Organizing International Payment Activities at Agribank

2.1.3. International payment activities at Agribank

2.1.3.1. Organizing international payment activities at Agribank

Agribank's current international payment model is organized vertically. The International Relations Department and Agribank Transaction Office are the focal points for international payments for the entire system.

In international payment activities, Agribank branches are organized into 2 types:

- Type 1: Branches that directly make international payments: These are branches that have the necessary conditions in terms of personnel, market, customers, and technology to directly process international payment transactions and are permitted to conduct direct international payment activities according to Decision 388/HDQT-QHQT dated September 5, 2005 of the Board of Directors of Agribank. The branch directly receives customer records, processes, and is responsible for arising transactions.

- Type 2: Branches that make indirect international payments: These are level 2 branches that are not qualified to directly make international payments. The documents will be sent to the competent branch for implementation.

2.1.3.2. Results of international payment activities and proportion of international payment by L/C method of Agribank during 2008 - 2011

Table 2.1 . Results of international payment activities and proportion of international payment by L/C method of Agribank during 2008 - 2011

Unit; Million USD

Year

International Sales	TT sales by L/C	Ratio of L/C / Total international sales
2008	10,643	8,642	81.2%
2009	9,700	8,788	90.6%
2010	8,790	7,566	86.1%
2011	7,734	6,788	87.7%

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(Source: Business summary report from 2008 - 2011)

2.2. PRACTICE OF PAYMENT BY LETTER OF CREDIT AT AGRIBANK

In the current integration trend, any country that wants to survive and develop must strengthen cooperation with other countries in the world. International relations between countries include many areas such as economics, politics, diplomacy, culture, science and technology, tourism... in which economic relations (mainly foreign trade) occupy a dominant position, being the basis for other international relations to exist and develop. The process of conducting international activities leads to payment and settlement needs between entities in different countries, thereby forming and developing international payment activities, in which banks are intermediary bridges between the parties. Thus, international payment is the implementation of payment obligations and monetary benefits arising on the basis of economic and non-economic activities between organizations and individuals of this country and organizations and individuals of other countries, or between a country and an international organization, through the relationship between banks of the relevant countries. Thus, international trade serves two areas of activity: economic and non-economic. However, in reality, these two areas of activity often overlap, without a clear boundary.

International payment activities at Agribank include 3 main international payment methods: inbound and outbound money transfer, payment method by letter of credit (export/import) and collection method (export/import). In which, currently payment method by L/C is being widely used at Agribank in particular because of its advantages.

2.2.1. Internal regulations on payment by L/C at Agribank.

2.2.1.1 Principles in international payment activities at Agribank

Article 2, Decision No. 1998/QD-NHNo-QHQT dated December 15, 2005 of the General Director of the Vietnam Bank for Agriculture and Rural Development on promulgating regulations on international payment procedures in the banking system.

Vietnam Bank for Agriculture and Rural Development and Decision No. 858/QD-NHNo-QHQT dated June 29, 2007 of the General Director of Vietnam Bank for Agriculture and Rural Development on amending and supplementing regulation 1998/QD-NHNo-QHQT stipulating the principles of international payment activities at Agribank as follows:

All international payment operations must comply with:

- The rules, practices and international trade conditions issued by the International Chamber of Commerce (ICC) are cited and applied as the source of governing law.

- International treaties to which Vietnam is a signatory or member are still in effect.

- Regulations of the law, the Vietnamese government, the State Bank of Vietnam and the Vietnam Bank for Agriculture and Rural Development (Agribank).

2.2.1.2 Regulations for units in the system participating in providing payment services by L/C

The Transaction Office and branches are permitted to conduct international payment activities according to Decision No. 388/HDQT-QHQT dated September 5, 2005 of the Board of Directors of NHNo promulgating regulations on management and operation of foreign exchange business activities in the NHNo system and according to the written approval of the General Director of NHNo, are responsible for:

- Directly deal with customers; prepare and process international payment documents in accordance with regulations.

- Be responsible for your decisions in international payment operations

- Foreign currency balance to serve import payment needs (immediate payment, deferred payment)

- Control the content of international payment transactions and report suspicious transactions according to regulations.

