Documentary Bills

When the exporter is unable to get the advance payment from the importer, the next best alternative mode of payment is ‘Documentary Bills’. The exporter is unwilling to part with the documents of title till he receives the payment and the importer is not prepared to part with payment and assume the risk until he is sure of receiving the goods. Under those circumstances, ‘Documentary Bills’ is a bridge, as documents are routed through the bank. It provides the required solution as it satisfies the claims of both the parties. In this system of payment, banks act as a media to reconcile the conflicting requirements of the exporter as well as importer.

Forms of Documentary Bills

Documentary Bills can be in the form of Sight Bill and Acceptance Bill. Method of payment depends on the form of bill used.

Documents against Payment: Under this method, exporter draws a sight bill on the importer and hands over the relative documents specified in the contract to his banker with the instructions to deliver the documents only on payment. The documents are sent to the correspondent’s bank, where the importer is located, with the instructions given by the exporter. When the importer makes the payment, he can get title to the goods and possession.

Documents against Acceptance (D/P): Under this method, exporter draws usance bill on the importer. Usance period may be 30 to 180 days. Usance period cannot exceed 180

days as the export proceeds are to be collected within a maximum period of 180 days as per Exchange Control restrictions. The essence of the transaction is the exporter is not only willing to ship the goods but also prepared to part with the title and possession of goods, before payment is received and even extending the agreed period of credit.

(A) Collection of Bill: In this case, either D/P bill or D/A bill is sent to the correspondent’s bank for collection of proceeds from the importer.

In case of D/P bill, importer has to make payment to get the documents. In case of D/A Bill, on receipt of advice from the bank, importer accepts the usance bill by writing the words ‘Accepted’ with his signature on the usance draft. Then only, importer gets documents of title to goods from the bank. He can get possession of goods and even sells the goods to get the necessary funds to make payment on the due date. In this case, the exporter is extending credit to the exporter, apart from assuming the commercial risk of default in payment as the importer may not pay on the due date, after taking delivery of goods. Soon after the payment is received from the correspondent bank, exporter’s account will be credited when the bill is sent on collection basis.

(B) Purchase/Discounting of Bill: When the exporter is in need of funds, at the time of handing over the documents, he can request the banker to purchase/discount the bill and allow the proceeds to be credited to his account.

If it is a sight bill, bank purchases and if it is usance bill, bank discounts the bill. In both the cases, payment is made to the exporter, on presentation of documents. Different terms ‘Purchase’ and ‘Discount’ are used, in separate contexts, to serve the same purpose. However, in case the importer fails to pay the bill, the exporter’s account will be debited.

Consequences of Non-Payment in Case of D/P Bill: When importer fails to make the payment, on presentation by the correspondent’s bank, exporter may have to pay additional charges by way of warehouse charges and insurance charges, at the port of destination as the goods will be lying in the foreign port. If the importer finally refuses to take delivery of goods, alternative buyer may have to be procured or distress sale may become necessary. If nothing materialises, goods may have to be brought back to the country. This course of action results in heavy loss to the exporter.

Consequences of Non-Payment in Case of D/A Bill: There are greater risks associated in case of D/A Bill, compared to D/P Bill. In case of D/A Bill, importer makes payment only on the due date. From the date of delivery of goods till date of payment, exporter has to bear credit risk as importer has, already, taken delivery of goods. If the importer fails to make the payment, exporter has no alternative but to file only a civil suit that is beset with costs and realisation difficulty.

Common Risk: In both the cases, documents against payment and acceptance, there is a common risk-transfer risk-if there is shortage of foreign currency or exchange control

restrictions in the importer’s country. However, institutional facilities are available in all countries to cover political risk related to inability to receive the remittance from the importer’s country, even after payment by the importer. In India, Export Credit Guarantee Corporation of India LTD (ECGC) offers this facility.