i STATE BANK OF VIETNAM BANKING ACADEMY Foreign Language Faculty -----o0o----- GRADUATION THESIS International payment risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade – Hoang Mai Branch Lecturer: Tran Thi Hai Ly (MA) Student’s name: Hoang Phuong Thao Student’s ID: 12A7511163 Class: ATCB – K12 Hanoi, May 2013 ii ACKNOWLEDGEMENTS First of all, on the completion of the study, I would like to express my deepest appreciation to my supervisor, Ms. Tran Thi Hai Ly of Foreign Language Faculty – Banking Academy for her considerable help and great support during the process to accomplish the study. I also thank her for her valuable suggestions, helpful advice and careful comments on the research, which was of critical importance for this study. Second, I am grateful to all trade finance’s staff of Vietinbank – Hoang Mai Branch for the internship period, in which I received welcomed condition and had opportunities to put all theory into practice.
I also owe a great debt of gratitude to all the lecturers of the Faculty of Foreign Languages for the precious knowledge and studying encouragement throughout the past four years at Banking Academy. Last but not least, I would like to convey thanks to my family and friends for their understanding and unconditional love during the time of conducting the thesis. Hanoi, May 2013 Hoang Phuong Thao iii ABSTRACT International payment is a characteristic and important off-table service in business activities of Vietnamese commercial banks. Owing to the wide operating scope and many parties related in international payment transactions, there are risks which can occur at any time, affecting the parties badly.
In this activity, commercial banks are the intermediary providing payment services for customers. Besides obtaining a specific amount of profit, they have to suffer particular risks which may be loss due to the inability to receive money, unnecessary-fee payments and the downgradation of banks’ reputation. Therefore, to dig deeper into this issue, the research paper, “International payment risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade – Hoang Mai Branch”, aims at examining the fundamental theory of risks in international payment; then exploring the real situation of Vietinbank – Hoang Mai Branch based on the secondary data analysis. Finally, after discussing some suggestions for the bank to manage common risks in international payment, the thesis proposes several recommendations for the Government and corresponding Ministries, the State Bank of Vietnam and Vietinbank – Hoang Mai Branch so that risks can be controlled better.
iv TABLE OF CONTENTS ACKNOWLEDGEMENTS. iii TABLE OF CONTENTS. iv LIST OF TABLES AND DIAGRAMS. vi LIST OF ABBREVIATIONS.
Rationale of the study. Objectives of the study. Scope and focus. Structure of the Thesis.
3 CHAPTER 1: AN OVERVIEW ABOUT INTERNATIONAL PAYMENT AND RISKS IN INTERNATIONAL PAYMENT .1 Notion of International Payment .2 Terms and conditions applied to International Payment .3 Common international payment methods .4 International Payment’s role.2 Risks in International Payment .1 Notion of risk and risk in international payments .2 Types of risks in International Payment. 14 CHAPTER 2: REAL SITUATION OF INTERNATIONAL PAYMENT ACTIVITY AND RISKS IN INTERNATIONAL PAYMENT IN VIETINBANK – HOANG MAI BRANCH .1 An overview about Vietinbank – Hoang Mai Branch .1 The formation and development history of Vietinbank – Hoang Mai Branch .2 Business activities of Vietinbank – Hoang Mai Branch from 2010 to 2012 .2 Real situation of international payment activities from 2010 to 2012 .1 Turnover of international payment .2 Proportion of International Payment’s methods .3 Risks of International Payment in Vietinbank – Hoang Mai Branch .1 Political risk and legal risk .2 Foreign exchange risk. 30 CHAPTER 3: SOLUTIONS AND RECOMMENTDATIONS FOR INTERNATIONAL PAYMENT’S RISKS MANAGEMENT IN VIETINBANK – HOANG MAI BRANCH .1 Solutions for International Payment’s risks management in Vietinbank – Hoang Mai Branch .1 Political and legal risk management .2 Foreign exchange risk management .3 Moral risk management .4 Credit risk management .5 Operational risk management .2 Recommendations for International Payment’s risks management in Vietinbank – Hoang Mai Branch .1 Recommendations for Government and correspondent Ministries .2 Recommendations for the SBV .3 Recommendations for Vietinbank – Hoang Mai Branch. 40 vi LIST OF TABLES AND DIAGRAMS Number Name Page Table 2.1 Total capital mobilized from 2010 to 2012 19 Table 2.2 Lending activities of Vietinbank Hoang Mai 21 from 2010 to 2012 Diagram 1.1 The process of remittance method 8 Diagram 1.2 The process of collection method 9 Diagram 1.3 The process of documentary credit method 11 Diagram 2.1 The structure of Capital mobilization of 20 Vietinbank – Hoang Mai Branch in 2012 Diagram 2.2 Non-paid loan rate of Vietinbank – Hoang 22 Mai Branch from 2010 to 2012 Diagram 2.3 Turnover of international payment activities of 24 Vietinbank – Hoang Mai Branch from 2010 to 2012 Diagram 2.4 Proportion of international payment’s methods 25 of Vietinbank – Hoang Mai Branch in 2012 vii LIST OF ABBREVIATIONS Number Abbreviations Original 1 HO Head Office 2 L/C Letter of Credit 3 SBV State Bank of Vietnam 4 SMEs Small and Medium Enterprises 5 SWIFT Society for Worldwide Interbank Financial Telecommunication 6 UCP Uniform Customs and Practice for Documentary Credits 7 USD United State Dollar 8 Vietinbank Vietnam Joint Stock Commercial Bank for Industry and Trade 9 VND Vietnam Dong 1 INTRODUCTION 1.