2.2.1.3. Regulations on conditions for subjects using L/C payment services at the Bank for Agriculture and Rural Development of Vietnam:

Clause 3, Article 1, Decision No. 858/QD-NHNo-QHQT dated June 29, 2007 of the General Director of the Vietnam Bank for Agriculture and Rural Development on amending and supplementing regulation 1998/QD-NHNo-QHQT stipulates the conditions for customers coming to make international payment transactions for the first time at Agribank to have:

- Business registration certificate, Tax registration certificate or Tax code notification, Investment certificate (for enterprises with foreign investment capital).

- Decision to appoint legal representative, Chief Accountant (if any)

- Sample seal, name, signature of legal representative (authorized) in transactions with the bank.

2.2.1.4. Regulations on payment methods by L/C

Regulations from sections I, II, III, IV, V of Decision No. 1998/QD-NHNo-QHQT dated December 15, 2005 of the General Director of the Bank for Agriculture and Rural Development of Vietnam on promulgating regulations on international payment procedures in the system of the Bank for Agriculture and Rural Development of Vietnam and Decision No. 858/QD-NHNo-QHQT dated June 29, 2007 of the General Director of the Bank for Agriculture and Rural Development of Vietnam on amending and supplementing regulation 1998/QD-NHNo-QHQT . Accordingly, at Agribank, there are the following forms of payment by L/C:

- Import LC at sight

- Deferred payment import LC

- Backup LC

- Export LC

- Transferable LC

2.2.1.5 Contents of /LC

L/C opening date, L/C number, name of customer opening L/C, L/C value, L/C type

(classified by payment term, actual payment date, payment source, margin ratio, other notes)

2.2.1.6. Payment procedure by letter of credit

The payment process by letter of credit is specifically and clearly regulated in Decision No. 1998/QD-NHNo-QHQT dated December 15, 2005 of the General Director of the Vietnam Bank for Agriculture and Rural Development on promulgating the Regulation on international payment procedures in the system of the Vietnam Bank for Agriculture and Rural Development and Decision No. 858/QD-NHNo-QHQT dated June 29, 2007 of the General Director of the Vietnam Bank for Agriculture and Rural Development on amending and supplementing the regulation 1998/QD-NHNo-QHQT .

- Step 1: The paying party, when wishing to pay by letter of credit, prepares a letter of credit opening form and submits it to Agribank according to the form prescribed by the bank.

- Step 2: The bank serving the payer checks the validity of the letter of credit application and decides to accept or reject the letter of credit. If the letter of credit is not opened, the bank must return the documents to the customer and include a written response stating the reason for the refusal. If the letter of credit is approved, the bank processes the letter of credit application:

+ One copy of the letter of credit opening form serves as an accounting document at the bank serving the payer.

+ A copy of the letter of credit is used as a debit note to the payer.

+ Two copies of the letter of credit application sent to the beneficiary's bank.

After opening a letter of credit, the opening bank must immediately send a notice of the letter of credit to the beneficiary's serving bank to notify the beneficiary.

- Step 3: After receiving the letter of credit opening form sent by the opening bank, the beneficiary's serving bank will check the letter of credit opening procedure and notify the beneficiary.

- Step 4: After receiving the letter of credit from the payer sent by their bank, the beneficiary must check it against the contract or order. If correct, they will deliver the goods and ask the recipient to sign the invoice or delivery document. Based on the invoice or delivery document, the beneficiary will make 4 copies of the invoice and delivery document list according to the form and submit it to the bank serving them to pay for the sale.

- Step 5: The beneficiary's bank checks the documents and, if appropriate, makes payment to the beneficiary.

- Step 6: The beneficiary's bank sends the delivery invoice to the opening bank for payment.

- Step 7: The paying bank closes the letter of credit.

The above payment procedure only applies to domestic letter of credit payments, applies to the payment method of immediate payment, the set of payment documents does not include a bill of exchange. This procedure has many limitations compared to international customs and practices. With domestic payments, this procedure is complicated and slower than other payment methods, causing capital to stagnate. Therefore, those who need to use payment services will choose a more effective payment method.

