Tài liệu International payment service by opening letter of credit at vietnam eximbank hanoi branch

Mai Thi Hai Yen – A2/K44/BBE ACKNOWLEDGEMENTS For much of improvement during the time when I took my apprentice at Vietnam Eximbank-Hanoi Branch along with a well-spring of helps and encouragements from all people around me, this 2009 internship report has been completed on time. First of all, I would like to express my gratitude to the Business English Faculty for providing best conditions for me during my study in Foreign Trade University for four academic years and now giving me a chance to practice my academic knowledge, skills and profession in reality in this final internship. I also wish to give my special thank to Ms Nguyen Thi Diem Ha, my dedicated instructor for her invaluable suggestions and continuing supports while this report was in progress. She was always available to input her constructive ideas and better edition to make my writing become more enjoyable. My heartfelt gratitude also goes to Ms Le Kim Lien – Manager of the international settlement department and all staff there who gave me a good opportunity to use my economic knowledge and face with the real facts and difficulties at the banking environment. Throughout my internship here, they have treated me as their real colleague, they are always ready to assist me to Field Study Report 2009 -1- Mai Thi Hai Yen – A2/K44/BBE finish my task and supply me with valuable materials related to my report. Hanoi, May 4, 2009 Student Mai Thi Hai Yen Field Study Report 2009 -2- Mai Thi Hai Yen – A2/K44/BBE CONTENTS 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 Field Study Report 2009 -3- Mai Thi Hai Yen – A2/K44/BBE 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 Analysis on the current Export L/C payment activities at Hanoi Branch..........................................................................................18 Field Study Report 2009 -4- Mai Thi Hai Yen – A2/K44/BBE 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 Opportunities................................................................................23 Challenges....................................................................................24 2. Vietnam Eximbank Hanoi Branch’s development orientation to 2010.............................................................24 General orientation.......................................................................25 Economic development targets...................................................25 Field Study Report 2009 -5- Mai Thi Hai Yen – A2/K44/BBE 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 Field Study Report 2009 -6- Mai Thi Hai Yen – A2/K44/BBE 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 Field Study Report 2009 -7- Mai Thi Hai Yen – A2/K44/BBE 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 Field Study Report 2009 -8- Mai Thi Hai Yen – A2/K44/BBE Field Study Report 2009 -9- Mai Thi Hai Yen – A2/K44/BBE INTRODUCTION For several recent years, Vietnam economy has much developed along with many domestic and international significant events, especially become the official member of WTO. The amount of trading with foreign companies has got a sharp increase, and the volume of imported and exported goods and services has also increased considerably. Therefore, the international payment with foreign companies becomes very important for settling a long time business trading. Acknowledging these requirements, Vietnam Eximbank has made a strong focus on its international settlement department to help the foreign trade carry out as quickly and smoothly as possible. After a short time as an intern at Vietnam Eximbank Hanoi Branch, I have gained a lot of practical experiences and learnt that the international payment by opening Letter of Credit is the most favorable method to be transacted between Vietnamese companies and other foreign companies through Hanoi Branch of Eximbank’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. Field Study Report 2009 - 10 - Mai Thi Hai Yen – A2/K44/BBE The main focus of this report is designed in three parts: Part I: Literature review of Export and Import LC and Overview of Eximbank-Hanoi Branch. Part II: The current situation of L/C payment at EximbankHanoi Branch. Part II: Development orientation and proposals to improve the international settlement services of Eximbank Hanoi Branch. Field Study Report 2009 - 11 - Mai Thi Hai Yen – A2/K44/BBE 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 Field Study Report 2009 - 12 - Mai Thi Hai Yen – A2/K44/BBE 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 the world. It has been used for the last several hundred years and is considered a highly effective way for banks to transact and finance export-import trade and to eliminate risks such as unfamiliarity with the foreign country, customs, or political instability. The letter of credit is a formal bank letter, issued for a bank's customer, which authorizes an individual or company to draw drafts on the bank under certain conditions. It is an instrument through which a bank furnishes its credit in place of its customer's credit. The bank plays an intermediary role to Field Study Report 2009 - 13 - Mai Thi Hai Yen – A2/K44/BBE help complete the trade transaction. The bank deals only in documents and does not inspect the goods themselves. Thus a LC (as it is commonly referred to) is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant like the buyer. A letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking (it can also be opened under other conditions like revocable, unconfirmed, transferable, back to back, etc. but the most common way is irrevocable/confirmed) to a beneficiary against complying documents as stated in the Letter of Credit. Letter of Credit is abbreviated as an LC or L/C and often is referred to as a Documentary credit, abbreviated as DC or D/C, documentary letter of credit, or simply as Credit. Documentary credits are governed by the International Chamber of Commerce code of practice, known as the Uniform Customs and Practice for Documentary Credits. The current code is