Documentary Collection – URC 522 

While finalizing any sale contract, Seller and Buyer will decide what should be the terms of payment. 

There could be four basic terms of payment: 

1. Advance Payment 
2. Documentary Credit 
3. Documentary Collection 
4. Open Account 

Advance payment is the form of payment that offers the least risk to the seller, but a high level of risk  to the buyer.  

From the seller’s point of view, receiving payment in advance of the shipment is an ideal situation, as  it eliminates all the risks of non-payment.  

From the buyer’s point of view, payment in advance carries the greatest risk, as payment has been  made but goods have not been received and the buyer is totally dependent on the seller shipping the  correct goods as per the contract. Apart from the above, payment in advance may create cash-flow  problems for the buyer, without receiving the goods. 

If the seller is in a strong bargaining position, but not strong enough to obtain payment in advance,  then the next-best payment method is a documentary credit (letter of credit), where an issuing bank  gives an irrevocable undertaking to the beneficiary (seller) to honour a complying presentation.  

If the buyer is not agreed for documentary credit as the term of payment, the seller will have the next best payment method as “documentary collection”. 

In a documentary collection, a seller will ship the goods and instead of sending the documents directly  to the buyer, he will send the documents via banking channel, to obtain payment and / or acceptance  by the buyer. 

• Documents means “financial documents” (like draft, promissory notes, etc.) and/or  “commercial documents” (like invoices, transport documents, insurance and certificates of  origin etc.). 

• The seller’s bank will ask a correspondent bank in the buyer’s country to deliver the  documents to the buyer: 

1. against payment i.e., Sight bills (Documents released against Payment − ‘D/P’) or 
2. against acceptance of a term Draft i.e., Usance bills (Documents released against  Acceptance − ‘D/A’).  

"Documentary collection" means collection of: 

1. Financial documents accompanied by commercial documents; 
2. Commercial documents not accompanied by financial documents  

• "Clean collection" means collection of financial documents not accompanied by commercial documents. 
• “Principal”: The principal, who is normally the seller, who entrusts the handling of a collection to a remitting bank. 
• “Remitting Bank”: Remitting bank is the bank to which the principal has entrusted the handling of a collection i.e., the bank that acts for the seller. It is usually based in the seller’s  own country and is invariably the seller’s own bank. 
• “Collecting Bank”: It is normally a correspondent of the remitting bank based in the buyer’s country; As an agent of the remitting bank, they will present the documents to the drawee  (buyer) for payment or acceptance. Thus, "collecting bank “, is the bank, other than the  remitting bank, involved in processing the collection. 
• “Presenting Bank”: Presenting bank makes the documents presentation to the drawee  (buyer). Usually, it is the banker of the drawee (buyer), who will be in a better position to  approach the drawee for payment or acceptance. In local collections the remitting bank may also be the collecting bank. 
• “Drawee”: The drawee is the one, to whom presentation is to be made i.e., the party  requested to pay or accept the documents. The drawee is usually the buyer. 

ICC publication that governs documentary collections is URC 522 (Uniform Rules for  Collections), which came into effect on 01 January 1996.

How does Sight (DP) documentary collection work? 

1. Contract is agreed between the seller (Principal) and buyer (drawee), indicating a  documentary collection payable at sight as the payment terms. 
2. Seller ships the goods as per agreed terms and forwards the shipping documents to its  bank, known as the ‘remitting bank’. 
3. Remitting bank sends the documents to the collecting bank or presenting bank (buyer’s  bank). 
4. Presenting bank makes the documents available for review at its counters, so that the  buyer can make a payment decision. 
5. Buyer authorises payment, and the presenting bank or collecting bank receives the  payment. They remit the fund to the remitting bank and release the documents to the buyer  to collect the goods. 
6. Remitting bank receives the funds and credits the amount to the seller’s account. 

How does Usance (DA) documentary collection work? 

1. Presenting bank makes the documents available for review at its counters, so that the  buyer can make a decision for acceptance of the term draft. 
2. Buyer accepts the draft and the presenting bank or collecting bank releases the documents  to the buyer to collect the goods. 
3. Collecting bank can retain the accepted draft. An advice of acceptance is sent to the  remitting bank, or the draft can be returned to the seller via the remitting bank for  presentation prior to the maturity date. 
4. The seller will receive the accepted draft for re-presentation near to the maturity date or  an advice of acceptance. 
5. On due date, drawee honours the draft and pays to the collecting bank, who remits the funds  to the remitting bank. 
6. The remittance bank receives the funds and credits the amount to the seller’s account. 
7. However, the seller has no guarantee that the accepted draft will be honoured on the due date. 
8. The payment of the accepted draft will happen only when the buyer makes payment on  the due date. 

