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Solution to limit risks in payment for imported goods by documentary credit method at transaction office 1 Eximbank - 1



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HO CHI MINH CITY UNIVERSITY OF TECHNOLOGY


Solution to limit risks in payment for imported goods by documentary credit method at transaction office 1 Eximbank - 1

GRADUATION THESIS


SOLUTIONS TO LIMIT RISKS IN IMPORT PAYMENT

BY DOCUMENTARY CREDIT METHOD AT EXIMBANK TRANSACTION 1


Major: BUSINESS ADMINISTRATION

Major: FOREIGN TRADE MANAGEMENT


Instructor: MSc. TRAN THI TRANG Student: LE PHI HAI

Student ID: 107401051 Class: 07DQN


Ho Chi Minh City, 2011


INTRODUCTION

In today's era, the trend of internationalization and globalization of the world economy is taking place more and more strongly, causing countries in the region and around the world to constantly interact with each other. This has helped countries have favorable conditions to develop and expand relations in foreign economic activities and international trade. In that trend, Vietnam has opened its economy, promoted the integration process with economies in the region as well as in the world and strengthened international cooperation through international trade activities to serve the process of economic development and national construction. This is clearly demonstrated by Vietnam's accession to the World Trade Organization (WTO) and recently becoming a non-permanent member of the United Nations Security Council. Thanks to that, trade and commerce activities between Vietnam and countries around the world are taking place smoothly. In this integration process, import-export activities (foreign trade) play a particularly important role.

In recent years, Vietnam's foreign trade activities have undergone many dramatic changes, increasingly improved and developed to meet the increasing demand for international cooperation. Among the factors affecting the development of foreign trade activities, international payment plays a very important role. International payment activities are an indispensable link in international trade activities, supporting and promoting the import-export business activities of developing enterprises and are a bridge in economic and trade relations between Vietnam and other countries in the world. The faster and stronger the process of international economic integration takes place, the more the demand for international payment of the economy increases. And the task for banks participating in the above activities is to ensure the effectiveness and safety of international payment activities. Only then can banks enhance their position and reputation in the domestic and international markets.

There are many different international payment methods, each with its own advantages. At present, the TDCT method is the most commonly used payment method due to its outstanding advantages compared to other payment methods. However, in reality, TDCT still has many potential risks, causing financial and reputational damage not only to enterprises participating in import and export but also to banks. Therefore, preventing and limiting risks in the TDCT payment method is a necessary task for commercial banks in general and the Department of Foreign Trade in particular.


Transaction 1 Eximbank in particular needs attention. Based on this reality, I have chosen the topic: "Solutions to limit risks in payment of imported goods by documentary credit method at Transaction 1 Eximbank" to research, analyze related issues and from there propose some solutions to limit risks when using this method in payment of imported goods at the bank.

Research objectives:

The thesis will study the TDCT payment method in the payment of imported goods at SGD 1 EIB, and at the same time study the current situation of risks when paying by this method. From there, propose solutions and recommendations to contribute to limiting and preventing risks in order to further improve the efficiency of payment of imported goods by TDCT method at SGD 1 EIB.

Object and scope of research:

The thesis studies the payment activities of credit institutions for imported goods at SGD 1 EIB. Focuses on analyzing and evaluating the current status of credit institutions payment activities in payment of imported goods of SGD 1 EIB from 2007-2010 through data collected at the Bank and analyzing the risks arising in this method. Thereby, proposing solutions to limit and prevent risks in payment activities of imported goods using credit institutions payment method at SGD 1 EIB.

Research method:

The methods used in the thesis are: theoretical basis, investigation, description, practical analysis, statistics, synthesis, comparison based on data from SGD 1 EIB.

Structure of the topic: The content of the topic includes three chapters: Chapter 1: Theoretical basis of International Payment

Chapter 2: Current status of payment for imported goods by documentary credit method at Eximbank Transaction Office 1

Chapter 3: Solutions and recommendations to limit risks in payment for imported goods by documentary credit method at Eximbank Transaction Office 1

Due to limitations in knowledge and practical experience, this thesis will inevitably have shortcomings. Therefore, I look forward to receiving sincere comments, suggestions and suggestions from teachers and seniors at SGD 1 EIB to improve the article.


