When Banks Send LC Documents “on Collection Basis”: Clarifying the Confusion

In documentary credit practice, few terms cause more misunderstanding than “documents sent on collection basis” — especially when a letter of credit (L/C) is involved and payment is at stake.

 In this Q&A, Mr. Old Man responds to a concerned exporter whose bank forwarded documents to the issuing bank after noting discrepancies. Are the documents still governed by UCP 600? Can the buyer delay payment? And does the exporter’s bank have complete discretion to refuse discounting, even if the presentation is fully compliant?

 Let’s unpack these common — but often misunderstood — situations.

QUESTION

Dear Mr. Old Man,

We made a shipment under an Irrevocable Sight L/C and submitted the documents in accordance with the L/C terms. However, our bank found some discrepancies and forwarded the documents to the issuing bank “on collection basis.” It’s been six days since the documents arrived at the issuing bank. The consignee received an arrival notice and confirmed the documents look fine — but has not yet visited the bank or made payment.

We are concerned:

1. Can the consignee delay or ignore collection of the documents and payment?
2. Is it true that an exporter’s bank always sends discrepant documents on collection basis and avoids purchasing them? And does it have full discretion to refuse to purchase even if the documents fully comply with the L/C?

Looking forward to your expert guidance.

— Sam

_________

ANSWER

Dear Sam,

Thank you for your message. Let’s take this step by step:

1. I wonder why documents made according to the L/C terms were sent on “collection basis.” This usually suggests the documents were found to be discrepant. In such cases, many banks choose to send the documents to the issuing bank on approval, while using the phrase “sent on collection basis.”

However, be cautious with this terminology. The phrase “sent on collection basis” can cause confusion — it might sound like a documentary collection governed by URC 522, but in L/C practice, banks often use it when sending discrepant documents under UCP 600, pending the issuing bank’s approval.

Please confirm with your bank whether the documents were sent:

• For payment under UCP 600; or
• For collection under URC 522.

If the documents were sent under UCP 600, the issuing bank must act in accordance with Article 16 — that is, it must issue a notice of refusal (if applicable) within five banking days following the day of presentation. If no notice is issued within that period, the issuing bank is precluded from claiming the documents are non-compliant and is obligated to honour.

As it’s only the 6th day (not necessarily the 6th banking day), you may simply need to wait. You can also ask your bank to follow up with the issuing bank for a status update.

1. It is not true that an exporter’s bank always sends discrepant documents on collection basis under URC 522. In fact, many banks send such documents on approval under UCP 600, even without mentioning the discrepancies in the covering schedule.

As for purchase/discounting of documents (negotiation):

Unless the exporter’s bank is a confirming bank or a nominated bank that has expressly agreed to negotiate, it has no obligation to do so — even if the documents are 100% compliant with the L/C. This is clearly stated in UCP 600, Article 12(a):

“Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary.”

In short:

• Check with your bank to confirm whether the documents were handled under UCP 600 or URC 522.
• If under UCP 600, the issuing bank is still within its timeframe to examine the documents.
• Your bank is not obliged to purchase the documents unless it has expressly committed to doing so.

I hope this helps clarify the situation.

Best regards,

Mr. Old Man