BANKING ACADEMY FACULTY OF COMMERCIAL BANKING GRADUATION THESIS Topic: IMPROVING THE EFFICIENCY OF THE INTERNATIONAL PAYMENT OPERATION BY MEANS OF DOCUMENTARY CREDIT AT JOINT STOCK COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM Student: Lê Trần Thái Phương Class: K18CLCA Year: 2015-2019 Student’s ID: 18A4000577 Supervisor: Đỗ Thu Hằng Hanoi, May 2019 ACKNOWLEDGEMENTS Firstly, I am deeply indebted to my thesis instructor and advisor, Ms. Do Thi Thu Hang, for her great support and conscientious assistance in the preparation process of this thesis. Secondly, I would like to give my special thanks to all lecturers in Banking Academy, for having taught and instructed me since my freshman days. I am also grateful for my colleagues and instructors at the Trade Finance Division of Credit Risk Control Department at Vietcombank – Ho Chi Minh City branch who had constantly supported me in starting the work, persevering with it, and finally publishing it.
Finally, I would like to acknowledge with gratitude, the support of my beloved family and friends – my grandfather, aunt, father, mother, sister and a number of my classmates. They all kept me going, and this thesis would not have been possible without them. Even though I have prepared very carefully and put a lot of effort to this graduation thesis, I am well aware of the shortcomings and limition of it due to the time pressure and lack of access to information. Thus, I am willing to receive feedback and comments from the board of lecturers and fellows to perfect the graduation thesis.
i STATUTORY DECLARATION I herewith formally declare that I myself have written the submitted Graduation Thesis independently. I did not use any outside support except for the quoted literature and other sources mentioned at the end of this paper. Hanoi, 27/05/2019 Le Tran Thai Phuong ii Table of Contents LIST OF TABLES AND FIGURES. 1 CHAPTER 1: THEORETICAL OVERVIEW OF THE INTERNATIONAL PAYMENT OPERATION AND DOCUMENTARY CREDIT AT COMMERCIAL BANKS.
The international payment operation by means of documentary credit at commercial banks. Letter of credit. The international payment operation by documentary credit. The international legal frameworks of documentary credit operation.
Risks of commercial banks in international payment by means of documentary credit. The efficiency of international payment operation by means of documentary credit at commercial banks. Criteria assessing the efficiency of international payment operation by means of documentary credit at commercial banks. Factors affecting the efficiency of international payment operation by means of documentary credit.
20 CHAPTER 2: THE CURRENT SITUATION OF THE THE EFFICIENCY OF THE INTERNATIONAL PAYMENT OPERATION BY MEANS OF DOCUMENTARY CREDIT AT VIETCOMBANK. Overview about Vietcombank. The international payment by documentary credit at Vietcombank. Research methodology of the efficiency of the international payment operation by means of documentary credit at Vietcombank.
The current situation of the international payment operation by means of documentary credit at Vietcombank. Evaluation of the efficiency of international payments operation by means of documentary credit at Vietcombank. Reasons for shortcomings. SOLUTIONS TO IMPROVE THE EFFICIENCY OF INTERNATIONAL PAYMENT OPERATION BY MEANS OF DOCUMENTARY CREDIT AT VIETCOMBANK.
Development orientation for the international payment operation by means of documentary credit at Vietcombank. Solutions to improve the efficiency of international payment operation by means of documentary credit at Vietcombank. Promoting marketing strategy. Improving the technology.
Strategies related to human resources. Solutions for Vietcombank’s Head Office. Proposals for improvement of international payment operation by means of documentary credit at Vietcombank. Towards the State Bank of Vietnam.
61 iv LIST OF TABLES AND FIGURES Figure Title Page 1 Documentary credit process 11 2.1 Proportion of Loans to customers over Total Assets 2016-2018 25 2.2 Proportion of Customer deposits over Total Liabilities 2016-2018 26 2.3 Interest income and Interest expense of VCB 2016-2018 28 2.4 VCB’s ratio of Group 2-5 Debt 28 Proportion of Net fee and Commission income in Total Operating 2.5 28 Income of VCB 2016 - 2018 Proportion of Settlement Service in Net fee and commission 2.6 29 income of VCB 2016 - 2018 The proportion of the L/C over total international payment 2.7 39 volume of Vietcombank from 2016 – 2018 Proportion of volume of import and export L/C of Vietcombank 2.9 Proportion of L/C's turnover of Vietcombank from 2016-2018 43 2.10 Proportion of L/C’s profit/turnover and cost/turnover 46 v Table Title Page 2.1 ROA and ROE of VCB and Mean of sector 27 The growth rate of the volume of L/C from 2016-2018 at 2.2 37 Vietcombank The growth rate of turnover, cost and profit from L/C method at 2.3 44 Vietcombank vi INTRODUCTION Statement of the problem and rationale for the study Nowadays, while the bank’s income sources from credit activities seem to decline, the service sector, including international payment services (or import and export payment) and trade finance is being promoted by commercial banks. The international payment service not only contributes to the production process’ s continuity, but it also accelerates the process of goods circulation nationally and internationally. Therefore, by acting as an intermediary in payment activities, commercial banks have contributed to the economy’s growth, customers’ satisfaction and banks themselves. The trend of globalization, international economic integration and trade liberalization through Vietnam’s participation in the Trans - Pacific Partnership Agreement, Free Trade Agreement, ASEAN Economic Community, etc.
is considered both an important step of Vietnam in the international economic integration and a great opportunity for our country to accelerate its growth, institutional reform, and enhance the competitiveness of the economy in general and the banking industry in particular. In addition, this trend also boosts the expansion of foreign trade activities of domestic enterprises. The exchange of goods between countries around the world is getting stronger and faster, which leads to the increase in payment demands of enterprises from all over the world. Furthermore, international payment is considered an important service for Vietnamese commercial banks that supports other banking activities.
