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Industry-Wide L/C Overdue Debt Ratio


* Overdue debt in L/C payment

Table 2.6: Rate of overdue L/C payment in the whole industry


Year

2001

2002

2003

2004

2005

2006

All

branch

2.8%

3.4%

2.9%

2.6%

2.4%

1.9%

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Industry-Wide L/C Overdue Debt Ratio


Source: Reports of Commercial Banks


In general, Vietnamese enterprises are mainly small and medium enterprises with little capital, and Vietnamese commercial banks in general and Vietnam Joint Stock Commercial Bank for Industry and Trade in particular are the main sponsors for import-export business activities of enterprises through the method of payment of documentary credit. In this method, most enterprises operate based on funding by reputation or by bank loans. Due to objective conditions such as fluctuations in commodity prices, foreign exchange rates, and tax policies, customers have suffered losses, even bankruptcy, and are unable to pay all or part of the loan to the bank, thus affecting the bank's ability to recover capital. For L/Cs using self-funded capital with a deposit of less than 100%, many customers have feasible business plans, but due to poor business performance, when the payment deadline comes, customers do not have enough money and are forced to provide compulsory loans. In such cases, banks spend a lot of money on telephone calls, time, etc. to urge, monitor, and work with customers to make payments abroad. L/Cs opened with budget capital ensure the ability to repay debts but are very risky in terms of the ability to pay on time; because in the current situation, to withdraw capital from the budget, many procedures are often required. Meanwhile, the issuing bank only has 5 working days from the date of receipt of documents to check documents and make payment.

Export L/Cs also contain many credit risks. If the financial capacity of the issuing bank is not considered, many sets of documents that are discounted without recourse will not be paid or will be delayed due to the financial difficulties of the issuing bank. In cases of recourse discounting,


If the financial situation of the enterprise is not carefully considered, if the set of documents for some reason is not paid, the enterprise will not have enough financial capacity to pay the discounting bank and will not be able to recover the discounted capital.

Thus, the risk in L/C payment is not only the loss or damage that occurs to the commercial bank due to the inability to recover the loan capital to open L/C or discount export documents but also the related costs. Therefore, the overdue debt of customers in import-export L/C payment is an indicator to assess the risk in international payment activities of the documentary credit method.

To move towards integration, banks need to negotiate debts with foreign countries to completely resolve outstanding debts.

* The trend is for more and more commercial contracts to incorporate multiple payment methods.

It is also difficult to assess risk separately for each payment method. For example, a Vietnamese company signs an import contract worth USD 200,000.00 with a Korean company under the payment terms of T/T transfer of 25% of the contract value before receiving the goods and payment by L/C for 75% of the remaining value (L/C allows for partial shipment).

The Vietnamese importer complied with the requirements of the commercial contract by transferring USD 50,000.00 in advance and opening an import L/C for the Korean beneficiary.

After the first shipment worth US D100,000.00, the Korean exporter presented documents to Korea Exchange Bank to claim the amount of USD 100,000.00 from the Vietnam Bank for Industry and Trade.

Due to negligence, Vietnam Commercial Bank paid the entire value of the documents – USD 100,000.00 (excluding the USD 50,000.00 advanced). Vietnam Commercial Bank was not in a position to deduct the amount from the next delivery because the Korean exporter did not deliver the goods afterwards and the L/C was eventually cancelled.


Although we called Korea Exchange Bank many times to remind them to return the USD 50,000.00, they deliberately refused to do so. It took a long time for NHCT Vietnam to be able to deduct the advance payment.

Just a small mistake can cause huge consequences, causing material and reputational losses to the bank. In some exceptional cases, the incident lasted for many years, affecting the bank's business operations. A typical example is the incident that occurred between the Transaction Office of the Vietnam Joint Stock Commercial Bank and the Hanoi Handicraft Import-Export Association (Vinahandcoop). The incident can be summarized as follows: In mid-1994, the Vietnam Joint Stock Commercial Bank received an L/C worth 1.2 million USD opened by Delta Bank, Hong Kong, the beneficiary was Vinahandcoop re-exporting decorative stones imported from China to the US for the importer, Wangich Company, Hong Kong. During the contract implementation, Vinahandcoop requested the buyer to amend the L/C to facilitate the establishment of payment documents according to the L/C.

Near the delivery date, Wangich Company, Hong Kong automatically sent a direct telegram to NHCT Vietnam to amend the L/C according to the seller's request without going through Delta Bank, Hong Kong.

Upon receiving the telegram, Vietnam Bank for Industry and Trade notified Vinahandcoop with a pre-printed L/C amendment notification form as usual. However, on the left corner of the telegram, there was a note that the telegram was waiting for a password request (Test).

Upon receiving this amendment, Vinahandcoop immediately proceeded to pay a portion of the goods to the Chinese side and deliver the goods to the ship for export to Hong Kong while completing payment procedures at the Vietnam Joint Stock Commercial Bank.

