Letter of Credit in Exports — Complete Guide for Indian Exporters

If you are exporting to a buyer you have never worked with before, in a country you have never shipped to, the Letter of Credit is your best friend. It is a bank-backed guarantee that you will get paid — provided you ship the right goods and present the right documents. No other payment mechanism in international trade offers this level of security to both the exporter and the importer.

Yet Letters of Credit are also the most misunderstood and most error-prone payment instrument in trade. Industry data consistently shows that 60-70% of first-presentation LC documents are rejected for discrepancies. A single typo — a misspelled city name, a weight mismatch, a missing document — can delay your payment by weeks or give the buyer grounds to negotiate a discount.

This guide covers everything an Indian MSME exporter needs to know about LCs — the types, the process flow from opening to payment, the documents required, the discrepancies that catch exporters off guard, and the practical tips that separate experienced exporters from first-timers.

What Is a Letter of Credit?

A Letter of Credit (LC) is a written commitment from the buyer's bank (called the issuing bank) to pay the seller a specified amount, provided the seller presents documents that comply exactly with the LC terms. It is governed by the Uniform Customs and Practice for Documentary Credits, UCP 600, published by the International Chamber of Commerce (ICC).

In simple terms: the buyer tells their bank to guarantee payment. The bank agrees, but only if the seller proves — through documents — that they have shipped the correct goods as per the agreed terms. The bank deals in documents, not goods. If your documents are clean, you get paid. Period.

Key parties in an LC transaction:

Party	Role
Applicant	The buyer (importer) who requests the LC
Beneficiary	The seller (exporter) who receives payment under the LC
Issuing Bank	Buyer's bank that opens/issues the LC
Advising Bank	Seller's bank that receives and authenticates the LC
Confirming Bank	Bank that adds its own guarantee (in confirmed LCs)
Negotiating Bank	Bank that examines documents and advances payment to seller

Why LCs Matter for Indian Exporters

Payment security. Your payment is guaranteed by a bank — not dependent on the buyer's willingness or ability to pay. Even if the buyer goes bankrupt after you ship, the issuing bank must pay if your documents comply.

New buyer relationships. The buyer does not want to pay in advance (what if you don't ship?). You don't want to ship on open account (what if they don't pay?). An LC solves this — both parties trust the banking system instead of each other.

Bank financing. Indian banks offer pre-shipment and post-shipment finance against LC-backed orders at preferential export credit rates.

Dispute resolution. LC terms are governed by UCP 600, an internationally recognised framework. Disputes are resolved based on document compliance, not subjective arguments.

Types of Letters of Credit

Irrevocable LC

This is the standard LC in international trade. Once issued, it cannot be amended or cancelled without the consent of all parties (buyer, seller, and banks). Under UCP 600, all LCs are irrevocable by default unless explicitly stated otherwise.

Use when: This should be your default. Never accept a revocable LC — it offers no payment security because the buyer can cancel it at any time.

Confirmed LC

An LC where the advising bank (or another bank in the seller's country) adds its own guarantee on top of the issuing bank's guarantee. This means even if the issuing bank fails to pay (due to country risk, bank insolvency, or foreign exchange restrictions), the confirming bank will pay.

Use when: The buyer's country has political or economic instability, or the issuing bank is not well-known. Common for exports to African countries, some Middle Eastern markets, and countries under economic stress.

Additional cost: The confirming bank charges a confirmation fee (typically 0.1% to 1% of LC value per quarter), which is usually borne by the seller unless negotiated otherwise.

Sight LC

Payment is made as soon as the documents are presented and found compliant. The negotiating bank examines your documents, and if everything is in order, payment is released immediately (in practice, within 3-7 banking days).

Use when: You need immediate payment and have no arrangement for credit terms with the buyer.

Usance LC (Deferred Payment LC)

Payment is deferred by an agreed period — typically 30, 60, 90, or 180 days after document presentation (or after the Bill of Lading date). The buyer gets time to receive and sell the goods before paying.

Use when: The buyer insists on credit terms. Usance LCs are extremely common in trade — many Indian export orders are on 60-day or 90-day usance terms. The advantage over open account credit is that payment is still bank-guaranteed.

Tip for Indian exporters: You can discount usance LCs with your bank. The bank pays you immediately (minus a discount charge) and collects from the issuing bank on the maturity date. This is called "negotiation under usance LC" and effectively converts a usance LC into a sight LC for your cash flow.

