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Collections
Collections
Trade between counterparties on collection basis is carried out where there is an inherent comfort level between the buyer and the seller but each party desires to safeguard itself to some extent. However, the buyer is at relatively lower risk than the seller. He can inspect the documents before paying for them.
The collection cycle starts when the seller, having shipped the goods and obtained the necessary documents, presents the documents together with his instructions to his bank (remitting bank). The Bank will send these to its branch/ correspondent bank (collecting bank) in the buyer's country for payment. Collection can be on D/P (Documents against Payment) or D/A (Documents against Acceptance) basis. Under D/P, the buyer gets the title to the goods only after he pays for them. In a D/A scenario, the buyer gets title to the goods against accepting to pay on a future date (i.e. due date) by accepting a Bill of Exchange drawn by the seller on the buyer; hence a credit period is extended by the seller to the buyer.
The risk to the exporter is much greater because he does not have a bank's undertaking as in the case of a documentary credit; but he may retain control over the goods through the collecting bank. This system is usually used when dealing with parties that have an established track record or where the exporter is sure that the importer will not refuse the goods.
The schematic below elucidates Collections transaction flow :
