LV Thạc sỹ_The letter of credit service in VCB

NATIONAL ECONOMICS UNIVERSITY
ADVANCED EDUCATIONAL PROGRAM
*****************************

BACHELOR’S THESIS IN FINANCE

THE LETTER OF CREDIT SERVICE, IN
VIETCOMBANK, HAI DUONG BRANCH


Table of Contents
Chapter 1: Literature Review.........................................................................................................2
Chapter 2: Research Methodology...............................................................................................9
2.1.

Qualitative method:...........................................................................................................9

2.2.

Quantitative method:.....................................................................................................10

2.3.

Observation method:......................................................................................................11

Chapter 3: Theoretical Background.........................................................................................15
3.1.

Definition:.......................................................................................................................15

3.2.

Legal background:.......................................................................................................22

3.3.

Vietcombank’s standardized procedures:.........................................................25

Chapter 4: Perfor4mance of L/C in Vietcombank – Hai Duong branch.....................30
4.1. Underwriting performance...........................................................................................30
4.2. Accounting results............................................................................................................36
4.3. Evaluation............................................................................................................................ 44
Chapter 5: Conclusion.................................................................................................................... 48

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Chapter 1: Literature Review
International trades and payment for goods sold in international sales
transactions have been observed for long, due to the problematic nature of such
transactions. The economic entities which have their business in different
countries, are therefore subject to different national legal systems. Furthermore,
the seller will often transport goods across large distances and across national
borders. Under such circumstances, the seller has a great interest in ensuring that
it will receive payment for goods sold once the goods leave its possession and
control, and the buyer has a corresponding interest to ensure that the seller has
dispatched conforming goods before making payment in terms of the sale
agreement.
When goods travel across national borders, they are moved outside the
jurisdiction in which the seller resides; thus, any attempts to regain control or
possession of the goods will be significantly more difficult for the seller. Similarly,

if the seller does not receive payment once the goods are delivered, it is all the
more difficult to pursue the buyer for payment. The seller will deliver goods to a
foreign jurisdiction where he has little influence, and possibly very little
knowledge of the applicable law. Foreign law may govern many aspects of the
transaction including procedures to obtain payment, and the seller may be
required to obtain any court order necessary to enforce such payment, through a
foreign forum, where it does not have easy access to the wheels of justice. This
may prove to be inconvenient and expensive. Similarly, if the buyer makes
payment for the goods prior to receiving delivery, and if the seller fails to make
delivery or delivers nonconforming goods, then the buyer is left facing a similar
prospect of pursuing the seller in a foreign jurisdiction.
Since Vietnam became a member of World Trade Organization (WTO), the
exchange activities between us and other countries have increased dramatically.
This kind of trading has brought domestic markets various benefits, thus is
strongly encouraged by government and many economic participants. However,
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the greater level of import and export transactions are conducted, the more
demand on capital flows must be facilitated in term of many currencies for
settling payments. Since Vietnamese Dong (VND) is quite illiquid and rarely
accepted outside of Vietnam, our international trade calls for a huge amount of
strong currencies to buy foreign goods and services. This puts a great burden on
domestic financial and monetary systems, and demands for considerable fiscal
innovative in an attempt to help Vietnamese companies initialize payments and
be on equal footing with foreign trading partners.
Regarding this topic of international payments, the government and many
financial institutes face with great dilemma of supporting the flow of strong
foreign currencies and maintaining the strength of Vietnam Dong relative to such
currencies. The harmonic environment must be achieved through resolving many

conflicts between different controversial issues, such as promoting economic
growth and controlling inflation, encouraging factors of production import and
reducing trading deficit, and facilitating international capital flows and ensure
the strength of domestic currency or exchange rate. With all such complex
objectivities, the most common and favorable tool for financing international
trades is the Letter of Credit or L/C. The fact and application have proved that
this payment channel processes many advantages and effectiveness over other
choices, to secure payment in an international trade transaction, in a way that takes
care of the interests of both the seller and the buyer.
For long period of time, Letter of Credit has been originated and viewed as
most reliable channel for import and export activities. For many developed
countries, the L/C is not only a payment tool, but also an investment security. The
issuing volumes of L/C in primary markets are extremely large, and secondary
markets which are structured to circulate it are also active with various services
associated. Data and indicators from these markets become important to present
the economy as much as CPI or stock indexes. Its role of encouraging the capital
flow at global trading scale is critical; and the L/C system is regulated by many