CHAPTER 1

THEORETICAL BASIS OF INTERNATIONAL PAYMENT


1.1. OVERVIEW OF INTERNATIONAL PAYMENT

1.1.1. Concept of International Payment

“International trade is the process of implementing foreign revenues and expenditures of a country towards other countries, to complete economic, trade, scientific and technical cooperation, diplomatic and social relations between countries” Source : [1, p. 14]

International trade can be divided into two types:

International trade: These are international trade activities used to serve the circulation of goods and services between countries. It includes foreign trade activities such as payment for import and export of goods, transportation services, post and telecommunications, finance and banking, etc.

Non-commercial international trade: These are international trade activities that are not related to the transportation of goods or provision of services between countries, but rather contribute to the implementation of non-commercial relations between countries, including diplomatic relations, social relations, scientific and technical cooperation, aid, etc.

1.1.2. The role of International Payment

International trade activities play a very important role in the economic development of each country, especially in the trend of the world economy being increasingly internationalized, countries are constantly striving to develop market economies, open doors, cooperation, and integration as today. In the current context, when each country puts foreign economic activities first, the role and importance of international trade activities are increasingly affirmed. The importance of international trade activities is mainly demonstrated through the following roles:

- Promote import and export activities of goods and services and promote direct and indirect foreign investment.

- Increase the volume of non-cash payments in the economy, enhance the attraction of remittances and other international financial and credit resources.

- Promote and expand service activities such as tourism and international cooperation.

- Promote the national financial market to integrate internationally, expand production activities to the world market.


- Help banks increase income, develop related operations, enhance position and reputation not only domestically but also in the international market.

With such a role, it can be said that without international payment activities, foreign economic activities would hardly exist and develop. The faster, safer and more accurate the international payment activities take place, the smoother and more effective the circulation of goods and money between parties will be, and at the same time, it will promote the stronger development of foreign trade activities.


1.2. IMPORTANT INTERNATIONAL PAYMENT METHODS

1.2.1. Remittance

Concept of money transfer method

“A money transfer is a payment method in which a bank customer (called the remitter) requests the bank to transfer a certain amount of money to a beneficiary at a certain location” Source: [2, p. 282]

Forms of money transfer

Mail Transfer (M/T): The bank transfers money by sending a letter ordering the correspondent bank abroad to pay the recipient. This form of money transfer is slow, but the transfer fee is low.

Telegraphic Transfer (T/T): The bank transfers money by telegraphically ordering the correspondent bank abroad to pay the recipient. Nowadays, when joining the SWIFT network, most money transfers are performed on the SWIFT network.

Telegraphic Transfer Reimbursement (TTR): This is also a form of telegraphic transfer, but if the beneficiary does not comply with the terms of the contract, when there is a discrepancy between the documents and the goods, the paying bank must refund the remitting bank the amount to the beneficiary upon receiving the request of the remitting bank. This type of transfer is beneficial to the importer and binds the responsibility of the exporter relatively tightly.

In the money transfer method, the bank only acts as an intermediary and receives a fee. Whether the money transfer is carried out or not depends largely on the goodwill of the importer, so this method is usually only applied in cases where the buying and selling parties have reputation and trust in each other.


1.2.2. Collections

Concept of collection method

“Collection is a payment method in which the exporter, after completing the obligation to deliver goods or provide services, authorizes the bank to collect money from the importer based on the Bill of Exchange and documents prepared by the exporter.”

Source: [2, pp. 287-288]

Types of collections

Clean Collection:

“It is a collection method in which the exporter authorizes the bank to collect money from the importer based on the draft draft he/she creates, while the goods documents are sent directly to the importer, not to the bank.” Source: [2, p. 288]

This method is rarely used in international payment because it does not guarantee the rights of the exporter. In this method, the bank only plays a simple intermediary role, is a service provider and is not responsible for the payment of the importer. Therefore, this method is often only used when the exporter and importer trust each other, used to pay simple transactions, small amounts such as transportation fees, insurance, commissions, fines, compensation, etc.

Documentary – Collection:

“It is a collection method in which the exporter, after completing the obligation to deliver goods or provide services, authorizes the bank to collect money from the importer based not only on the Bill of Exchange but also on the accompanying goods receipt, with the condition that if the importer pays or accepts to pay, the bank will hand over the receipt to the importer to receive the goods.” Source: [2, p. 291]

In this method, the bank not only acts as an intermediary but also directly holds the BCT. The bank only delivers the BCT when the importer pays or accepts payment, thereby ensuring the interests of the exporter.