When Vietnam Joint Stock Commercial Bank received the set of documents presented by Vinahandcoop and checked the suitability of the set of documents, it found that the buyer had prepared the payment claim documents based on the L/C amendment without confirmation of the authenticity from the opening bank. Therefore, Vietnam Joint Stock Commercial Bank immediately notified Vinahandcoop and refused to provide payment services for that set of documents for the above reason.

Vinahandcoop paid nearly USD 50,000.00 to China and this is the amount of money that was cheated in this deal. This dispute lasted until 2001 and finally


Along with Vinahandcoop bearing 1/5 of the damage value, NHCT Vietnam had to bear the remaining 4/5 of the value due to technical operations.

Errors in operations come in many forms. The more parties, processes and operations involved in an international payment method, especially the documentary credit method, the more errors there are.

2.2.2.2. Business risks from an ethical perspective

Ethical business risks are caused by people intentionally violating the payment process. Ethical risks occur in both banks and customers. Ethical business risks occur in any payment method. Ethical risks in documentary credit payments are much more complicated because there are many participants and furthermore, payment is based only on the surface of the documents, not depending on the actual delivery and other related transactions, so the participants in documentary credit payments often take advantage of this loophole to commit fraud to appropriate the assets of related parties, manifested as follows:

* Due to the ethics of foreign exporters:

Some foreign exporters deliberately do not deliver goods, deliver less goods, deliver goods of incorrect quality or type... but present perfect documents, fake documents to the issuing bank to request payment. Fake documents are not a new phenomenon. In Western countries since 1999, more than 1 billion USD worth of fake documents have been discovered, Hong Kong has 96.4 million USD in 4 years, Indonesia has 2 million USD in 2 years and in Vietnam, documents are no exception to this situation.

Or a famous dairy corporation in Vietnam imported butter from Latel of Norway to produce nutritious milk. The transaction was introduced through some information on the Internet. Because they were in urgent need of raw materials, the dairy corporation in Vietnam quickly agreed on an import contract with Latel. They agreed to pay by L/C, but because of the rush, this corporation did not mention the contents of the L/C in detail but quickly transferred money to Latel by L/C through a bank designated by this corporation. But then the money was sent without


The goods still haven't arrived. After careful investigation, the group discovered that Latel is just a virtual company on the internet, not real.

In recent years, along with the strong development of e-commerce, many Vietnamese businesses have been at risk due to partners intentionally defrauding them. Fake documents were sent to demand money from Vietnamese partners under online transaction contracts.

The causes of this type of risk are:

- On the Vietnamese importer's side, they did not thoroughly investigate their partners, and hastily signed a commercial contract based on the broker's introduction. The next mistake is that the L/C should only be opened after the seller opens a performance bond.

- On the broker's side, in pursuit of profit, they falsely advertise about foreign partners because in reality, the broker only knows the seller through the internet.

- On the bank side, although banks are not responsible for the legality of the documents. However, in this case, it can be affirmed that the bank did not check the documents carefully because all the documents, including the original set of documents sent by the exporting bank, were fake. But the point is that the color titles on the documents are so sketchy that if you just pay attention, they used color photocopies and still fooled the bank and the buyer.

* Due to importer ethics:

The importer's moral hazard is mainly borne by the issuing bank of the letter of credit. This risk is often manifested by asking the bank to open the L/C on a fake commercial contract, or intentionally not performing the payment obligation to the issuing bank of the L/C even though the set of documents is in order.

Some typical examples of importer moral hazard:

- Case 1 : When newly established, the Bank received an application to open an L/C requiring a low deposit (10%). In that application, the bank staff discovered that the beneficiary's signature had been cut, pasted and photocopied. In fact, this was a ghost company, the phone number and fax number on the commercial contract were not real.


- Case 2 : Regarding the dispute in the issuance of a guarantee for receipt of goods: The bank issued an irrevocable, freely negotiable L/C at sight at the order of the import-export company in Vung Tau, the beneficiary was an Indian company, and the notifying bank was Inida Bank, Bombay.

After delivery, the beneficiary presented documents to India Bank for negotiation, in which the presented bill of lading was a copy of the transport document and the beneficiary informed India Bank that the original bill of lading had been endorsed and sent directly to the importer and requested India Bank to telegraph to Vietnam Commercial Bank for payment instructions with the presented copy of the transport document instead of the original as required by the L/C. After checking the documents, India Bank telegraphed Vietnam Commercial Bank for instructions to negotiate the above invalid documents.

Vietnam Commercial Joint Stock Bank informed the Import-Export Company in Vung Tau that the beneficiary had presented documents with an invalid copy of the bill of lading presented in lieu of the original bill of lading. The Import-Export Company in Vung Tau accepted the documents and authorized Vietnam Commercial Joint Stock Bank to deduct from their escrow account to pay the beneficiary.

Vietnam Bank telegraphed to India Bank to accept payment and India Bank sent documents to Vietnam Bank for payment.