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international authorities and regulating systems.
In Vietnam, the L/C service has just been established for about ten years;
and the young age makes it just stay in primary market. Moreover, there is only
one type of financial institutes which are allowed to issue and accept the L/C;
which are commercial banks. The value of this letter is only meaningful to entities
which have titles on it; and secondary usage is prohibited. This makes
researchers, whenever want to explore this market sector, must go straight to the
bank and examine the current situation of L/C business in Vietnam.
During my last year of undergraduate period, the university asks students

for certain time of having an internship, to gain practical knowledge in working
environment. For which, I decide to apply for a commercial bank, the most
important entity in the financial system, which produces the majority of services
in Vietnam, and also responsible for the L/C underwriting. Among many options,
I target Bank of Foreign Trade of Vietnam (Vietcombank), one of four largest
banks, which is also specialized in import and export activities, thus has the most
developed L/C service.
After two months staying with the Vietcombank, I have chance to
understand much more about international payment methods, and observe how
L/C is actually provided in a real situation. Once gathering reasonable materials
about this topic, I decide to write a comprehensive paper about “L/C service in
Vietcomebank”, to present a general information, analyze the operating results,
and suggest some solutions or enhancements.
Regarding this L/C topic, there are many dedicating research papers which
have been conducted to explore various aspects of international payment tool. I,
as a follower, have reviewed many reference materials, in an attempt to gather
reasonable, academic information for my study. Mostly, I look up from three
sources: the Vietcombank’s information storage, the university’s library, and the
internet base. From such, there are some significant writings which I enjoy great

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knowledge derivation from; they are:
 From the Vietcombank’s information storage:
Trần Hồng Vân (2008), “UCP 600, Những thay đổi cần bi ết và ứng dụng
trong quy trình thanh toán Thư Tín Dụng”.
This paper was written by a Vietcombank headquarter staff in International
Payment Department; and served for purpose of listing significant changes of
UCP 600 in comparison with other previous version, and explaining how the

administrative procedure for Letter of Credit should be adjusted in accordance.
Since the Uniform Customs and Practice for Documentary Credits (UCP) is the
primary set of rules on the issuance and use of L/C; it utilizes by Vietcombank
and many other commercial banks as the ultimate, comprehensive standard. The
writer, from the standing point of an underwriter with much experience in L/C
service, had justified this new UCP version and demonstrated in certain cases
how its adjustments would affect the L/C process. She stressed that the new rules
in general calling for consolidation among commercial banks, thus suggested
reasonable modifications for Vietcombank in detail. However, since Vietcombank
is under much control of State Bank of Vietnam and other authorized units; her
recommendation also took into account many government’s policies during 2008
period. Most of solutions in this paper have been approved and put into practice
for the bank’s internal procedure; and from that turning point, there has not been
other significant changes.
Thus, in order to study the current L/C service of Vietcombank, I have taken
a deep review and audacious reading from this research paper.
 From the university’s library:
Đặng Vương Anh Et Al. (2010), “Lựa chọn cơ chế tỷ giá hối đoái trong bối
cảnh phục hồi kinh tế của Việt Nam, trọng tâm 2010”.

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This research explained the foreign exchange mechanism of Vietnam, given
considerable government’s control in order to direct domestic economy toward
recovery after financial crisis of 2008-2009. It started with a firm theoretical
background of exchange rate regimes, which have been experienced and
recognized through the history of multinational trading. Each regime was
demonstrated in detail regarding mechanism, development, and effects on a
nation which applies it. For any country, how the government wants to define the

domestic currency relative to others influences internal markets and diplomatic
relationships at macro level. This will stream the value of exchange rate across
payment tools, including Letter of Credit. In addition, this thesis had also drawn
out a picture of the exchange rate system in Vietnam during 2008-2010 periods
which witnessed many great fluctuations and difficulties. At that time, the US’s
financial crisis had spread out, confronted many other countries, and brought in
such destructive effects; thus, to defense Vietnam economy, the government must
intervene with various restrictions. Their total effects on exchange rate and
payment systems were illustrated and justified in sophisticated manner.
This research provides me the comprehensive insight about international
payment system in Vietnam, and helps me to fully understand corresponding
actions of Vietcombank for L/C service.
 From the internet base:
Ficom S.A. v. Socialized Cadex, Credit Research Foundation (1980),
“Understanding and using Letters of Credit”.
This reference source is a very basic and common writing, which specializes
in terminologies and general structure of Letter of Credit. Firstly, the paper
explained many standardized terms which had been internationally accepted,
such as: beneficiary, issuing and confirming bank, revocability and negotiability.
The paper was among first comprehensive studies about definitions in a Letter of
Credit; thus helped banks in various countries to have a unifying source to look