Meticulous compliance and interpretation of Remitting Bank instructions 

Article 4 talks about collection instructions. 

1. All documents sent for collection must be accompanied by a collection instruction indicating that the collection is subject to URC 522 and giving complete and precise  instructions. Banks are only permitted to act upon the instructions given in such collection  instructions, and in accordance with these Rules. 
2. Banks will not examine documents in order to obtain instructions.
3. Unless otherwise authorised in the collection instruction, banks will disregard any  instructions from any party/bank other than the party/bank from whom they received the  collection. 

 A collection instruction should contain the following items of information, as appropriate. 

1. Details of the bank from which the collection was received including full name, postal and  SWIFT addresses, telex, telephone, facsimile numbers and reference. 
2. Details of the principal including full name, postal address, and if applicable telex, telephone and facsimile numbers. 
3. Details of the drawee including full name, postal address, or the domicile at which presentation is to be made and if applicable telex, telephone and facsimile numbers. 
4. Details of the presenting bank, if any, including full name, postal address, and if applicable telex, telephone and facsimile numbers. 
5. Amount(s) and currency(ies) to be collected. 
6. List of documents enclosed and the numerical count of each document. 
7. Terms and conditions upon which payment and/or acceptance is to be obtained.  Terms of delivery of documents against: 

• • Payment and/or acceptance 
  • other terms and conditions 

• All collections must have a separate collection instruction attached. 
• Collecting bank will only be guided by the instructions on the collection instruction itself. 
• Collecting bank will not look elsewhere for instructions and will not be obliged to examine documents for instructions; no instructions are to be shown on individual documents and if  they are, they will be ignored. 
• Principals and remitting banks are urged to examine the list of information shown in sub Article 4(b), in order to ensure that the information and the instructions they provide are as  complete as they need to be. 
• If the principals/remitting banks do not provide the required information, then any delay or  non-compliance is not the responsibility of the collecting bank. 

Understanding important articles of URC 522 

• Article 1 states that banks are not obliged to handle any collection. Should a bank decide not  to handle a collection, it must advise the party from which it received the collection or  instruction without delay. 
• Once the Bank advises that it is unable to handle the collection or cannot carry out an instruction, it may at its discretion return the documents to the sender without any further  action.
• Articles 5, 6, 7 and 8 give details on the procedures relating to the form of presentation,  making presentation for payment or acceptance, release of commercial documents and  creation of documents. 
• Expressions such as "first", "prompt", "immediate", and the like should not be used in connection with presentation or with reference to any period of time. If such terms are used  banks will disregard them. 
• Collections should not contain draft payable at a future date with instructions that commercial  documents are to be delivered against payment. 
• If a collection contains a draft payable at a future date, the collection instruction should state  whether the commercial documents are to be released to the drawee against acceptance (D/A) or against payment (D/P). 
• In the absence of such a statement commercial documents will be released only against  payment and the collecting bank will not be responsible for any consequences arising out of  any delay in the delivery of documents. 
• If a collection contains a draft payable at a future date and the collection instruction indicates  that commercial documents are to be released against payment, documents will be released  only against such payment and the collecting bank will not be responsible for any  consequences arising out of any delay in the delivery of documents. 
• Once documents are released against the accepted draft, the collecting/presenting banks  have no further liability or responsibility in respect of documents so released, because by  carrying out the remitting bank's instructions they have fulfilled their obligation. 
• Article 9 states that banks will act in good faith and will exercise reasonable care when  handling a collection instruction. 
• Article 10 states that goods should not be dispatched directly to a bank nor a transport  document evidence that goods are consigned to or consigned to order of a bank − without the bank’s prior agreement. Where no prior agreement has been given, there is no obligation on the part of the bank to take delivery of the goods. A collecting or presenting bank is under no obligation to take action to store and insure goods, even if there are instructions to that effect in the collection instruction. 
• Article 12 states that although the banks are not obliged to examine the documents presented in detail, a bank must check that they have received all of the documents listed on the collection instruction and in the number stated. In the event that some documents are missing or additional documents are received that are not listed, then they must advise the party who  sent the collection by telecommunication or other expeditious means, without delay. 
• Articles 13 and 14 provide a disclaimer on the effectiveness of data appearing within the presented documents, e.g., sufficiency, accuracy, genuineness, falsification, etc, and against  any delays or loss of documentation in transit. 
• Articles 20 and 21 relate to interest, charges and expenses and, in particular, the action that  should be taken by a bank where these have been refused by the drawee.
• Article 22 states that the bank that releases documents against acceptance is responsible for  seeing that the form of acceptance appears to be complete and correct, but there is no  responsibility to ascertain the genuineness or authority of any signatory to the acceptance. 
• Article 23 states that a presenting bank is not responsible for the genuineness or authority of  any signatory appearing on a promissory note, receipt or other instrument. 

