Due to the globalization, inter dependency of nations is increasing. Foreign trade is being voluminous day by day. Different means of payments have been used to make payment in foreign trade. Among them documentary credit is one, which play significant role in foreign trade. A documentary collection is a transaction whereby the exporter entrust the collection of payment to the exporter’s bank, which sends documents to a collecting bank i.e. importer’s bank along with the instructions for payment.
With documentary collection, banks serve as channels for the documentation, but they do not guarantee the payments, as is common with letter of credit. A bank can only debit the account of a buyer with the buyer’s authorization. In documentary collection, payment is done to exporter through the bank’s of importer to the bank’s of exporter either upon the receipt of documents of goods and services or obtaining the documents.
Documents against Payments (DAP)
Under DAP, the exporter makes shipment of goods as per agreement, and then Transport Company will provide transport related documents to the exporter. With the purpose to receive payments from the importer, the exporter gives the documents to his bank, which will be forwarded to collecting bank (importer’s bank), along with the instructions on how to collect payment from importer. Here, importer’s bank releases the documents to the importer upon the receipt of payment from him. So in simple sense, payment before the release of document is called DAP. The collecting bank transfers the payment to exporter through remitting bank. After obtaining documents upon the payment, importer submits documents to carrier to collect goods and services.
Documents against Acceptance (DAA)
Under DAA, the exporter grants credit to the importer against time draft. In this case, the documents are released to the importer to receive the goods upon acceptance of the time draft. Here, the time draft makes the importer legally obligated to make payment of goods in future. At maturity the collecting bank collect payment from the importer and transmits to exporter through remitting bank. Under DAA system, goods are received earlier then actual payment of cash. It is a kind of credit facility, where importer sells the good and collects money from market and then makes the payment.
The process of payment and transaction shall carry out as per the provision done in Uniform Rules for Collection (URC), ICC Publication No.522 of International Chamber of Commerce.
The role of banks in a documentary collection is partial. Banks do not verify the trade documents, bear risks, nor the bank gives guarantee of payment. They just control the flow of the documents from the destination of exporter to the destination of importer.
Parties involves in Documentary Collection
It is a Foreign bank/Seller’s bank. The remitting bank is a bank that will transfer the trade documents to the importer’s bank with the instruction for collection of payment from the importer in order to make payment to exporter against the goods supplied by him.
It is a Domestic bank/Buyer’s bank. The presenting bank presets the documents to the buyer for payment or acceptance based on the collection instructions. The presenting bank is the agent of the remitting bank in the importer’s country.
The seller /exporter are also known as the drawer. Drawer is the foreign party who supplies good on the request of importer as per the agreement and submits documents to his bank with instructions for the collection of payment.
The buyer/ importer is also known as a drawee. Drawee is the domestic party, who orders good from foreign country and pay for the documents or accept the bill of exchange.
Transaction flow in Documentary Collection
As per the agreement between importer and exporter regarding documentary collection, transaction shall be followed as per following.
1. The exporter ships the goods to the importer as per agreement and collects documents from transporter to forward to importer through bank to receive payment or accept the draft for payment.
2. The importer present documents to his bank with instruction to collect payment from importer through importer’s bank.
3. The exporter’s remitting banks forward trade related documents to the importer’s collecting bank.
4. The collecting bank releases the documents to the importer upon either the receipt of payment or accepting of draft from importer.
5. The importer then presents the documents to the carrier in exchange for the goods.
Documents Used In DC
The exporter’s bank on behalf of exporter forwards the documents and instructs the importer’s bank regarding the release of documents to the importer as per terms and conditions of documentary collection.
Bill of exchange:
It is the written order which is signed and forwarded by the drawer to the drawee instructing to pay a sum of money to the order at sight or on due date as specified in bill.
It is also called a “ documents of contents” because it generally contains all the information such as shipping of goods, price, quality, quantity, unite price, delivery terms, country of origin, harmonic code, etc. which is prepared by the exporter and forwarded to the importer.
The document which is issued by the transporter to the exporter undertaking for to shipment/transfer of goods from the place of exporter to the place of importer evidencing the date of shipment, port of loading/shipment and port of discharge is called transport document. The importer releases the goods from the transporter upon presentation of these documents.
Insurance policy is a document which is issued by insurance company covering the risk of good from the place of exporter to the place of importer. The coverage of risk must be at least 110% of the cost, insurance and freight (CIF) or carriage and insurance paid to (CIP) value of goods and must indicate the amount in the same currency as the credit.
So, documentary collection is a international payment practice in foreign trade that allows exporter to forward the trade related documents to the importer through his bank in order to collect payment immediately or in future as per agreement done between them.
(Mr. Mukunda Tripathee is currently working in the banking sector.)
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