPAS Documentary Credit. Critical Issues and Recommendations for Vietnamese Commercial Banks. Remarks on using Confirmed Documentary Credit.
Remarks on using Back-to-Back Documentary Credit. Remarks on using Transferable Documentary Credit. Remarks on using Standby Documentary Credit. Remarks on using Red Clause Documentary Credit.
Remarks on using Green Clause Documentary Credit. 45 CHAPTER 5: CONCLUSION AND LIMITATIONS. 51 1 DECLARATION I declare that this dissertation has not been accepted in substance for any degree and is not being concurrently submitted in condidate for any degree. I state that this dissertation is the result of my own investigation and research, except where otherwise stated.
I hereby give consent for my dissertation, if accepted, to be available for photocopying and understand that any reference to or quotation from my thesis will receive an acknowledgement. Dang Thanh Trung 2 ACKNOWLEDGEMENTS I am gladful to my instructor, Dr. Nguyen Thi Hong Hai, whose experience, understanding, guidance and sincere support have inspired me and made it possible for me to work on the topic of my great interest. It was a great honor to work together with her on this graduation thesis.
Without her help and support, this research will never become reality. I throughly grateful to every lecture of the Faculty of International Business, Banking Academy of Vietnam, who has supported and kept me well-informed of all regulations and procedures on conducting this research. I am hugely indebted to Bao Minh Dat Trading Company Limited, Bao Minh Dang Trading Company Limited, Mai Trung Company Limited, Matrico Import- Export Trading Company Limited, MLC ITL Logistics Company Limited, HANAKA Group Joint Stock Company, Hoa Thuan Company Limited, Ningbo plastic machinery Company Limited, Bank of Investment and Development of Vietnam- 1st Branch,.These companies and banks have unconditionally chosen to be a part of my research interview as well as willingly donate documents, sample Letters of credit, and statutory management accounts to my research, which helped me in fulfilling my graduation journal. Finally, I would like to express my gratitude to my friends, my family, who put their faith in me and urged me to complete this thesis better.
3 ABSTRACT International business plays an essential role in global trading activity. The elements of globalization have facilitated international trade by whittling down tariff barriers and releasing markets, offering new opportunities for exporters and importers alike. Of all the most significant issues in the international business process, the international payment sector is highly regarded. Exporters and importers are often concerned about this topic and both have a wish to know about the way and the time payments will be entirely performed.
In the concept of the cutthroat competition, technology and time-efficiency factor of other payment methods such as teletext transfers, open account, and documentary collection remained inadequate and unreliable, making documentary credit become more of a preferred payment term to a great number of global dealers. Recent decades have witnessed a tremendous increase in the number of Letter of Credit used in international trade. This optimistic scenario can be ascribed to the fact that Documentary credit transactions have been proven to provide users with such advantages as the easy accessibility, time efficiency, and flexibility to different kinds of goods and geographical areas. Additionally, credit transactions also have a considerable bearing on mitigating risks incurred during the settlement process.
As for third-world countries such as Vietnam, the documentary credit transactions can also be a key to stimulate international trade as well as mitigate the risk arose from the inadequacy of payment experience of exporters and importers. Thus, international traders in every continent can turn to L/C as a safeguard to grasp the opportunities of global trade. In a documentary credit transaction, the letter of credit can be regarded as the bottom line and plays the fundamental role in the payment process. L/C payment is generally a business procedure in which a bank substitutes the credit worthiness of an L/C applicant with the warranty for a certain transaction.
Under the letter of credit, a bank undertakes payment for a consignment provided when the exporter submits required documents within a specified period. As for documentary credit itself, importers and exporters can both have access to a multitude of different kinds of L/C, each serve differing purposes and can create distinctive characteristic in a transaction. Having said this, every aspect of international trade transactions is believed to 4 be more risky and complex than the domestic ones, and the sector of international payment is not exclusive. Against the background of opportunities, documentary credit transactions do have problems and discrepancies that both merchants and banks should take into consideration.