Obligations of the collecting / presenting bank 

• On receipt of the remitting bank’s collection instruction and the documents, the collecting  bank will examine what has been received, check the schedule of instructions it has been  given, and make sure that the documents attached are as described and in the correct number of originals and copies. 
• Collecting bank is not required to look at the documents for any instructions. The collecting  bank should then contact the buyer and inform them of the instructions they have received. 
• The collecting bank may well have a banking relationship with the buyer but, when handling  a collection, they are acting as agents for the remitting bank and therefore owe the remitting  bank the normal duty of care of an agent to its principal. Therefore, the collecting bank’s duty and responsibility to the remitting bank overrides any duty to its customer. 
• If accompanied by a draft payable at sight, the documents will be released against payment.  Where no draft is attached, the covering schedule will merely call for payment in exchange  for release of the documents. 
• If accompanied by a term draft, then the collecting bank must obtain the buyer’s acceptance  prior to release of the documents. 
• In either case, the buyer may be allowed to examine the documents at the bank. 
• Once a bill is accepted, the collecting bank must inform the remitting bank and, once payment thereof is received on the due date, funds, less any charges, will be sent via SWIFT. 
• When the collecting bank is the consignee and releases goods to the buyer against payment,  acceptance or other terms and conditions, the remitting bank is deemed to have authorised  such action. In practice, the collecting bank will then issue its own delivery order to the carrier,  authorising release of the goods to a specific party, usually the buyer. 

Actions to be taken in case of non-payment and non-acceptance 

• What if the drawee fails to pay sight bills or to honour the accepted draft on the due date?  Principal (seller) cannot claim the amount from the collecting / presenting bank unlike  documentary credit where the risk is shifted from buyer to issuing bank. A very few options  are left with the principal in case of non-payment by the drawee (buyer) on the due date. 
• Article 24 talks about “Protest”. The collection instruction should give specific instructions  regarding protest (or other legal process in lieu thereof), in the event of non-payment or non acceptance. 
• In the absence of such specific instructions, the banks concerned with the collection have no  obligation to have the document(s) protested (or subjected to other legal process in lieu  thereof) for non-payment or non-acceptance.
• Any charges and/or expenses incurred by banks in connection with such protest, or other legal process, will be for the account of the party from whom the collection instruction was  received. 
• Sub-article 26.c.3 talks about advice of non-payment and / or non-acceptance. The presenting  bank should endeavour to ascertain the reasons for non-payment and/or non-acceptance and  advise accordingly, without delay, the bank from which it received the collection instruction. 
• The presenting bank must send without delay advice of non-payment and/or advice of non acceptance to the bank from which it received the collection instruction. 
• On receipt of such advice the remitting bank must give appropriate instructions as to the  further handling of the documents. 
• If such instructions are not received by the presenting bank within 60 days after its advice of  non- payment and/or non-acceptance, the documents may be returned to the bank from  which the collection instruction was received without any further responsibility on the part of  the presenting bank. 
• In a normal correspondent relationship, a collecting or presenting bank may seek to protect  the remitting bank’s interests and hence that of the seller, when payment or acceptance is  not forthcoming, by arranging for storage and insurance at the remitting bank’s expense. 
• URC 522 sub-article 10 (b) states that a collecting bank has no obligation to store and insure  the goods, even when specific instructions are given to do (usually with details of who will be  responsible for the costs involved). 
• This is where a ‘case of need’, who may be the seller’s local agent, can help, particularly if a  new buyer must be found. If the buyer fails to pay, the goods will either have to be shipped  back to the seller, sold by auction (almost certainly at a huge loss to the seller) or be destroyed. 
• If a previously accepted draft is subsequently dishonoured, then there is little to be done as  far as the goods are concerned, they will already have been released to the buyer at the time  the bill was accepted. 
• Article 25 states that if the principal nominates a representative to act as case-of-need in the  event of non-payment and/or non-acceptance the collection instruction should clearly and  fully indicate the powers of such case-of-need. In the absence of such indication banks will  not accept any instructions from the case-of-need. 

Source: Guide to International Trade and Finance by Paul Cowdell and Peter McGregor

Written by : Mr Isaac Tudu, Trade Finance Specialist and ex Regional Head Sales, ICICI Bank.