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up. Since Vietcombank has just had a short history of providing L/C service, many
unclear issues should be reviewed and check from a reliable work. Moreover, the
use of Letter of Credit as a protective tool for international trade was also
examined carefully in this research. How a L/C can reduce risk, facilitate trade
and accomplish payment purpose through substituting the credit strength of a

bank for that of economic entities was clarified in a professional manner.
Therefore, it had pointed out the mechanism of L/C and the rationale of its
popularity in US, Great British, and many other developed countries.
The paper worked as a starting point, very basic, but reliable ground for me
to explore L/C service and find out modifications for Vietnam market and more
specifically for Vietcombank.
From this three main reference sources, I have also associate some other
information pools, to derive reasonable support for my study. However, there are
many differences in presentations which have been observed from above
researches:
Firstly, I concentrate on practical doings in Vietcombank rather than
theoretical knowledge and requirements which are easily noticed and
understood by externalities. The daily work will be demonstrated in detail, and
how accepted standards put influence on my work will be presented with both
positive and negative sides.
Secondly, my time internal is from 2009 to 2011 given unique
macroeconomic circumstance and governmental direction. We all know that this
bank must act strictly in accordance with SBV’s policies; thus, the procedure
changes from time to time in order to comply with external influences. Therefore,
my results are different from previous studies, given the same subject.
Finally, my scope is not about the whole Vietcombank system in Vietnam,
but only the Hai Duong branch where I have the internship. For each operation
area, the unit must match regional demand with its foreign currency resources;
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thus my work in this branch and the final study are subject to environmental
issues which only happen in Hai Duong.
Keeping these distinctive attributes in mind, I move to the next part of my
study.

Chapter 2: Research Methodology
To derive with this final writing, I have gone through a long process which
recruited many researching methods:
 Qualitative method:
 Quantitative method:
 Observation method:

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These three research methods can be demonstrated in more detail as:

2.1.

Qualitative method:

A method of inquiry which employs academic theories and professional
disciplines, aims to gain an in-depth understanding about the studying object.
Most of time, the qualitative method produces information background and welldeveloped assertions in certain cases. It also asks for logical evaluation, rational
consideration to come up with analytical insight about the subject which will be
examined or problem which will be encountered. Specifically, the qualitative
analysis will search for theoretical background of L/C, relating international
standards for this payment channel across countries, and any Vietnamese
requirements that Vietcombank must adhere.
In my study, I start with understanding about legal and theoretical
knowledge in general; then observe the written policies of Vietcombank which
govern daily work for issuing a L/C. I must be familiar with many Vietnamese and
international standards regarding commercial trading and payment methods.
Some general agreed systems that are widely applied are:

 Uniform Commercial Code (UCC)
 Uniform Customs and Practice for Documentary Credits (UCP)
 International Commercial Law
In addition, I must follow the bank’s procedure which is subject to daily
changes. Vietcombank is among the largest commercial bank, thus its system is
carefully designed and tailored in an attempt to meet customers’ needs. It also
has great degree of freedom in packaging financial services; and to some extents,
can influence the foreign exchange policies of SBV. Therefore, its policies and
orientation for each period of time are unique, with many different attributes

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from what are provided in small banks. I must observe such policies with
judgment and care, so that can have reasonable evaluation.
These two information sources help me to know what exactly I perform to
customers, and ensure that my doings are in compliance with standardized
systems.

2.2.

