Documentary Collections Part 1

In my last blogs we saw the two methods of trade settlements (advance payment/open account) which are commonly used by buyers and sellers worldwide.

Advance payment and Open account, both, do not involve banks, in terms of routing of documents, or payment obligations. The buyer simply, uses the banking network for making a remittance to the seller for the goods that are sold.

We will now see the next method of trade settlement called Documentary collections with the applicable set of rules and the process involved.

Documentary collections, if very simply put, is routing of documents (transport documents, commercial invoices, certificate of origin etc) by the seller through their bank to be handed over to the buyer, through their bank, upon certain payment instructions, to be made by the buyer

Documentary collections are governed by URC (Uniform Rules for Collections) ICC publication 522. This came in effect on the 1st of January 1996, and is still in effect, however one should be mindful that the URC 522, is a set of rules and are not laws or regulations.

URC 522 is only applicable to documentary collections, if they are said to be applicable on the Covering schedule (we will see this in my later blog) submitted by the bank. If applicable, the rules do not give a chance of any ambiguity in interpretation of terms etc, between the buyer, seller and the banks involved.

It is important to know the correct terminology used and the parties in Documentary collections…..

Drawer/PRINCIPAL – this is the seller/exporter in the transaction, and sends documents (as seen above) through their bank.

Remitting bank – this is the bank on the sellers/drawers side, which collects documents from the seller/drawer and simply acts as per the instructions from the seller. The seller will mention the buyers bank details, for sending the documents, along with the disposal instructions (we will this in my later blog)

Collecting bank – is any bank, other than the remitting bank, involved in processing the collection.

Presenting Bank – this is the collecting bank on the buyers/drawee/importers side of the transaction, which receives, processes the documents, from the Remitting bank, along with the Covering schedule, which carries the disposal instructions of the documents and presents the documents to the drawee.

Drawee – this is the buyer/importer in the transaction, and has a payment obligation towards the seller, as per the contractual terms, and collects the documents from the presenting bank, as per the disposal instructions.