Revolving LC

An LC that automatically restores to its original amount after each drawing. Instead of opening a new LC for every shipment, a single revolving LC covers multiple shipments over a period.

Use when: You have a regular buyer placing monthly or quarterly orders of similar value. Saves time and banking fees.

Transferable LC

An LC that the beneficiary can transfer (in whole or in part) to one or more secondary beneficiaries. The first beneficiary is typically a middleman/trader who transfers the LC to the actual manufacturer.

Use when: You are a trading house or merchant exporter sourcing from multiple manufacturers, and the manufacturer wants LC-backed payment assurance.

Back-to-Back LC

Two separate LCs where the export LC (received from the buyer's bank) is used as collateral to open a domestic LC (for the manufacturer or supplier). The export LC backs the domestic LC.

Use when: Similar to transferable LC, but when the original LC is not transferable. Common in the garment and textile export trade where merchant exporters source from multiple manufacturers.

Standby LC (SBLC)

A Standby LC functions as a guarantee — it is only invoked if the other party defaults. It is closer to a bank guarantee than a traditional LC, used as a performance guarantee or payment security backup.

The LC Process Flow — Step by Step

Understanding the full cycle helps you manage timelines and avoid delays.

Step 1: Sales Contract

You and the buyer agree on the commercial terms — product, quantity, price, Incoterms, and payment by Letter of Credit. Specify the LC type (irrevocable, confirmed if needed), sight or usance period, and the documents required.

Critical: Negotiate LC terms during the contract stage, not after the LC arrives. Once the LC is issued, amendments cost time and money.

Step 2: Buyer Opens the LC

The buyer (applicant) approaches their bank (issuing bank) with the sales contract and requests an LC. The issuing bank evaluates the buyer's creditworthiness and opens the LC. This typically takes 3-7 working days.

Step 3: LC Transmitted to Your Bank

The issuing bank transmits the LC via SWIFT (Society for Worldwide Interbank Financial Telecommunication) to your bank (the advising bank) in India. Your bank authenticates the SWIFT message to confirm it is genuine.

Step 4: You Receive and Review the LC

Your bank forwards the LC to you. This is the most critical step for you as an exporter. Read every single word of the LC. Check that:

• Product description matches your contract and your ability to supply
• Quantity, unit price, and total value are correct
• Shipping terms (Incoterms, port of loading, port of discharge) match what you agreed
• Latest shipment date gives you enough time to produce and ship
• Document presentation deadline (typically 21 days after B/L date under UCP 600)
• All required documents are ones you can actually obtain
• There are no impossible or unusual conditions

If anything is wrong, request an amendment immediately — before you start production. Amendments require buyer's consent and take 3-7 working days.

Step 5: Produce, Pack, and Ship the Goods

Once you are satisfied with the LC terms, proceed with production and shipping. Ensure that every detail of the shipment matches the LC exactly — product description, packaging, marks and numbers, quantities, ports, and shipping date.

Step 6: Prepare and Present Documents

After shipment, collect all required documents and present them to your bank (the negotiating bank). Under UCP 600, you must present documents within 21 calendar days of the shipment date (B/L date), unless the LC specifies a different period. Documents must also be presented before the LC expiry date.

Step 7: Bank Examines Documents

Your bank has a maximum of 5 banking days (under UCP 600, Article 14) to examine the documents and determine if they comply with the LC terms. The bank checks documents against the LC — it does not verify whether the goods are actually correct. This is purely a document check.

Step 8: Documents Sent to Issuing Bank

If documents are compliant, your bank sends them to the issuing bank. The issuing bank also has 5 banking days to examine the documents.

Step 9: Payment

• Sight LC: Issuing bank pays immediately upon finding documents compliant
• Usance LC: Issuing bank accepts the documents and commits to pay on the maturity date

Step 10: Buyer Receives Documents and Clears Goods

The issuing bank releases the documents to the buyer. The buyer uses the Bill of Lading, commercial invoice, and other documents to clear the goods through customs at the destination port.

