INTRODUCTION

Today, with the trend of industrialization and modernization of the country, the economies of

countries in the world in general and Vietnam in particular are still in the process of

transitioning to a global economy, especially when countries become full members of the

international trade organization. The field of international transactions and international

payments becomes more and more important and necessary. Therefore, businesses need to

learn carefully about payment methods to help companies avoid risks and facilitate them to

gain benefits. One of the payment methods that businesses pay attention and use the most is

documentary credit.

In Vietnam, the use of L/C in international trade is also prevalent, and it is considered a

reliable and secure payment method. Therefore, our team will choose to present the

documentary credit payment method. This essay aims to present the practical usage situation

of documentary credit in Vietnam, its benefits and shortcomings for stakeholders, and

solutions to make full use of it.

CHAPTER 1: OVERVIEW OF DOCUMENTARY CREDIT.

1.1 Definition:

Documentary credit is an agreement in which a bank - the issuing bank of the letter of credit,

at the request of the customer - the person requesting the opening of the letter of credit will

pay a certain amount. to another person- the beneficiary of the amount of the letter of credit

or acceptance of a draft drawn by this person to the extent that such person presents to the

bank a set of payment documents in accordance with the terms and conditions. case of letter

of credit.

L/C also known as a documentary credit or bankers commercial credit, or letter of

undertaking (LoU), is a payment mechanism used in international trade to provide an

economic guarantee from a creditworthy bank to an exporter of goods. Documentary credits

are used extensively in the financing of international trade, when the reliability of contracting

parties cannot be readily and easily determined. Its economic effect is to introduce a bank as

an underwriter that assumes the counterparty risk of the buyer paying the seller for goods.

1.2 Function

A documentary credit is an important payment method in international trade. It is a primary

method in international trade to mitigate the risk a seller of goods takes when providing those

goods to a buyer. It does this by ensuring that the seller is paid for presenting the documents

which are specified in the contract for sale between the buyer and the seller.

1.3 Parties

Figure 1.3: Stakeholders in documentary credit

The parties to a letter of credit are usually a beneficiary who is to receive the money, the

issuing bank of whom the applicant is a client, and the advising bank of whom the

beneficiary is a client. The buyer is the Applicant and the Seller is the Beneficiary. The Bank

that issues the LC is referred to as the Issuing Bank which is generally in the country of the

Buyer. The Bank that Advises the LC to the Seller is called the Advising Bank which is

generally in the country of the Seller. Almost all letters of credit which are irrevocable can

not be amended or canceled without prior agreement of the beneficiary, the issuing bank and

the confirming bank.

 1.4 Process of Documentary Credit

Figure 2: The Documentary Credit Cycle

CHAPTER 2: PRACTICAL USAGE SITUATION OF DOCUMENTARY CREDIT IN

VIETNAM AND BENEFITS AS WELL AS SHORTCOMINGS OF DOCUMENTARY

CREDIT FOR STAKEHOLDERS

2.1 Practical Usage Situation of Documentary Credit in Vietnam

According to the report of the State Bank of Vietnam, the use of L/C in Vietnam has been

increasing in recent years. In 2018, there were over 99,000 transactions using L/C, double the

number in 2012. The trend continued until 2019, when the proportion of L/C in Vietnam's

total export value ranged from 30-35%. However, due to the impact of the COVID-19

pandemic, the number of transactions decreased to about 75,000 in 2020. Despite this, L/C is

still considered a popular and reliable payment method in Vietnam's international trade.

In Vietnam's import and export enterprises, the form of documentary credit (L/C) payment

accounts for over 60%, even according to statistics at some banks, this method accounts for

80-90% of international payment methods, showing that this method is chosen by businesses

in international payment because of its advantages. However, in Vietnamese enterprises,

about 70% of documents presented under L/C are rejected by banks due to errors.
Vietnamese import-export enterprises are still weak in the process of making documents.

Seemingly very small errors, as simple as spelling, name, address, quantity to bigger errors

such as missing documents, conflicting with each other, wrong bill of exchange all make it

difficult for businesses to pay.

Recently, import-export businesses have encountered a lot of frauds in international

payments, the situation is increasingly complicated. The seller committed commercial fraud

and made a set of documents in accordance with the L/C, but it was a forged set of

documents. The seller does not deliver or delivers fake goods but with fraudulent purposes

still make fake documents to claim money issued by the bank. If the fraud is not detected or

there is no clear evidence, the bank still has to pay and is not responsible.

Vietnamese enterprises are still careless in international payments. The weakness of

Vietnamese enterprises is that they do not fully understand the contracts and accompanying

terms. In many cases, the buyer writes in the L/C some other content than the sales contract.

