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Documentary Collections (Bills of Exchange)

Generally, Bills of exchange (drafts) are unconditional orders written and signed by a party (drawer), requiring a certain party (drawee) to pay certain sum of money on demand or at a determinable maturity date. In international trade, bills of exchange (drafts) together with other commercial documents are sent by the seller to the buyer, upon whose acceptance, the draft amount would be paid to the seller at the specified maturity date. In case the buyer and the seller were in two different countries, settlement would be carried out through international banking system (remitting, collecting, and presenting banks).
In terms of type of bank undertaking, documentary collections may be handled in two forms, considering the extent of confidence and agreement existing between the buyer and the seller.
A- Acceptance of the documentary drafts by the buyer. In this case, due to the full confidence between the buyer and the seller, once the draft is received along with other commercial documents, the buyer accepts and sends the draft back to the seller and arranges for providing the amount at the specified time and makes the payment to the seller through the banking system. In this case, the bank takes no responsibility for acceptance or non-acceptance of the draft amount, only playing the role of an advisor.
B- Acceptance of the documentary drafts by the bank. In this case, considering the credit that the buyer has with the bank, upon receiving the shipping documents and term documentary draft, the bank accepts the draft and undertakes to pay at a specified maturity. In this type, collaterals are obtained from the customer on bank’s discretion and customer status considering the undertaking made through acceptance of the draft by the bank. These collaterals may be one or a combination of collaterals accepted by the bank.
Documentary Drafts are classified into three groups in terms of settlement date and date of payment to seller:

  • Document against Payment: The payment has to be made to the seller as soon as the documents are accepted by the bank or the buyer.
  • Document against Acceptance: There is a specific period of time between draft’s acceptance by the bank or the buyer and its maturity, implying the draft amount will be paid to the seller at a maturity date.
  • Avalized bills of exchange (drafts): The bank undertakes to remit the draft amount to the beneficiary.