Under Documentary Collection method – there is sight and usance collection. For sight documentary collection it’s called DP (or Documents Against Payment), for usance it’s called DA (or Documents Against Acceptance).
In this video we shall look at the DP method.
1. In this presentation on Documentary Collection, we have the exporter (also known as Principal) and the importer (also known as Drawee). Both of them entered into a sales contract whereby they agreed that method of payment will be by sight Documentary Collection Method ie DP or Document against Payment.
2. Once the contract is signed, the exporter will ship out the goods to the importer through the shipping agent.
3. After the exporter shipped out the goods, the exporter will prepare the necessary trade documents and this includes Bills of Lading and Sight Bill of Exchange.
The exporter will then prepare a cover letter which is also known as a Collection Instruction containing complete and precise instructions. The Collection Instructions form is normally prepared on a standard format given by the bank.
The exporter will then forward all the trade documents as detailed in the Collection Instruction to his bank, the Remitting Bank in this case – ABC Bank. Basically, the Exporter is informing the Remitting Bank that he had shipped goods to the Importer. And the Exporter has wants the Remitting bank to send all the trade documents over to the importer and to collect payment on his behalf. So this is why this method of payment is also known as collection method.
4. So now the trade documents are with the Remitting bank. The remitting bank also prepares its own Collection Instruction.
5. Whatever instructions given by the Exporter in his Collection Instruction will be transferred over to the Remitting Bank’s Collection Instruction.
6. The Remitting Bank will then forward all the documents to the Collecting/Presenting Bank. Normally there are 2 banks here – the collecting bank is the remitting bank’s agent whereas the presenting bank is the importer’s bank. For simplicity sake in this diagram, both banks are placed into the same box.
So when the documents arrive at the Collecting/Presenting Bank, the Collecting/Presenting bank will then inform the importer to make payment in order to collect the documents.
7. Here the importer has paid the Collecting/Presenting Bank.
8. The Collecting/Presenting bank released the trade documents to the importer.
9. The Collecting/Presenting bank subsequently remit payment to the Remitting bank.
10. When the Remitting bank received the payment, the Remitting bank will credit the payment to the exporter’s account. In the meantime, the goods has arrived at the port, and with the trade documents the importer will be able to clear the goods from the port.
This entire transaction is governed by the Uniform Rules for Collection URC522 published by the International Chamber of Commerce.
So this is in essence the workflow of a Documents Against Payment method.