ICC publication No.500 and is generally referred to as UCP 500 and UCP 600 and e-UCP600 in payment via the Internet. The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. Field Study Report 2009 - 14 - Mai Thi Hai Yen – A2/K44/BBE The parties to a letter of credit are usually a beneficiary who is to receive the money, 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 is the Beneficiary. The Bank that issues the LC is referred to as the Issuing Bank which is generally in the country of the Buyer. The Bank that Advises the LC to the Seller is called the Advising Bank which is generally in the country of the Seller. Almost all letters of credit which are irrevocable can not be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank. 1.2 Role of Banks in Documentary Letters of Credit Compared to other payment forms, the role of banks is substantial in documentary Letter of Credit transactions. Firstly, the banks provide additional security for both parties in a trade transaction by playing the role of intermediaries. The issuing bank often works for the importer and the advising bank works for the exporter. Moreover, the banks assure the seller that he would be paid if he provides the necessary documents to the issuing bank through the advising bank. And the banks also assure the buyer that his money would not be released unless the shipping documents evidencing proper and accurate shipment of goods are presented. 1.3 The Documentary Credit Cycle Field Study Report 2009 - 15 - Mai Thi Hai Yen – A2/K44/BBE The specified bank makes the payment upon the successful presentation of the required documents by the seller within the specified time frame. Note that the 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 Seller gets assured that if documents are presented on time and in the way that they have been requested on the LC the payment will be made and Buyer on the other hand is assured that the bank will thoroughly examine these presented documents and 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. The letter 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 to the 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 the importer. If an importer directs the bank to open letter of credit by cable the buyer'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 conditions which are laid therein. The expense of the telegram is met by the importer. The bank also mails the written confirmation of the cable to the corresponding bank for forward Field Study Report 2009 - 16 - Mai Thi Hai Yen – A2/K44/BBE delivery to the exporter. The bank also sends a copy of the cable and the 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 - Insurance document - Inspection Certificate - Certificate of Origin - Other documents bill Field Study Report 2009 - 17 - Mai Thi Hai Yen – A2/K44/BBE 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 to the LC can be made without the consent of the beneficiary. A “sight” LC means that payment is made immediately to the beneficiary/seller/exporter upon presentation 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 upon presentation of the required documents. A letter of Credit may be payable either at sight or at extended payment terms (payment at a future date). A payment at sight means that the payment is due upon the presentation and receipt of documents after shipment of the goods and/or services are provided. On the other hand, if the exporter (seller) allows the importer (buyer) an additional period after presentation of documents to pay the credit at a future date, then the credit is payable at 30, 60 or 90 days after presentation and acceptance of documents (Bill of Lading Date or whatever payment terms have been agreed upon). 2. Import LC Import Letters of Credit provide importers the most widely used and accepted international trade payment mechanism and finance instrument. Letter of credit is an undertaking of a bank for account of the importer to pay the foreign exporter the value of Field Study Report 2009 - 18 - Mai Thi Hai Yen – A2/K44/BBE the goods provided the required documents are submitted and the terms of the credit are complied with. With an Import Letter of Credit, importers request that their bank guarantee payment for the goods, provided that certain documentary conditions are met. A fast and secure method of guaranteeing payment to suppliers to expedite shipment from overseas, the Import Letter of Credit brings such features and 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 are met, improving cash flow management, minimizing financial risks to your business, and eliminating extensive credit investigations by the seller of the importer. A process of opening Import L/C can be undertaken through following eleventh steps. First of all, buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment. At the second step, buyer applies to his bank for a letter of credit in favor of the seller. Thirdly, buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary). At the fourth step, advising bank will authenticate the credit and forward the original credit to the seller (beneficiary). And next, seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly Field Study Report 2009 - 19 - Mai Thi Hai Yen – A2/K44/BBE depending on the perceived risk involved in dealing with a particular company. At the sixth step, seller presents the required documents to the advising or confirming bank to be processed for payment. After that, advising or confirming bank examines the documents 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 bank will claim the funds by debiting the account of the issuing bank or waiting until the issuing bank remits, after receiving the documents or else reimbursing on another bank as required in the credit. Next, advising or confirming bank will forward the documents to the issuing bank. At the tenth step, issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer's account. Finally, issuing bank then forwards the documents to the buyer and the buyer gets the consignment by presenting the shipping documents to the shipping company. Field Study Report 2009 - 20 -