The main reason is still due to the limited negotiating capacity of some businesses, poor

English proficiency, misunderstanding or not fully understanding the terms of the model

contract, disputes arise when the buyer discovers that the contract signing stage is not tight,

there are many loopholes. This is the result of substandard human resources.

2.2. Reality about International Payment Documentary Credit in BIDV

International payment activities at BIDV in recent years have grown quite well, both in terms

of number of items and value, in which, L/C method, although there are not too many items,

accounts for quite high value. increasingly popular and important in international payment

activities at banks. The reason is that compared to other methods, the L/C method is less risky

and fairer when it ensures the interests of both parties, because in this method the bank does

not merely act as an intermediary for payment but have more initiative in payment.
Table 2.2. International Payment methods (paid) at BIDV in the period 2012 - 6/2022

2012 2014 6/2014 6/2022

Payment

Methods Contract Values Contracts Values Contract Values Contract Values

Remittance 948 45,536.9 Processed at the Payment Center

Collection 174 28,515.4 210 40,255.3 126 18,341.3 185 26,820.2

L/C 325 62,140.7 624 115,137.6 294 46,306.7 395 62,541.9

Unit: thousand USD

From: BIDV’s planning and synthesis department

Therefore, in order to ensure safety in transactions, especially in the payment stage,

businesses tend to prioritize choosing which method can minimize risks, helping businesses

ensure safety in payment, achieving high efficiency in business operations. Because of that,

the documentary credit method is the method chosen by more and more businesses,

especially exporters; Moreover, when using this method, enterprises can also discount export

documents when experiencing temporary economic difficulties that enterprises do not want.

That is the reason why L/C method increasingly occupies a high proportion in the

international payment structure of BIDV banks. The following are the results of international

payment activities by L/C method at BIDV from 2012 to June 2022.

Besides, there is a remarkable point in the growth of L/C method is that the growth rate of the

number of items is always lower than the growth rate of the value; This proves that the value

of L/Cs is increasing, showing the size of the deals, furthermore, the business scale of the

business is expanding, which is a good sign. However, there is one thing that needs to be

noted to improve further in the payment transaction by L/C method is to try to improve the

payment rate further, although in the past time this rate has increased but still only over 70%,
this is not really a high rate but can be further improved so that L/C will always be the first

choice of businesses in international payments.

2.3. Benefits of Documentary Credit for Stakeholders

Benefits for the sellers

● The seller has the obligation of the buyer's bank to pay for the shipped goods.

● Reducing the production risk if the buyer cancels or changes his order.

● The opportunity to get financing in the period between the shipment of the goods and

receipt of payment (especially, in case of deferred payment).

● The seller is able to calculate the payment date for the goods.

● The buyer will not be able to refuse to pay due to a complaint about the goods.

Benefits for the buyers

● The bank will pay the seller for the goods, on condition that the latter presents to the

bank the determined documents in line with the terms of the letter of credit.

● The buyer can control the time for shipping of the goods.

● By a letter of credit, the buyer demonstrates his solvency.

● In the case of issuing a letter of credit providing for delayed payment, the seller grants

a credit to the buyer.

● Providing a letter of credit allows the buyer to avoid or reduce pre-payment.

Benefits for the banks:

 ● L/C is a profitable service that generates revenue from fees and commissions.

● Banks charge fees for issuing, confirming, and negotiating L/Cs.

● Earn interest on the funds held in the L/C account.

● Enhances the bank's reputation as a reliable and trustworthy financial institution.

2.4. Shortcomings of Documentary Credit for Stakeholders

Shortcomings for the sellers:

● Revocable letter of credit: Some letters of credit are revocable, meaning the buyer can

revoke it at any time without notice. This leaves the seller at risk of not being paid.

● Fees charged by banks: Both the seller's and buyer's banks typically charge fees

related to processing the letter of credit. These can reduce the overall payment

received by the seller.

● Bank default: If the bank that issued the letter of credit becomes insolvent, the seller

may not be able to collect payment even if all terms of the letter of credit are met.

● Payment delays: Even if the documents conform, there can be delays in the bank

examining the documents and making payment. The seller may have to wait weeks or

even months to receive payment.

● Delayed shipment: If the seller is unable to ship the goods by the deadline specified in

the letter of credit, payment may be refused even if the buyer accepts the delayed

shipment.

Shortcomings for the buyers:

 ● Cost: The buyer is responsible for paying the fees associated with establishing an LC.

These fees can be significant and the buyer may also be required to pay for any

additional costs associated with the LC.

● Time-consuming process: Establishing an LC may take several weeks or even months

to complete. This can delay the shipment of goods and affect the buyer's ability to

meet their own deadlines.

● Risk of fraud: There is always a risk of fraud associated with LC. Fraudulent sellers

may provide false documentation or use fake companies to obtain payment from the

buyer.

