Banking 2 documentary collection. Some aspects of commercial banking

PART I

In documentary collection, a bank collects payment for the seller by delivering documents to the buyer. Here again, the bank acts as an intermediary between the buyer and the seller. In this case, however, the seller does not receive payment until after payment has been made to the remitting bank. He therefore has to wait longer for his money than if he were paid under a documentary credit. Moreover, his risk is not fully covered. When he sends off the goods, he still has no assurance that the buyer or the buyer’s bank will pay; he simply has to trust in their ability and willingness to do so. Documentary collections are therefore normally used only when the buyer and the seller are already familiar with each other.

Collection means the handling by banks, on instructions received, of documents in order to obtain acceptance and/or payment.

The documents are attached to an application form that the exporter presents to its bank. The latter makes out a collection order and, as a rule, passes it over to its correspondent bank in the country of the importer. The correspondent bank or some other bank called «collecting» delivers the documents to the importer against payment and/or acceptance.

Banks concerned with collection do not accept responsibility for payment or acceptance.

DRAWER/ PRINCIPAL/ EXPORTER

Specific advantages of documentary collections:

 Substantially better security than settlement on open account;

 Usually faster than settlement on open account (because the documents are presented through a bank);

 Where documents are to be released against acceptance of the bill of exchange, the seller can request an official confirmation in the event of non-payment. This speeds up recovery of the debt and simplifies the collection of interest on arrears;

 Few formal requirements; hence great flexibility for both buyers and sellers;

 Low cost.

Here is the diagram of a collection order:

REMITTING BANK

Importer (Drawee)

Here is the scheme of the Documentary Collection procedure

LEGAL RELATIONS IN THE CASE

OF DOCUMENTARY COLLECTION

Contract of sale

Collection Оrder