Once the draft has been accepted, the exporter can, if he wants to get his money quickly, discount it. If he has sent the draft and documents direct to the foreign bank, he can instruct that bank to send the bill back after acceptance; and when he receives it back, he can hand it over to his own bank, or to a discounting firm, which will pay the amount of the draft, less a commission for discounting, which will vary according to the tenor of the draft and the amount of risk involved in obtaining payment from the drawees when it becomes due. In the alternative, the exporter, without asking for the draft to be sent back, may request the foreign bank to do the discounting and remit the proceeds to him. In actual fact, drafts are normally and preferably handed over by the exporter to his own bank, which sends, them abroad to the bank with which they have dealings; and the bank abroad will notify the exporter’s own bank of acceptance. in this instance, the exporter’s bank will arrange for the discounting of the bill for him. Commercial practice, in fact, goes a stage further; the exporter’s bank wilt normally discount the bill at the time it is handed over to it for transmission abroad and will not wait for a notification of acceptance. Whether the bank will do this depends largely upon how well the bank knows the exporter and how much it trusts his commercial acumen and morality.
Such discounting of bills costs the exporter money in bank charges, and these charges vary and depend upon whether the draft is discounted with recourse or without recourse. The term with recourse means that if the draft is not paid by the drawee, the bank or discounting house can claim back the money paid to the exporter when it discounted the draft. ‘The term without recourse means that the bank or discounting house takes the full risk of not being able to get its money back from the drawee. Drafts presented against a letter of credit are almost always without recourse (even though the phrase is not mentioned on the actual draft). If with recourse drafts are asked for in a letter of credit, the exporter is advised to obtain an amendment before taking action to ship the goods.
In some countries, it is customary to allow the drawee three days in which to make payment after the due date of a usance draft. These days are called grace days, and adrawee, who has accepted a draft for payment in 60 days after sight, will in fact make payment on the sixty-third day after the date on which it was accepted. Such grace days are not allowable on at sight or on presentation drafts. In India, no stamp duty is required on but usance drafts must be stamped legally acceptable. The amount of tenor of the draft – whether it is 3 sight – but is calculated on the amount.
While it should not happen if proper care and attention is taken, there may be an instance when the drawee does not make payment against the draft even if it is a draft which he has signed as accepted. In such a case, the first procedure is to have the bill noted. This means that the unpaid draft is handed over to Notary Public (who is a specially authorized lawyer) who again presents it to the drawee (or to the bank at which he accepted the draft as payable) for payment. If payment is not made, the Notary Public will note the fact on the draft, giving also the reasons why payments as not been made.
After the draft has been noted, the same Notary Public will draw up a formal document known as protest. The protest is legally necessary to enable the drawer to enforce payment from the drawee. The bank abroad will see to it that the unpaid draft is not noted and is unprotected if instructions to do so have been given by the exporter.
Noting and protesting can also be done if the drawee refuses to accept the bill. The consequences then will be the same for the buyer who refuses acceptance.
In most countries there is a time limit for noting and protesting. Care must, therefore, be taken to ensure that if such action is necessary, it is taken within the legal period, which may be within one week or within one month after the date on which payment should have been made.
While the main reason for noting and protesting an unpaid or unaccepted draft is to enable the drawer to sue the drawee or a proven debt, it often happens that the effect of noting and protesting is to frighten the buyer (or the drawee) into honoring his obligations because if he allows the noting and protesting to be carried out, his credit and reputation with other possible suppliers will be badly damaged.
It is not usual for drafts and documents to be sent direct to a collecting banks abroad. The exporter hands over the drafts and shipping documents to his own banker and usually fills in a special form, supplied by the bank, which provides space for the exporter’s instructions to be filled in, including space headed “if paid” and “if unpaid” and it is in these spaces that the exporter will fill in the words protest or not protest he wants the banks abroad to note and protest in the case of non-acceptance or non-payment. If the word protest is filled in, the exporter will be responsible for the payment of the noting and protesting fees, which he may not be able to recover from the drawee. However, all this may not happen if drafts are drawn under a letter of credit.
One more fact should be borne in mind in connection with D/P and D/A terms of payments- and that is that both the exporter’s bank to which the documents are handed and the foreign bank which collects from the drawee will make a charge for their own services. The charges are not excessive, but are certainly worth considering, especially when the exporter wishes to have the money remitted by cable as soon as it is collected from the drawee. The banks also charge extra for sending the documents by air mail. As the actual amount of these costs is not known to the exporter before the transaction is finalized, he may, instead of adding a calculated amount to the total of his invoice, as he would when drawing against a letter of credit, add the words plus bankers’ collection, air mail and remittance charges immediately following the amount of draft.