Documents Typically Required Under an LC

While the exact document list depends on the LC terms, here is the standard set for most Indian export LCs:

Document	Key Requirements
Commercial Invoice	Must match LC description exactly — product, quantity, unit price, total value, Incoterms. Signed and stamped.
Packing List	Detailed carton-wise packing, gross/net weights, dimensions. Must tally with invoice and B/L.
Bill of Lading (B/L)	"Shipped on board" notation, consigned as per LC (usually to order of issuing bank), notify party as per LC, port of loading and discharge exactly as in LC. Clean B/L (no adverse remarks).
Certificate of Origin (CoO)	Issued by the relevant chamber of commerce or authorised body. Country of origin, HS code.
Insurance Certificate	Required if CIF terms. Coverage amount (usually 110% of CIF value), risks covered per Institute Cargo Clauses (A), effective from warehouse to warehouse.
Inspection Certificate	If LC requires pre-shipment inspection by a specified agency (SGS, Bureau Veritas, etc.)
Fumigation Certificate	Common for agricultural exports — timber packaging must be ISPM-15 compliant.
Phytosanitary Certificate	For plant products, fruits, vegetables, spices — issued by plant quarantine authorities.
Health/Veterinary Certificate	For animal products — issued by EIC/FSSAI.

For detailed information on each document, see the export documentation guide.

Common LC Discrepancies — and How to Avoid Them

Discrepancies are the single biggest problem with LCs. When your bank finds a discrepancy, they either reject the documents or present them on a "discrepancy basis" — which means the issuing bank can refuse payment or the buyer can negotiate a discount.

Here are the most frequent discrepancies and how to prevent each one:

Late Shipment

The problem: You ship after the latest shipment date specified in the LC.

How to avoid: Work backwards from the LC shipment deadline. If the latest shipment date is June 30 and you need 15 days for production and 5 days for customs clearance, start production by June 10 at the latest. If you cannot meet the deadline, request an LC amendment immediately — do not hope for the best.

Late Presentation of Documents

The problem: You present documents to your bank more than 21 days after the B/L date (or whatever period the LC specifies).

How to avoid: Start preparing documents on the day of shipment. Do not wait for the B/L to arrive — prepare the invoice, packing list, CoO, and other documents in advance. Chase the shipping line for the B/L and submit everything within 7-10 days of shipment. The 21-day window sounds generous until you realise how long it takes to collect certificates from multiple agencies.

Description Mismatch

The problem: The product description on your invoice does not match the LC word-for-word. Even minor differences — "100% cotton T-shirts" on the invoice vs. "100% cotton T-shirt" (singular) in the LC — are technically discrepancies.

How to avoid: Copy the product description from the LC exactly, character by character, into your commercial invoice. Do not paraphrase, abbreviate, or "improve" the description. If the LC says "Indian Basmati Rice 1121," your invoice must say exactly the same — not "Basmati Rice" or "Indian Basmati 1121 Rice."

Stale Documents

The problem: B/L or other documents are dated before or after the period allowed by the LC.

How to avoid: Ensure the B/L date falls on or before the latest shipment date. Ensure all certificates are dated on or before the B/L date (unless the LC permits otherwise).

Insufficient Insurance Coverage

The problem: The insurance certificate covers less than the amount required by the LC (usually 110% of CIF value), or the wrong risks are covered.

How to avoid: Read the LC insurance requirements carefully. If it says "Institute Cargo Clauses (A) for 110% of CIF value," ensure your insurance certificate states exactly that. Do not get Clause (C) coverage when Clause (A) is required.

Missing Documents

The problem: You fail to include one of the documents specified in the LC.

How to avoid: Create a checklist from the LC document requirements the day you receive the LC. Check off each document as you obtain it. Review the complete set against the checklist before presenting to your bank.

Inconsistency Between Documents

The problem: The weight on the packing list does not match the weight on the B/L. The quantity on the invoice does not match the packing list. Marks and numbers on the B/L differ from the invoice.

How to avoid: Cross-check all documents against each other before presentation. Weights, quantities, marks, numbers, ports, and dates must be consistent across all documents.

LC Charges — Who Pays What

LC charges can be significant, especially for smaller shipments. Understanding the standard cost allocation helps you negotiate.