After Vietnam Commercial Joint Stock Bank received the documents with the error that the original bill of lading was not presented but a copy was presented instead. Vietnam Commercial Joint Stock Bank debited the account of the Import-Export Company in Vung Tau to pay India Bank. One day after paying the letter of credit, the Import-Export Company in Vung Tau requested Vietnam Commercial Joint Stock Bank to issue a letter of guarantee for receiving goods because the original bill of lading had not been received. Vietnam Commercial Joint Stock Bank saw that the applicant of the letter of credit had completed the payment and agreed to issue a letter of guarantee for receiving goods as requested by the Company.

One week after the L/C was paid and the import-export company in Vung Tau received the goods based on the letter of guarantee for receipt of goods from the Vietnam Bank, the Vietnam Bank received a letter of collection from China Bank with a set of collection documents from another exporter also from India (not the beneficiary of the L/C) demanding


The money from the Import-Export Company in Vung Tau included: A sight draft, a commercial invoice and a set of original bills of lading that should have been presented under the L/C. Vietnam Commercial Bank tried to contact the drawee, the Import-Export Company in Vung Tau, but in vain because the company had gone bankrupt. Vietnam Commercial Bank informed China Bank that it could not collect the money and asked for instructions on how to resolve the matter.

China Bank informed the collection company from India about the content of the notice from Vietnam Commercial Bank and waited for the customer's instructions.

The Indian company informed China Bank that the Vietnam Bank for Industry and Trade had issued a letter of guarantee for the import-export company in Vung Tau to receive the goods without the original bill of lading. The consignor was the issuer of the collection and was holding the original bill of lading, so they had the right to own the shipment and the Vietnam Bank for Industry and Trade had to pay them. If the bank did not pay, they could request the carrier to pay. China Bank informed the Vietnam Bank for Industry and Trade of the above content. The Vietnam Bank for Industry and Trade realized that they had been defrauded by the importer, the Vung Tau Import-Export Company, and had notified the China Bank with the argument that: They had paid for the above shipment under the L/C on behalf of the importer, the Vung Tau Import-Export Company, who was also the recipient of the collection under the set of documents, so they were not obliged to pay for the shipment.

In this case, the collection company complained to the carrier, the carrier claimed against the Vietnam Bank for Credit. The Vietnam Bank for Credit knew that it was being defrauded and in order to maintain its reputation, it was forced to pay the carrier and consult a lawyer to seek legal procedures to prosecute the person requesting the opening of the L/C.

Or for deferred payment L/C. Moral risks arising in the implementation of this method account for the largest proportion in deferred payment L/C guarantee business at commercial banks in general and Vietnam Joint Stock Commercial Bank for Industry and Trade in particular. Because they do not have to pay immediately to foreign countries, import-export enterprises have the mentality of taking advantage of the money from sold goods to trade other shipments or other goods to make profits without considering the payment obligation. Some enterprises even use the money from deferred payment sales to invest in real estate. The consequence is that there is no money to pay according to L/C. To maintain their reputation, the Bank must pay many debts on their behalf.


L/C money is deferred when the customer is unable to pay. In one case, the bank had to pay the debt of ELOPI company, which imported steel with a 270-day deferred payment, worth more than 1.5 million USD. This company sold all the steel and used the money to trade other products, and when the L/C was due, there was no money to pay. Or the customer also committed fraud and appropriated the bank's assets. That put the bank in a difficult situation when it had to fulfill its payment commitment to foreign countries when due.

Another example of the importer's fraudulent behavior is that in early April 2001, Bac Son Company Branch signed an economic contract to purchase 5,000 sets of motorcycle components from Tam Hoa Mechanical Manufacturing Co., Ltd., Chongqing, China, with a total contract value of 1,250,000 USD, payment method by letter of credit. To implement the above principle contract, on April 9, 2001, the parties signed an appendix to the contract. In this appendix, the seller also had the Director of the Ho Chi Minh City Electrical Appliance Company - TODIMAX branch participate in signing the contract as an authorized unit to transact with the bank to open a letter of credit and carry out payment transactions. The basic content of the contract appendix is ​​that Tam Hoa Company sells to Bac Son Company Limited branch 2,000 sets of separate motorcycle components, the contract value is 500,000 USD, the goods are delivered at Dong Dang station, Lang Son.

On the same day, Bac Son Company Branch and TODIMAX signed a business cooperation contract with the following content: The two units will cooperate in importing motorcycle components. TODIMAX is responsible for opening a letter of credit and paying the correct value of the shipment to the seller, coordinating with Bac Son Company to carry out customs procedures for the shipment, renting a warehouse, managing and coordinating with Bac Son Company Branch to transport motorcycle components from the warehouse to the assembly workshop... Bac Son Company Branch is responsible for transferring 10% of the value of the shipment to TODIMAX within 2 days after TODIMAX opens the letter of credit to carry out customs procedures for the shipment and deliver all goods and related documents to TODIMAX. Before each time receiving goods, Bac Son Company Branch must pay an amount equivalent to the amount of goods delivered by TODIMAX.

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