2.2.1.7. Conditions for cancellation of L/C

At Clause 12, Article 1, Decision No. 858/QD-NHNo-QHQT dated June 29, 2007 of the General Director of the Vietnam Bank for Agriculture and Rural Development stipulates the conditions for canceling an L/C as follows: Only cancel an L/C and withdraw the balance when the parties participating in the L/C agree to cancel. Do not cancel an L/C when: The L/C has been issued by the Branch to guarantee receipt of goods but the original set of documents required by the L/C has not arrived and the L/C is in dispute and has not been agreed to be canceled by the parties participating in it . At Point 2, Clause 12, Article 1 stipulates the case of requesting to cancel an L/C within the validity period of the L/C:

- Beneficiary Bank requests to cancel L/C: Upon receiving the SWIFT message from the Beneficiary Bank requesting to cancel L/C, the Branch notifies the L/C issuer and requests a written response. Based on the L/C issuer's written response, the Branch issues a reply to the Beneficiary Bank. If the L/C issuer agrees to cancel L/C, the Payer shall carry out the L/C cancellation procedures as prescribed in Clause 4, Article 1, Decision 858/QD-NHNo-QHQT.

- The person who proposed to open the L/C requests to cancel the L/C: Based on the request to cancel the L/C of the person who opened the L/C and the written agreement to cancel the L/C of the buyer and seller (if any), the Payment Officer prepares a suitable telegram according to SWIFT standards, transfers it to the Head of the Department for the Branch Leader to sign and approve to send to the Bank to notify the L/C.

The content of the telegram must request the Notifying Bank to give feedback from the beneficiary. After 05 working days from the date of sending the telegram requesting cancellation, if there is no response from the Notifying Bank, an inquiry telegram must be made. Upon receiving the telegram accepting the cancellation of the L/C from the Notifying Bank, the Payer shall proceed with the procedures for canceling the L/C as prescribed in Clause 4 of this Article.

2.2.1.8. L/C expired

At Point 3, Clause 12, Article 1 of Decision No. 858/QD-NHNo-QHQT dated June 29, 2007 of the General Director of the Bank for Agriculture and Rural Development of Vietnam stipulates the expiration date of L/C: Within 10 working days from the date of expiration of L/C, the Payer shall issue a notice to the L/C issuer requesting the issuer to cancel the L/C and issue a message in accordance with SWIFT standards to the Bank stating that the L/C has expired. If we do not receive other instructions from your Bank, we will proceed to cancel the L/C after 05 working days from the date of sending this message. After 02 working days from the date of receiving the Bank's notification stating the beneficiary's acceptance to cancel the L/C or 10 working days from the date the L/C opener sends a written notice to the Branch notifying that the L/C has expired or accepts to cancel the L/C, the Payer shall carry out the procedures to cancel the L/C according to regulations.

2.2.2. Some risks in documentary credit payment method at Agribank

Risks in Agribank's documentary credit payment activities are unexpected problems that occur during the process of carrying out activities and negatively affect the business activities of Agribank in particular and commercial banks in general. In the process of carrying out payment activities by LC, risks occur when the rights of a participating party are violated. Risks are not only understood in the narrow sense that the documents are not paid, but also understood more broadly as any delay in the stages of the payment process. Risks can occur to all participating parties: for the seller, the risk occurs when the sale of goods does not collect money or is slow to collect money, market risks, risks of not receiving goods, risks of not paying...; for the buyer, the risk occurs when the seller delivers goods that do not comply with the terms of the contract (incorrect quantity, type...), risks of not delivering goods, risks during the transportation of goods...; With the relevant banks, risks occur when the buyer or seller is dishonest, does not fulfill the commitments stated in the contract, due to exchange rate fluctuations... These risks come from shortcomings or limitations of commercial banks. It is very difficult to concretize them into figures, but these are actually common risks for commercial banks in general and the Vietnam Bank for Agriculture and Rural Development in particular.

2.2.2.1. Risks for importers

Agribank's payment to the exporter is based only on the presented set of documents and not on the actual inspection of the goods. Agribank only checks the apparent validity of the documents. If the exporter intentionally commits fraud, he can present fake documents to the designated Agribank for payment. Thus, there will be no guarantee for the importer that the goods will be as per the contract in terms of quantity, type and will not be damaged.