International payments are based on international trade, but whether or not the international payments can exist or develop depends on the timeliness, security and accuracy of the payments. To ensure the security in the payment process, the documentary credit is proved to be an effective and appropriate method because it can be used in the first transaction, when both parties have not known each other well yet. Like other commercial banks, the international payment operation by documentary credit at Bank for Foreign Trade of Vietnam was established to meet the demands of import – export enterprises for international payment. However, 1 documentary credit is a rather complicated method that requires high level of technical expertise, so it is inevitable that there are some related issues need to be solved.
Furthermore, Vietcombank has just applied the new centralized model of International Payment – Trade Finance for a few years, so finding out solutions to improve the efficiency of international payment operation in accordance with this change is an urgent requirement to help the bank maintain its current market share and increase its competitiveness. For the reasons above, I chose the topic: “Improving the efficiency of international payment operation by means of documentary credit at Vietcombank” as my graduation thesis. Aims and objectives of the study • Research on some theoretical issues relating to the international payment operation, especially the use of letter of credit in international payment at commercial banks; • Assess on the efficiency of the international payment operation by means of letter of credit at Vietcombank in recent years, using qualitative research methodology that comprises of qualitative criteria and quantitative criteria; • Propose solutions to improve the efficiency of international payment operation using letter of credit at Vietcombank. Significance of the study Although there have been many graduation theses on the international payment operation by means of documentary credit at commercial banks, however, this topic is of great importance that should be examined further and solved thoroughly.
Drawing from previous experience of some research papers, the thesis will analyze and evaluate the improvement of the efficiency of international payment operation by letters of credit at the Bank for Foreign Trade of Vietnam. 2 Data and research methodology The thesis uses specific scientific methods such as comparative method, analytical method, statistical method and observation method. Methods of collecting the data: Secondary source of information comes from the annual financial statements of Vietcombank, the internal documents of Vietcombank, books, newspapers, reliable Internet sources, etc. Methods of analyzing and evaluating information: From the information obtained, the thesis will provide analysis and evaluation to solve the outstanding problem.
Organization of the study Chapter 1. Theoretical overview of the international payment operation and documentary credit at commercial banks Chapter 2. The current situation of the efficiency of international payment operation by means of documentary credit at Vietcombank Chapter 3. Solutions to improve the efficiency of international payment operation by means of documentary credit at Vietcombank 3 CHAPTER 1: THEORETICAL OVERVIEW OF THE INTERNATIONAL PAYMENT OPERATION AND DOCUMENTARY CREDIT AT COMMERCIAL BANKS 1.
Literature Review Recently, the international payment operation at commercial banks in Vietnam has constantly been developed by the reconstruction in the international payment network system, provision of training sessions for the staff working in the field, investment in the innovative technology, etc. As a result, the international payment service at commercial banks in Vietnam has gained some significant outcomes. However, it is obvious that the banks have only focused on the expansion and risk management in international payment operations, rather than making analysis and quantitative assessment towards the efficiency of the operations. The study more generally has made progress as it does not only analyze, assess and provide solutions to improve the efficiency of the international payment operations using specific criteria, but it also focuses on one of the most popular, yet important international payment methods known as documentary credit (or letter of credit).
Norman Mugarura (2014) addressed issues of law and policy, the potential pitfalls such as fraud, conflict of law and documents discrepancies that are often encountered by the parties in usage and practice of the Letter of Credit (L/C) at commercial banks. The article has gleaned other forms of payment mechanisms in international commercial trade to demonstrate that despite the upsurge in international payment instruments, the L/C has remained a viable commercial product. Furthermore, this article aims to provide an in-depth analysis of the law governing the L/C and why it has remained resilient and a viable commercial product in banking industry for many years. To make this happen, the author has utilized the current version of UCP 600 (2007) and the legislation such as Brussels Convention (2000) in Europe, litigated cases and secondary data sources in writing the paper.
The findings of the paper have demonstrated that despite a myriad of payment mechanisms as a result of innovation in international trade, the L/C is still a viable commercial product. Parties will need to be knowledgeable and skilled 4 enough to keep abreast of dynamic changes on law and policy relating to usage and practice of L/Cs. Vladimir Anatolevich ERMAKOV et al. (2017) analyzed the practice of using documentary letters of credit in foreign trade, and to determine effective ways to improve L/C payment method for importers/exporters at commercial banks.
They applied some empirical research methods, indicator techniques and secondary analysis of the results of a global survey of experts in international trade financing throughout the study. Eventually, they concluded some important points. First, commercial L/Cs are most widely used in foreign trade transactions, however, their volume in international payments has decreased. The reason for this is due to the decline in foreign trade turnover.
Second, unlike countries with developed financial markets, the share of payments using L/Cs remains rather small in Russia (about 15% of the total volume of payment transactions in the banking system). Third, there has been a twofold increase in the volume of payments in value terms using L/Cs.