Quantitative method:

This analysis technique focuses on the empirical investigation through
statistical, mathematical or computational means. It starts with collecting
numerical information, processing data to derive meaningful outcomes, and
transforming indicators into verbal explanation. The process of measurement is
central to quantitative method because it provides the fundamental connection
between empirical observation and mathematical expression of quantitative
relationships. Any relevant data in form of absolute numbers, percentage, ratios,

etc will be explored using this process.
For the L/C service of Vietcombank, I concentrate on operational results
which are contain in some common types of data, for example, sale, face amount,
fee, or number of transactions.
After complying with all written requirements and performing the L/C
service, I must review the aggregate operating results for every month. The
numbers are run by the electronic system already, and our jobs are to explain
such data, compare and match the computers records with the documental
evidences. If we can perform daily transactions with prudence and care, the two
forms of data should be matched perfectly. In addition, the electronic system also
produces some indicators for internal usages, which represent L/C performance
in various aspects. Therefore, I must comprehend all information and be able to
review and evaluate the conducted performance.

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2.3.

Observation method:

The observation process which allows me to study the target in native
environment, in order to understand it from my perspective. Observation
requires me to spend considerable time in the field with the possibility of
adopting various roles in order to gain a more comprehensive understanding.
Gaining access to the studying object and experience about practical settings are
two important factors that need consideration. Using this method, I have spent
months in Vietcombank, worked a L/C underwriter and gather practical
understanding about it; this is also the stress of my study.
As I enter the Vietcombank, I can see that there are two separate parts in

its organizational structure. The first provides many financial services as a bank’s
duties; and the second works as the back-up unit, dealing with administrative
procedures just like any other company. The International Payment Department
belongs to the first part which directly works with customers when they need to
conduct transactions in term of foreign currencies. From my opinion, the tasks
performed in this department can be categorized into two groups: the bill
payments and the money transference. Previously, both of jobs used to be
managed by on International Payment Department. However, as the number of
individual transferences increase, and the amount of each is small, about several
thousands USD or equivalent; most of this business is done by the Customer
Service Department. The International Department is specialized and
concentrates in institutional users with the face amount of each transaction can
be up to some hundreds million USD. The L/C service is also a method of
payment which is solely used by firms and corporations.
Keeping the fact that most of my customers will be companies, I must
understand all the procedures and requirements which are set up systematically,
and are mutually agrees between Vietcombank and such companies. Many
documental formats are designed for each firm; their representatives are also
known in personal by the department’s staffs. This requires me to understand the

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history and relationship between Vietcombank and each institutional customer
before I want to conduct any service for it. There are certain types of transactions
that are frequently requested by this company; and there are also some types
that are restricted.
For newly established company which comes to Vietcombank for the first
time, there is a long process must be conducted. It starts with a detail evaluation
by Credit Department, to justify the nature of the firm’s business. When its credit

worthiness is acceptable for foreign currency usage, my department will create
an account denominated in specific currency other than Vietnam Dong. Most of
time, the company will choose a major foreign currency depending on it trading
partners. This currency will be transacted with large amounts, thus our bank can
prepare with reasonable storage in advance. For other currencies, it will take
time and more costly for firm to process.
The International Payment Department and it customers are also subject
to a great governing and supervision from State Bank of Vietnam, and
Vietcombank headquarter. We must follow the macro foreign exchange policies of
SBV with fairly fluctuating inter-bank exchange rates; the headquarter also
adjusts exchange rates on daily basis and many other qualitative change for
Vietcombank system. All make the work in International Payment Department is
both standardized and flexible; and I must gather above knowledge in order to
understand and be able to analyze the L/C service.
After a week of pursuing knowledge in written requirements and about
general working mechanism, I have chance to work on real package of L/C
contact. I expect that this period with help me to fully understand about this
product line. Firstly, I find out that, Vietcombank divides L/C into two different
types; they are L/C for import and L/C for export. Each is designed with
distinguish structure and procedure. These categories are differentiated basing
on their nature of capital flow.