● Currency fluctuations: LC are typically denominated in a specific currency, which can

create risks for the buyer if there are significant fluctuations in exchange rates.

Shortcomings for the banks:

● Credit risk - The bank is ultimately on the hook to pay the seller if the documents

conform to the letter of credit terms, even if the buyer defaults on payment. This

exposes the bank to credit risk from the buyer.

● Fraud risk - There is a chance the letter of credit could be fraudulent if presented by a

fraudster rather than the genuine buyer. This could result in the bank making an

improper payment.

● Foreign exchange risk - If the letter of credit involves payments in a foreign currency,

the bank is exposed to foreign exchange fluctuations between issuance and payment.

● Operational risk - Errors in the bank's letter of credit issuance and processing

procedures could result in improper payments or disputes.

CHAPTER 3: SOLUTIONS TO MAKE FULL USE OF DOCUMENTARY CREDIT

3.1 Increasing Awareness and Education

According to "Documentary Credit and Its Implication on Small and Medium Enterprises

(SMEs) in Developing Countries: A Case Study of Ghana" by F. K. Alhassan và J. Mensah

(2019) they propose to improve the processing process and reduce costs, while supporting

small and medium enterprises in training and improving management capacity. To make full

use of L/C, it is essential to increase awareness and educate stakeholders on its benefits and

shortcomings. This can help them make informed decisions and choose the most appropriate

payment method for their international trade transactions.

3.2 Improving Efficiency and Reducing Costs

Efforts should be made to improve the efficiency of the L/C process and reduce the

associated costs. This can be achieved by streamlining the procedures and using technology

to automate the process. It can also involve negotiating lower fees and commissions with

banks. According to "Improving the Efficiency and Transparency of Documentary Credit

Operations Through Blockchain Technology" by P. A. Danquah and J. E. Mensah (2019): In

this work, the author proposes to use blockchain technology to improve the efficiency and

transparency of documentary credit operations. Specifically, they suggest using smart

contracts to automate processes and reduce processing time, while increasing the accuracy

and security of transactions.

3.3 Managing Credit Risk

To manage credit risk, buyers and banks should conduct thorough due diligence on sellers to

ensure they are creditworthy and have a good reputation. Banks can also provide credit

guarantees or insurance to reduce the risk of non-payment. According to "Credit Risk

Management in International Trade Finance: A Study of Documentary Credit" by R. T.

Olusegun and O. A. Ayeni (2019): In this work, the author assesses credit risk in
documentary credit and proposes some solutions. Specifically, they suggest using credit risk

analysis tools such as customer reviews, industry analysis and collateral valuation to

minimize credit risk.

3.4 Resolving Legal Issues

According to "The Legal Issues of Documentary Credit in International Trade: A Study of the

Nigerian Banking Industry" by O. A. Ayeni and R. T. Olusegun (2019): In this work, the

author examines the legal issues related to documentary credit in Nigeria and proposes some

solutions. Specifically, they propose to increase understanding of the legal regulation and

resolve disputes quickly and effectively.

To avoid legal issues and disputes, it is important to ensure that the terms and conditions of

L/C are clear, precise, and agreed upon by all parties involved. Disputes should be resolved

through negotiation or arbitration to avoid legal and financial consequences.

CONCLUSION

In conclusion, L/C is a popular and reliable payment method in international trade, including

in Vietnam. It provides benefits to all stakeholders, but also has shortcomings that need to be

addressed. To make full use of L/C, stakeholders should increase their awareness and

education, improve efficiency and reduce costs, manage credit risk, and resolve legal issues.

With these measures in place, L/C can continue to be a valuable tool for facilitating

international trade and promoting economic growth.

References:

[1] Nong Thi Nhu Mai 2023, International Settlement, Ho Chi Minh city.

[2] F. K. Alhassan và J. Mensah 2019, Documentary Credit and Its Implication on Small and

Medium Enterprises (SMEs) in Developing Countries: A Case Study of Ghana.

[3] P. A. Danquah and J. E. Mensah 2019, Improving the Efficiency and Transparency of

Documentary Credit Operations Through Blockchain Technology.

[4] R. T. Olusegun and O. A. Ayeni 2019, Credit Risk Management in International Trade

Finance: A Study of Documentary Credit.

[5] O. A. Ayeni and R. T. Olusegun 2019, The Legal Issues of Documentary Credit in

International Trade: A Study of the Nigerian Banking Industry.

[6] https://nghiepvuxuatnhapkhau.com/nhung-kho-khan-trong-thanh-toan-quoc-te.html

[7] https://moit.gov.vn/tin-tuc/thi-truong-nuoc-ngoai

[8] https://connect2india.com/finance/letter-of-credit/problems-with-letter-of-credit