Letter of Credit (LC) in Export: Complete Guide for Indian Exporters (2026)

What is a Letter of Credit?

A Letter of Credit (LC), also called a Documentary Credit, is a written undertaking by a bank (the issuing bank) on behalf of the buyer (applicant) to pay the seller (beneficiary) a specified amount, provided the seller presents documents that comply with the LC terms.

In simple terms: the buyer's bank guarantees payment to the seller, reducing the risk for both parties. It's the gold standard of international trade payment — especially for first-time transactions between buyers and sellers who don't have an established relationship.

Why Use Letters of Credit?

• Security for exporter — Payment is guaranteed by the bank, not just the buyer's promise
• Security for importer — Payment is only released when the exporter presents compliant documents (proof of shipment)
• Bank intermediation — Both banks verify documents independently, reducing fraud
• Financing — Exporters can get pre-shipment and post-shipment finance against the LC
• Creditworthiness substitute — Even if the buyer has no credit history, their bank's guarantee is sufficient

Types of Letters of Credit

By Revocability

• Irrevocable LC — Cannot be amended or cancelled without consent of all parties. This is the standard and most common type. Under UCP 600, all LCs are irrevocable by default.
• Revocable LC — Can be cancelled by the issuing bank at any time. Rarely used as it provides no security to the exporter.

By Confirmation

• Confirmed LC — A second bank (usually in the exporter's country) adds its own guarantee. If the issuing bank defaults, the confirming bank pays. Adds cost but provides extra security.
• Unconfirmed LC — Only the issuing bank's guarantee. Standard for trade with stable banking systems.

By Payment Terms

• Sight LC — Payment on presentation of compliant documents (usually 3-5 banking days after document submission).
• Usance LC (Deferred Payment) — Payment after a specified period (30, 60, 90, 120, 180 days from B/L date or invoice date). Gives the buyer time to sell goods before paying.
• Acceptance LC — The bank accepts a time draft drawn by the exporter. Payment on maturity of the draft.

Special Types

• Transferable LC — Can be transferred to a second beneficiary (useful for middlemen/traders).
• Back-to-Back LC — A second LC opened against a master LC. Used by intermediaries.
• Red Clause LC — Allows the exporter to draw advance payment before shipment.
• Standby LC (SBLC) — Used as a guarantee, not for direct payment. Activated only if the buyer defaults.
• Revolving LC — Automatically renews for multiple shipments up to a specified total value.

The LC Process — Step by Step

1. Sales Contract — Buyer and seller agree on terms including payment by LC
2. LC Application — Buyer applies to their bank (issuing bank) to open an LC in favor of the seller
3. LC Issuance — Issuing bank sends the LC to the advising bank (in seller's country) via SWIFT
4. LC Advising — Advising bank authenticates and forwards the LC to the seller
5. Shipment — Seller ships goods and obtains the Bill of Lading and other documents
6. Document Presentation — Seller presents documents to the negotiating bank within the LC validity period
7. Document Examination — Bank checks documents for compliance (typically 5 banking days under UCP 600)
8. Payment — If documents comply, the bank pays the seller (sight) or accepts the draft (usance)
9. Document Forwarding — Documents are sent to the issuing bank, which reimburses the negotiating bank
10. Release to Buyer — Issuing bank releases documents to the buyer (after payment/acceptance)

Common LC Discrepancies

Discrepancies are the biggest headache in LC transactions. Over 60% of first presentations have discrepancies. Common ones include:

• Late Shipment — Goods shipped after the latest shipment date in the LC
• Late Presentation — Documents presented after the LC expiry date or beyond 21 days from B/L date
• Description Mismatch — Goods description on invoice doesn't match the LC exactly
• Amount Excess — Invoice value exceeds the LC amount (tolerance is usually ±5% unless specified)
• Missing Documents — A required document (COO, inspection certificate, etc.) is not presented
• B/L Issues — B/L is "received for shipment" instead of "on board," or is stale (presented too late)
• Insurance Issues — Insurance amount less than required, wrong risks covered, or effective date after shipment date
• Spelling Errors — Even minor typos in names, addresses, or vessel names can be flagged

Pro tip: Always request a draft LC from the buyer before finalization. Review every clause carefully and request amendments before shipping.

LC Costs for Indian Exporters

• LC Advising Fee — ₹2,000-5,000 (charged by the Indian bank)
• LC Confirmation Fee — 0.1%-0.5% per quarter (if confirmation is requested)
• Negotiation/Discount Fee — 0.1%-0.25% of the LC value
• Amendment Fee — ₹1,000-3,000 per amendment
• Discrepancy Fee — ₹1,000-2,000 per set of discrepant documents
• SWIFT Charges — ₹500-1,500 per message

How Eximly Manages Your LC Transactions

Eximly's LC Management module tracks every LC from opening to maturity. You get automatic alerts for shipment deadlines, document presentation dates, and LC expiry. Our document compliance checker flags potential discrepancies before you present documents to the bank — reducing rejection rates by 90%. Track amendments, monitor usance maturity dates, and reconcile LC payments with e-BRC certificates — all in one platform. Start your free trial.