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The import L/C is provided for firm with import activities, which are to
buy good and service from external manufacturers, and to pay the commercial
bill in term of foreign currency. This service is provided for our institutional
customers, which have already been known and able to justify their financial
strength. Once accepting to issue the import L/C, we guarantee that our domestic

buyers can fulfill the contract obligations in term of paying money with full
amount, right currency, and on time. If they are not possible, we must pay sellers
in advance and accept to lend importers whole or partial value of bills. Thus,
import L/C is more complicate, associates with credit strength of our partners,
and also affects bank foreign currency reserves. Some transactions with large
bill’s face value, denominated in uncommon currency, and the credibility of the
buyer is not met; we must refuse to issue the L/C.
The export L/C, in contrast, is served for export activities. Thus, the
customers that our bank represents are sellers, and we just have to wait for
money being delivered to their account. For this type of L/C, the monetary
resources can not be harmed, and we also do not have to perform any financial
service; this is only about the administrative works. We will receive the import
L/C from the bank of foreign buyers, and have duty to justify its rightness. We
also need to understand to content of relating documents, such as commercial
contact, bill of trading, bill of lading, for management purpose. When the
payment is in due, we contact the importers’ banks, remind them about their
duty, and make sure that the money arrives on time. If the payment is not
satisfied, and our customers need immediate cash, we will transfer this export
L/C to Credit Department so that they can evaluate and underwrite suitable
lending for our domestic sellers.
From both of the import and export L/C, we receive unwaivable in advance,
compensate for administrative costs; if any lending or borrowing is derived, there
will be interest cost on such.

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I only have chance to confront these knowledge in Vietcombank office, but
not in any international trading book that I have learned so far. For only one
object as L/C, the points of view are different from a real providing bank to a

theoretical writer. Thus, to have a complete perspective about the L/C product
line, I must associate theoretical background with the working practical in
Vietcombank,.
Using these three researching methods, I can develop a concrete procedure
which smoothly goes through many stages and helps me to come up with final
report. They have proved their effectiveness and suitability with my targeting
topic. The whole described process makes me complete with a formal writing and
represent it to concerning readers in the following section.

Chapter 3: Theoretical Background
3.1.

Definition:

3.1.1.

Letter of Credit:

(L/C) is a document that a financial institution or similar party issues to a
seller of goods or services which provides that the issuer will pay the seller for
goods or services the seller delivers to a third-party buyer, The issuer then seeks
reimbursement from the buyer or from the buyer's bank. The document serves
essentially as a guarantee to the seller that it will be paid by the issuer of the
letter of credit regardless of whether the buyer ultimately fails to pay. In this way,
the risk that the buyer will fail to pay is transferred from the seller to the letter of
credit's issuer.

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Letters of credit are used primarily in international trade for large
transactions between a supplier in one country and a customer in another. In
such cases, the International Chamber of Commerce Uniform Customs and
Practice for Documentary Credits applies (UCP 600). They are also used in the
land development process to ensure that approved public facilities (streets,
sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit
are the supplier, usually called the beneficiary, 'the issuing bank,' of whom the
buyer is a client, and sometimes an advising bank, of whom the beneficiary is a
client. Almost all letters of credit are irrevocable, i.e., cannot be amended or
canceled without the consent of the beneficiary, issuing bank, and confirming
bank, if any. In executing a transaction, letters of credit incorporate functions
common to giros and Traveler's cheques.
3.1.2.

The Mechanics of Letters of Credit.

The system of documentary credits that is in use in current international
trade has largely alleviated these problems relating to payment. The parties
establish a letter of credit, which enables the seller to obtain payment from a
bank within his jurisdiction. The buyer establishes the letter of credit in such a
manner, that payment is promised on presentation of certain documents, the
contents of which confirm that the goods being delivered to the buyer are goods
that conform to the terms and conditions of the underlying sales agreement. The
seller need only comply with the documentary conditions as specified in the
credit, and is thereafter assured of payment.
The commercial practice of documentary credits entails that the buyer
makes an application to a bank to issue an undertaking to make payment to the
seller, once the bank receives certain documentation on behalf of the buyer from
the seller, indicating that the seller has dispatched conforming goods. This
undertaking, if issued, is known as a letter of credit or a documentary credit. The

buyer, as applicant, will inform the bank of the documentary requirements that
he wishes to have inserted into the letter of credit. These requirements are
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essentially designed to ensure that the seller submits documentation that records
his compliance with its obligations in terms of the underlying sales agreement.
The buyer will normally request the seller to submit clean shipping
documents proving that the goods have been delivered to a carrier for carriage,
and the sellers commercial invoice listing the goods, the quantities, and the price
of the goods. The buyer may also request the seller to submit insurance
documentation, certificates to prove quantity or quality, packing lists, and any
other documentation required to show that the seller has complied with the
terms of the underlying sales agreement. The seller will then submit all the
stipulated documents to the issuing bank or to the bank nominated to receive
documents and to make payment. If the submitted documents comply strictly
with the terms of the credit, then the paying bank is obliged to make payment in
terms of the credit, to the seller.