Charge	Typical Amount	Usually Paid By
LC opening/issuance charges	0.1% – 0.5% of LC value per quarter	Buyer
LC advising charges	Rs 2,000 – 5,000 (flat)	Seller
LC confirmation charges	0.1% – 1% of LC value per quarter	Seller (but negotiable)
Document examination/negotiation	0.1% – 0.25% of LC value	Seller
Amendment charges	Rs 1,000 – 3,000 per amendment (both sides)	Party requesting amendment
Discrepancy fee	Rs 2,000 – 5,000 per set (plus issuing bank charges)	Seller
SWIFT charges	Rs 500 – 2,000	Both sides (own bank's charges)
Usance/acceptance commission	0.1% – 0.3% per quarter	As per LC terms
Reimbursement charges	Rs 1,000 – 3,000	As per LC terms

Important: Many LCs state "All charges outside the issuing bank's country are for account of the beneficiary." This means as an Indian exporter, you bear all charges from your bank — advising, confirmation, negotiation, and discrepancy fees. Factor these into your export pricing.

Practical Tips for Indian Exporters

1. Negotiate LC terms during the sales contract stage. Specify the document list, shipment period, and whether partial shipments and transhipments are allowed. Do not leave these to the buyer's bank.
2. Keep the document list simple. Every additional document is another chance for a discrepancy.
3. Review the LC within 24 hours of receipt. Every day you delay is a day less for amendments.
4. Start preparing documents on shipment day. Do not wait for the B/L to arrive — prepare invoices, packing lists, and CoO in advance.
5. Match every detail to the LC — letter for letter. Copy descriptions, marks, and numbers exactly.
6. Present documents 5-7 days before the deadline. This gives your bank time to flag issues you can fix.
7. Ask your bank to pre-check informally. Most AD banks will do a courtesy review before formal presentation.

Common Mistakes Indian Exporters Make

Shipping before the LC is received. Some exporters start production or even ship goods based on the buyer's promise that the LC is "on the way." If the LC terms differ from what you expected, you are stuck with goods already in transit and documents that may not comply. Never ship before you have reviewed and accepted the LC.

Not reading the LC carefully. This cannot be overstated. Many exporters glance at the amount and shipment date and assume the rest is standard. It is not. Every LC is different. Read every clause. The 30 minutes you spend reviewing the LC can save you weeks of payment delays.

Presenting documents after the deadline. Under UCP 600, if you present documents late, the bank must refuse them — no exceptions, no extensions. Track your 21-day window (or whatever the LC specifies) as a hard deadline.

Not requesting amendments when needed. Exporters sometimes try to "work around" LC discrepancies rather than requesting a formal amendment. This almost always results in a discrepant presentation. If the LC needs to be changed, get it amended. The cost (Rs 1,000-3,000) is trivial compared to a discrepancy fee plus payment delay.

Accepting LCs with unrealistic terms. If the LC requires a document you cannot obtain, or a shipment date you cannot meet, do not accept it hoping things will work out. Request an amendment or reject the LC.

LC vs Other Payment Methods

Payment Method	Security for Exporter	Security for Importer	Cost	Speed
Advance payment (TT in advance)	Highest	Lowest	Low	Fast
Letter of Credit	High	High	High	Medium
Documentary Collection (D/P, D/A)	Medium	Medium	Low	Medium
Open Account	Lowest	Highest	Lowest	Fast

For new buyer relationships, always insist on an LC or advance payment. As the relationship matures and trust builds over 3-5 successful orders, you can gradually move to documentary collection or open account terms for repeat orders.

Key Takeaways

• An LC is a bank guarantee for payment — the strongest payment security in international trade after advance payment
• Under UCP 600, banks have 5 banking days to examine documents; you have 21 days from B/L date to present documents
• Read every word of the LC before starting production. Request amendments for anything that does not match your contract
• 60-70% of first-presentation LC documents have discrepancies — the biggest risk is careless documentation, not buyer default
• Copy product descriptions and details from the LC exactly — letter for letter — into your commercial invoice and other documents
• Factor LC charges (advising, negotiation, confirmation) into your export pricing
• Never ship before receiving and reviewing the LC
• Use your bank's pre-check service to catch discrepancies before formal presentation

Your LC Action Plan

If you have an export order with LC payment terms:

1. Negotiate LC terms during the contract stage — keep the document list simple and the shipment window realistic
2. Review the LC the day you receive it — check every term against your contract
3. Create a document checklist from the LC requirements and start collecting documents immediately
4. Ship on time — track your production timeline against the latest shipment date
5. Present documents early — aim for 7-10 days after shipment, not 20
6. If you need an IEC to start exporting, get that first — it takes just 1-3 days and costs Rs 500

The Letter of Credit has facilitated international trade for over a century. It works. But it works only when you understand the rules and follow them precisely. Master LC documentation, and you remove the single biggest friction point in getting paid for your exports.