Collections, Guarantees and Trade Finance Instruments
Collections - URC 522
In a documentary collection the bank is an agent only, with no payment undertaking. The parties are the principal (exporter), remitting bank, collecting/presenting bank and drawee (importer). Two forms dominate: D/P (documents against payment) - documents released only on payment - and D/A (documents against acceptance) - documents released against a bill of exchange acceptance, creating an unpaid credit exposure. The collection instruction must be complete (goods description, documents, protest instructions, charges, case-of-need). Banks are not responsible for the goods and, under URC 522, should not consign goods to a bank without agreement. Without instruction, the collecting bank may hold documents but never releases them unpaid.
Guarantees - URDG 758 / ISP98
Independent demand guarantees are governed by URDG 758, which sets a five business day examination of a demand, and an extend-or-pay mechanism. Like an LC, the guarantee is independent of the underlying contract - the guarantor pays against complying documents, not against proof of default. ISP98 applies to standby letters of credit. Common types: bid bond, advance payment guarantee, performance guarantee, retention guarantee, often issued against a counter-guarantee.
Trade finance instruments
The bank's balance sheet is engaged through pre-shipment (packing) credit, post-shipment finance, bill discounting, forfaiting (without recourse), factoring, trust receipts and import loans. Concessional export finance is scheme-driven and eligibility-linked.
Traps
Candidates confuse D/A with an LC (it is not), and confuse a bank guarantee with a documentary credit (similar independence, different rules). A collection bank's failure to protest does not make it liable for the debt.
Rule of thumb
Ask: does the bank promise to pay? LC/guarantee = yes; collection = no.