Figure 3.1: the mechanism of Letter of Credit
The whole process, thus, surrounds two economic parties operating in
different countries, which wish to exchange physical goods or products. When
they agree on commercial trading, they sign a contract and other commercial

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documents. However, the value of contract is usually large, and thus, the money
payment cannot be settled immediately. The buyer, in order to pay the bill, must
apply for credit service from a bank. This bank will issue the Letter of Credit to

defer and guarantee future payment. It also works with parallel entity-the seller’s
bank to facilitate and promote payment afterward. The process can be depicted in
the above figure.
3.1.3.

The Principle of Strict Compliance, and the Independence

Principle.
It is trite that every letter of credit involves at least three separate and
independent transactions, between three different parties. Two distinct doctrines
uphold the sanctity of the letter of credit, secure the payment transaction, and
thus promote the efficiency of international trade. The doctrine of strict
compliance is not the focus of this dissertation, but it is a vital component of the
structure of credits. It gives rise to the doctrine of independence and therefore to
the fraud exception, which in essence allows a piercing of the doctrine of
independence. It therefore merits brief discussion for the purposes of a wider
discussion of the fraud exception.
 Strict Compliance:
The doctrine of strict compliance protects the interests of the buyer and of
the paying bank. When submitting the required documents, the law expects the
seller to comply strictly with the requirements stated in the letter of credit. This
assures the buyer that the bank will not pay the seller, unless the seller presents
documents that satisfy the requirements of the buyer. The bank is protected in
that it is not required to make any judgement calls as to the relevance of the
requirements contained in the letter of credit. The bank is not called upon to
make any decisions as to substantial compliance by the seller.
The banker is not concerned whether the documents for which the buyer
has stipulated serve any useful commercial purpose or as to why the customer
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called for the tender of a document of a particular description. Both the issuing
banker and his correspondent bank has to make quick decisions as to whether a
document which has been tendered by the seller complies with the requirements
of a credit.
In terms of the doctrine, the beneficiary's performance has to comply
precisely with the terms and conditions as contained in the letter of credit. The
bank is not required to make any judgment as to the adequacy of the
performance of the beneficiary, nor as to the importance of any particular term of
the letter of credit. If performance were not made in strict accordance with the
letter of credit, the bank would then be contractually obliged to the applicant, to
refuse payment on the credit.
American law also upholds and applies the doctrine of strict compliance,
and need not be specifically referred to, due to the fact the approach of the
American courts is identical to that of the English Courts as referred to above.
 Independence.
The corollary to this doctrine is that the seller will always receive payment
from the bank if he submits documents that strictly comply with the credit,
regardless of any developments in the underlying sales agreement, or in the
relationship between the seller and the buyer. The seller will be paid regardless
of any disputes that may arise in respect of the underlying sale.
The independence principle safeguards the position of the seller, and
thereby promotes the efficiency of international trade. It holds that the
relationship between the seller and the issuing bank in respect of the letter of
credit is completely independent from any ancillary agreements between the
seller, the buyer, and the issuing bank.
In reality, there are at least three separate agreements in such transactions.
These are the contract of sale between the seller and the buyer and the contract

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between the buyer and the issuing bank pertaining to the issue of the letter of
credit to the seller. There is also the contract between the issuing bank and the
seller regarding the issuing bank's undertaking to make payment of a certain sum
of money to the seller, as soon as the seller has complied with certain
documentary conditions. It is this latter agreement that is independent of the
other two. International commercial law strongly recognises and confirms the
independence of the agreement between the issuing bank and the beneficiary as
evidenced in the letter of credit, from all the other underlying and ancillary
agreements.
The principle underlying documentary credits is that the person taking
bills on the faith of it is to have the absolute benefit of the undertakings in the
letter, and to have it in order to obtain the acceptance of his bills, without
reference to any collateral or cross claims. The whole rationale of the letter of
credit in international trade is that it is used to provide the beneficiary with a
secure and swiftly-operating instrument to provide payment, to the exclusion of
any disputes that may arise with respect to the underlying contract of sale.
Essentially, the buyer must first pay the seller, and can thereafter refer any
disputes in relation to the underlying agreement for litigation.
It is well recognised that the system of documentary credits which has
been established over centuries, provides security for both buyer and seller. It
forms the basis upon which banking institutions extend credit facilities to the
various parties in such transactions. Ignoring these principles would seriously
jeopardize and undermine the confidence of international traders, because the
security of the payment obligations of the bank would be eroded.
3.1.4.