As for the expert enterprises in Vietnam, who have long applied L/C in their payment condition, the usage of Documentary Credit is optimally increased and made flexible in different contexts of payment. However, in less experienced companies and small enterprises, the advantages of Documentary Credit do not entirely work, they mostly used a single kind of L/C for all of their differing payment without flexibly changing types of L/C, thus making the benefits of Documentary Credit in their transactions become virtually futile. In this study, different kinds of Letter of Credit used in international business were examined with a strong emphasis on the special ones. Along with this, the distinctive features of this method of payment will be profoundly analyzed, and the advice as well as remarks to the business and bank community will also be given in order to help them in using the Documentary Credit more effectively as well as how to tackle frauds and discrepancies.
RATIONALE OF THE RESEARCH Because of the fact that many enterprises in the third-world countries do not have an adequacy of documentary credit experiences, the benefits of this payment method are not entirely developed and taken advantages of. Also, in less experienced banks, there is often a lack in knowledge dealing with documentary credit, leading to the fact that they cannot fulfill their business procedure in dealing with a L/C transaction. Simultaneously, one of the most astonishing merits of letter of credit is the diversity in different kinds of this payment method, which can transparently create distinctive features to agree with different contexts of usage. A particularly interesting fact highlighted by the result of this research is that only large companies with a long time dealing with L/C can frequently use different kinds of L/C in their payment terms, while in small enterprise who do not have a comprehensive experience on documentary credit, people often choose other high-risked payment terms or simple kinds of documentary credit such as irrevocable L/C, at sight L/C which cannot truly create benefits for their transaction.
Vietnamese small and medium-sized companies perfectly exemplify this situation. In many produce importing companies, instead of using a revolving L/C, they choose to open the ordinary L/C for many times, thus leading to the unnecessary price hike for their shipments. Therefore, the original aim of this thesis is to analysis different kinds of L/C from which the enterprises and commercial banks can draw a comprehensive understanding about different kinds of L/C, their usage, and the contexts each kind should be used. Additionally, with a strong focus on remarks when using special and distinctive kinds of documentary credit, enterprises as well as commercial banks can be equipped with a guideline to use those kinds of L/C effectively.
LITERATURE REVIEW 1- Gabriel, H. Standby Letters of Credit: Does the Risk Outweigh the Benefits. The purpose of this study is to point out differing risks and benefits to differnt parties arise from Standby L/C payment process and give opinions on these two conflicting aspects. The thesis has found that they generally analyse the risk to 6 different parties, and keep L/C users well-informed of the problems that can occur in a Standby L/C transaction.
Additionally, the benefits of this kind of L/C are also listed and analysed to conclude that the befefits that standby credits offer can eclipse the risks incurred. The research ,however, focus on how risks and benefits from Standby Documentary credit can generally occur to varying parties such as exporters, importers, bankers,., but not truly pointed out how the benefits can outweigh the risks, and not focus on how to mitigate those risks. The Domestic Standby Letter of Credit Desk Book for Business Professionals, Bankers and Lawyers. The purpose of this study is to describe an effort to convince readers (business people, bankers, and lawyers) that the standby letter of credit is a handy, flexible, commercial device that can support virtually any business activity and often without a battery of lawyers or letter of credit “experts”.
The law of standby L/C is unique but not exotic. Any educated professional can understand it and can use the standby to enhance the value of an unperformed promise. But the research was restricted in the area of academia and the professional, the novices and newbies may make it difficult to follow the guideline of the research. 3 - Michael Stern (1985), The University of Chicago Law Review, The Independence.
This journal have outlined the legal systems that goverining the standby documentary credit and how they can affect the standby credit transactions. The thesis has found different featureas and aspects of the standby Letter of credit, and bring out several legal guideline for enterprises and to use the standby credit effectively. There is a darkside is that he guiline is much more partial to legalism. Rev (1982), Problem Children-Standby Letters of Credit and Simple First Demand Guarantees.
The purpose of this study is to give a deep analysis standby L/C, Demand guarantees and how to overcome the risk occured in this kind of credit. The thesis has found the distinctive feature of the standby letter of credit and indicate different kinds of risk incurred. Nevertheless, this journal does not explore how risks can arise and how to avoid and mitigate such a risk. 5- Justin Pritchard (2019), “Standby Letter of Credit: A Backup Plan for Payment”.