Rationale of the study International integration has brought many chances to Vietnam in economic development since the country became a member of World Trade Organization (WTO) in 2006. Foreign trade activities have also been widened recently, which leads to higher need for Vietnam to corporate with other countries. The role of commercial banks, especially in international payment field, therefore, has been paid more attention to. It has been shown in statistics that among external economic activities of Vietnamese commercial banks, international payment takes up a large proportion to raise banks’ turnover by fees collected from related doings.
Realizing its meaning, commercial banks have recently invested more in renovating international payment system. For example, training staff specializing in this field, upgrading technology and organizing payment set-up suitable with international standards have been focused. As a result, international payment services in banks have gained encouraging outcomes. With the strength of being one of the biggest Vietnamese commercial banks, building wide business networks, supplying a variety of high-quality banking services, having good reputation and being a member of Society for Worldwide Interbank Financial Telecommunication (SWIFT), Vietnam Joint Stock Commercial Bank for Industry and Trade satisfies customers’ demands about international payment services.
Moreover, its modern technology is often updated and applied to the payment system to save time and expenses, as well as increase revenue from business activities. However, continual changes of the international and domestic economy, together with the issuance and correction of regulations and laws challenge the bank to improve its payment process and ensure the efficiency of international payment operations. Many other risks can also be seen during practice, resulting in the revenue and fame reduction. Consequently, it is really important for the bank to be aware of risks so as to 2 avoid them while working.
If risk management is handled well, banking services will develop more effectively. From this fact, after an internship period in Vietnam Joint Stock Commercial Bank for Industry and Trade – Hoang Mai Branch, the topic “International payment risk management in Vietnam Joint Stock Commercial Bank for Industry and Trade – Hoang Mai Branch” has been chosen with the aim of providing related parties with deeper understanding and practical solutions and recommendations to enhance international payment business of the bank. Objectives of the study The study is conducted to provide an overview of international payment and its risks in commercial banks, analyze and assess common risks, as well as propose solutions and recommendations to prevent them in international payment process in Vietnam Joint Stock Commercial Bank for Industry and Trade – Hoang Mai Branch. Research methodologies After my internship period in Vietinbank – Hoang Mai Branch, I have collected important primary through personal interview and observation and secondary information from annual reports of the bank for my research.
Methods of data comparison, analysis and synthesis are used to clarify the content of the research issue. Three main questions are interviewed in the writing. They are: 1) What are common risks in international payment Vietinbank – Hoang Mai Branch has to face? 2) Why do risks happen? 3) What does Vietinbank – Hoang Mai Branch do to avoid risks? 3 4. Scope and focus The study focuses on international payment risk management of Vietnam Joint Stock Commercial Bank for Industry and Trade – Hoang Mai Branch, supported by research data calculated in the last three years from 2010 to 31 December, 2012.
Structure of the Thesis Beside the Introduction and Conclusion parts, the thesis is divided into three chapters as below. Chapter 1: An overview about International Payment and risks in International Payment. Chapter 2: Real situation of International Payment activities and risks in International Payment in Vietinbank – Hoang Mai Branch. Chapter 3: Solutions and recommendations for International Payment’s risks management in Vietinbank – Hoang Mai Branch.
4 CHAPTER 1: AN OVERVIEW ABOUT INTERNATIONAL PAYMENT AND RISKS IN INTERNATIONAL PAYMENT 1.1 An overview about International Payment To understand what international payment is, people initially comprehend the notion which is a generally picture about international payment activities.1 Notion of International Payment The relation among countries is based on many factors, such as economic, politic, diplomatic and cultural relation, in which the economic one plays an important role to ensure the existence and development of other international relations. Globalization brought about nations’ demand in payment and transaction. However, the geographic distance was an obstacle, which requires a go-between agent to support and ensure settlement. Therefore, international payment was formed with banks’ position as an intermediary to connect parties.
According to the author of the book “International Payments and Commercial Finance”, Doc. Nguyen Van Tien, “International payment is a process executing obligations to payment and entitlements to benefits of money which leads to economic and non-economic activities between organizations, individuals of different nationalities or between a nation and an international organization through banks of related partners”. Economically, international payment is divided into two types: trade payment and non-trade payment. The former means that making payment depends on commercial goods and services exchange following worldwide price.
In this kind, the bound between the seller and the buyer is sale contract which shows the particular relation and regulates specified payment conditions. In contrast, the latter doesn’t involve goods for exporting and importing as well as labor supply services. In other words, it is to make payment for non-commercial activities. Non-trade payment is the payment for expenses of diplomatic missions in foreign countries, travel and accommodation expenses of state delegations, organizations and individuals, etc.
5 Because international payment is an activity relating to many parties and seems to be complicated, certain terms and conditions must be used to regulate this business.2 Terms and conditions applied to International Payment There are four terms and conditions which are relevant to international payment: Currency, payment place, payment time and payment instruments and methods.1 Currency terms and conditions Payment for goods and services in international commerce usually engages to the currencies of more than one country, so the decision of which currency to use can become a considerable impediment to conduct a transaction. Therefore, the right selection in currency terms and conditions is one of the decisive factors to business efficiency in external activities. In current foreign trade practices, currency choice is made depending mainly on the habit of using currency in commerce and international payment. For example, in terms of goods such as rubber, tin and some ferrous metals, the pound sterling (GBP) is chosen as payment currency.
Meanwhile, to the others, the currency used is the US dollar (USD).