Types of L/C:

There are some common types of L/C which will be mentioned in this
paper, they are:

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 Irrevocable or revocable L/C: An irrevocable LC cannot be changed
unless both buyer and seller agree. With a revocable LC, changes can
be made without the consent of the beneficiary.
 Sight and time L/C: A sight L/C 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
L/C will specify when payment will be made at a future date and
upon presentation of the required documents.
 Standby L/C: If the beneficiary does not get paid from its customer it
can then demand payment from the Bank by forwarding the copy of
the invoice that was not paid and supporting documentation.
 Negotiation means the giving of value for draft(s) and/or
document(s) by the bank authorized to negotiate, viz the nominated
bank. Mere examination of the documents and forwarding the same
to the letter of credit issuing bank for reimbursement, without
giving of value / agreed to give, does not constitute a negotiation
3.1.5.

Other relating terms:
 SWIFT address: from Bank Identifier Code (BIC) is a universal bank
identifier that is unique to each institution. The BIC for SWIFT
member banks is their SWIFT address. For instance Citibank NA,
New York’s SWIFT/BIC is CITIUS33. Digits from 1 to 4 represent the
bank; the two digits following (positions 5-6) represent the country

or residential nation. Positions 7-8 represent a location (city or
region) in that country.

Banks that are not SWIFT members are assigned unique identifiers that
contain a 1 in the eighth position of their SWIFT/BIC address. For example, the
BIC for any international bank in Paris, France- a non-SWIFT member would be

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ANYBFRP1. BIC should be used whenever possible in funds transfer messages to
facilitate automated processing.


TELEX: An electronic method of transferring funds. Telegraphic
Transfers are used primarily for overseas wire transactions. These
transfers are used most commonly in reference to CHAPS, Clearing
House Automated Payment System, transfers in the U.K. banking
system. Telegraphic Transfers are also known as Telex Transfers,
abbreviated TT. TTs can also refer to other types of transfers.
Telegraphic Transfers are usually fairly expensive, due to the fast
nature of the transaction.



Nostro-vostro account: A Notro account is held in a foreign
country by a domestic bank, denominated in the currency of that
country. Nostro accounts are used to facilitate settlement of foreign
exchange and trade transactions. The term is derived from the Latin
word for "ours." Conversely, accounts that are held by the domestic

bank in its home country for foreign banks are called Vostro
accounts, derived from the Latin word for "yours."

3.2.

Legal background:

As I have mentioned previously, my study focus on Vietcombank’s L/C
business; thus in this section, I only explain some legitimate requirements which
have great influence on my department and must be regularly reviewed by our
staff. Aside from following legal articles, there are many other international
standard which we must comply with; yet, they are very common and can be
easily read from other writings. For instance, Uniform Commercial Code 600,
Uniform Customs and Practice for Documentary Credits (UCP). Therefore, I
assume that concerning readers have already had knowledge about them, and go
straight to other details.

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3.2.1.

Vietnamese legal documents for L/C:

To begin with, I must say that the law and regulation for commercial and
international trading in Vietnam are complicated with many details and articles.
The L/C service is a branch of such ground, which is subject to the governing
from SBV, Ministry of International Trade. Some important legal documents that
have been drafted and applied, only for L/C business are:
Circular No.07/1997 by SBV: in conjunction with Decision 802/TTgSeptember 24, 1997, to instruct bank handle the issued, yet, unpaid L/C. This

document specifies the due obligation of company which has import L/C and
guarantee from bank.
Decision No.711/2001 by SBV: to set a standardized mechanism of issuing
time Letter of Credit. In it, the company which is allowed, and the requirements
for it which must be met are addressed in a comprehensive manner. Some followup decisions and settlement methods are also demonstrated in details, in order to
ensure that payment will be received by foreign trading entities.
CV No.4941/NHNN-QLNH by SBV: to regulate the foregin exchange
between commercial bank and domestic company. SBV demands that bank is not
allowed, in all circumstances or purposes, to buy or sell the US Dollar in exchange
for Vietnam Dong with the exchange rate that is higher than the SBV’s ceiling rate.
Decision No.1233/2001 by SBV: to direct commercial bank how to charge
time L/C fees.
3.2.2.