Collection with documents includes 2 forms:

+ Collection with documents in D/P form (Documents against Payment): The importing organization must pay immediately, the bank will deliver the original BCT for the importing organization to receive the goods.

+ Collection with documents in the form of D/A (Documents against Acceptance): The Importing Organization only needs to sign the acceptance on the Bill of Exchange, the Bank will deliver the BCT to the Importing Organization to receive the goods.


1.2.3. Documentary Credit Method

1.2.3.1. Concept of Documentary Credit method

“LC is a payment method in which a bank, at the request of a customer, commits to pay a certain amount to the beneficiary or accept a Bill of Exchange drawn by this person within that amount if this person presents a payment certificate in accordance with the provisions stated in the L/C” Source: [2, p. 301]

1.2.3.2. Participants in the Documentary Credit method

Applicant: Is the person to whom the L/C is issued. Usually the buyer or importer of goods.

Beneficiary: The person who receives the payment amount or owns the Bill of Exchange that is committed to be paid. Usually the seller, the exporter or any other person designated by the exporter.

Issuing Bank: Is the bank representing the importer, located in the importer's country and is usually specified in the contract. If there is no prior regulation, the importer has the right to choose. The bank is responsible for issuing the L/C at the request of the importer and making payment to the exporter.

Advising Bank: Is the bank serving the exporter, responsible for notifying the exporter that the L/C has been opened. This bank is usually a branch or agent of the L/C issuing bank.

In addition, there may be other banks participating in this payment method, such as: Confirming Bank, Paying Bank, Negotiating Bank, Transferring Bank, Nominated Bank, Reimbursing Bank, Accepting Bank, Remitting Bank. All are assigned specific responsibilities in the L/C.

1.2.3.3. Letter of Credit (L/C)

Concept of Letter of Credit

“A Letter of Credit (L/C) is a conditional payment commitment document, issued by a bank to the exporter (beneficiary in general) to commit to pay, or accept to pay, the exporter, if the exporter complies with the conditions stated in the L/C and is evidenced by a valid and legal BCT and presented on time” Source: [1, pp. 145-146]


How Letter of Credit Works

Independence: L/C is formed on the basis of a commercial contract, that is, based on the content and requirements of the contract, the importer must request the bank to open an L/C. But after being opened, the L/C is completely independent of that commercial contract. L/C is the main legal basis for payment, it binds the responsibilities of the parties involved in the payment method of credit such as: the importer (the person opening the L/C), the exporter (the beneficiary of the L/C), the bank issuing the L/C, the bank notifying the L/C and other banks. The commercial contract only has legal value binding the rights and obligations between the two parties signing the contract: the importer and the exporter.

Strict compliance: L/C is a guarantee for payment to the exporter (beneficiary) by the bank if the delivery documents are completely consistent with the L/C and in accordance with the instructions of the importer. Therefore, the issuing bank must carefully check the beneficiary's BCT to decide whether to pay or refuse to pay. If the bank makes an incorrect payment, it will be fully responsible.

Main contents of Letter of Credit

L/C number, location and date of opening:

- L/C number: Each L/C has a separate number with the function of facilitating the implementation of the L/C in the easiest way such as exchanging information between related parties, recording in related documents in the L/C payment statement.

- L/C opening location: Is the place where the bank opening the L/C commits to pay the beneficiary and is related to the choice of law source to resolve disputes, conflicts or disagreements if they occur.

- L/C opening date: The date when the L/C opening bank officially accepts the importer's L/C opening application, the date when the L/C opening bank's commitment to the beneficiary begins to arise and take effect, and the date when the L/C validity period begins to be calculated. It is also the basis for the exporter to check whether the importer has opened the L/C within the time limit in the contract or not.

Type of L/C: It is necessary to determine the type of L/C because each type of L/C has different nature, content, rights and obligations of the related parties.

Name, address, information of related parties: L/C applicant, L/C beneficiary, L/C opening bank, notifying bank and some related banks such as confirming bank, paying bank, document transferring bank...

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