Show the operational procedure of Documentary Collection and Documentary Credit.
Documentary Collection
Documentary Collection is a method where banks handle the export documents and collect payment from the importer on behalf of the exporter. The banks do not give any payment guarantee to the exporter.
Operational Procedure:
(1) The exporter ships the goods to the importer and prepares the bill of exchange and other shipping documents.
(2) The exporter submits the documents to the remitting bank along with clear collection instructions.
(3) The remitting bank sends the documents to the collecting bank in the importer’s country.
(4) The collecting bank releases the documents to the importer against payment under Documents against Payment (D/P) or against acceptance of the bill under Documents against Acceptance (D/A).
(5) After receiving the payment, the collecting bank sends the proceeds to the remitting bank. In the case of D/A, payment is made when the accepted bill becomes due.
(6) The remitting bank receives the proceeds and credits the amount to the exporter’s account.
Documentary Credit
Documentary Credit is a bank-based payment method where the issuing bank gives a payment undertaking to the exporter against presentation of complying documents. The transaction mainly depends on the terms of the LC and the documents presented.
Operational Procedure:
(1) The importer and exporter first enter into a sales contract. The contract specifies the terms and conditions of the trade.
(2) The importer approaches the issuing bank and requests it to open an LC in favor of the exporter.
(3) The issuing bank issues the LC and sends it to the advising bank in the exporter’s country.
(4) The advising bank verifies the authenticity of the LC. After verification, it advises the LC to the exporter.
(5) The exporter ships the goods according to the LC terms. The required shipping and other documents are then prepared.
(6) The exporter presents the documents to the nominated or advising bank. The bank examines the documents against the LC terms.
(7) If the documents comply with the LC, the nominated bank pays, accepts or negotiates the documents, as applicable.
(8) The documents are sent to the issuing bank. The issuing bank examines the documents and makes reimbursement if they comply with the LC terms.
(9) Finally, the issuing bank releases the documents to the importer. The importer uses the documents to take delivery of the goods.
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