Vietcombank’s guidelines for L/C:

Aside from general regulation, Vietcombank has also developed its internal
system with many policies and mechanisms, which are distributed among
branches and offices. Such policies can be divided into some main topics which
are:
 L/C mechanism:
“Guidance for international payment using L/C”: the most comprehensive
document which instruct International Payment Department to perform L/C
service.

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Decision No. 228/QĐ-NHNT.HĐQT on December 02, 2006: to address
certain types of L/C customers, their level of credit line, and the greatest amount

that they can borrow from bank to settle commercial activity. This document ask
for cooperation between both International Payment and Credit Departments.
More information about level of credit line can also be found in Decision
No.39/QĐ-NHNT.CSTD on March 08, 2007.
CV No.795/CV-NHNT.CSTD on July 26, 2007: to explain in more detial the
Decision No.711/2001/QĐ-NHNN on May 25, 2001 by SBV. In which, some
acceptable methods of guarantee for time L/C are instructed. Vietcombank also
verifies duties and obligations of relative parties in L/C and guarantee contracts,
as civil contract drafted in Civil Law and Degree No.163/2006/NĐ-CP. For more
information about guarantee service, there is also Decision No. 285/QĐNHNT.HĐQT on August 15, 2008.
The absolute level of credit line and the relative level in relation with
Vietcombank’s foreign reserve are set for each kind of company and the L/C
contract. Details are found in Decision No.36/QĐ-NHNT.CSTD on January 28,
2008 for Small and Medium Enterprises; and in Decision No.246/QĐ-NHNT.CSTD
on July 22, 2008: for all institutional customers having commercial finance from
Vietcombank.
 Foreign exchange rate:
In order to buy or sell foreign currencies between Vietcombank and the
institutional customers, we must comply with some documents:
CV No.1286/NHNT-QLKDV: to list certain types of goods and services are
favored to import, thus have priority over other types. For such products, the
import company is allowed to by foreign currencies with many beneficial favors;
and the mechanism for it is explained in CV No.1196/NHNT-QLKDV.
CV No.1093/NHNT-QLKDV: to limit the L/C service only for companies
with self foreign currency resources, and prohibit all Vietcombank’s branches
and offices to lend or sell foreign currencies for institutetional customers. this
document also restraint the import L/C underwriting for commodity products,
despite the financial strength of the domestic importers.

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In CV No.1047/NHNT-QLKDV: Vietcombank depicts the mechanism which
is used to sell foreign currencies for importing certain types of goods; also
demonstrates a serious reporting procedure for all of L/C contracts which
importers need to buy foreign currencies from Vietcombank. The list of these
favored importing products is in CV No.993/NHNT-QLKDV; CV No.4941/NHNNQLNH, and CV No. 690/NHNT-KDNT. Some common products are: energy, oil,
fuel, gas, medicine, agricultural machine.
CV No.590/NHNT-KDNT: depict the internal foreign currency flows within
a branch and among branches and offices. The document allows Vietcombank’s
subsidiaries to buy and sell foreign currencies with each other, given a internal
exchange rate. Thus, each office can convert Vietnam Dong into US Dollar to meet
the demand of its responsible customers. This helps Vietcombank;s branches
which cannot balance their foreign reserve with regional demand for L/C credit
line can contact nearby office to replenish this reserve.

3.3.

Vietcombank’s standardized procedures:

From all above laws and regulations, Vietcombank has designed a
complete procedure to provide L/C service for customers.
3.3.1.

For Import L/C:

Vietcombank only accepts to issue the L/C when our customers must meet
all of following criteria first:
a. Are the formal customers with active Customer Identification Factors
(CIF) in Vietcombank:

b. (1) Deposit the full amount of the bill face value associated with the L/C;
or (2) deposit partial amount and have the unused credit line with total
amount equal the bill face value associated with the L/C; or (3) deposit
partial amount and be accepted and granted a loan by Credit Department
the remaining amount.

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