Banking
Letter of Credit guide for Indian exporters
Types (sight, usance, SBLC), UCP 600 rules, bank charges comparison (SBI, HDFC, ICICI), document discrepancies, and EDPMS implications.
By Aaryan Kakani · · 7 min read
How Does a Letter of Credit Work?
A Letter of Credit is a written commitment from the buyer's bank (issuing bank) to pay the exporter a specified amount, provided the exporter presents documents that comply exactly with the LC terms. The key principle: banks deal in documents, not goods.
LC flow. 8 steps
- Sales contract. Buyer and exporter agree on price, Incoterm, and LC as payment method
- Buyer applies to their bank. Buyer requests their bank (issuing bank) to open an LC in favour of the exporter
- Issuing bank opens LC. Sends the LC via SWIFT to the exporter's bank (advising bank)
- Advising bank notifies exporter. Authenticates the LC and passes it to the exporter. Charges an advising fee.
- Exporter ships goods. Ships per the LC terms (within the shipment deadline, from the specified port, etc.)
- Exporter presents documents. Submits all required documents to the advising/negotiating bank within the presentation period (typically 21 days from B/L date)
- Banks examine documents. The negotiating bank checks documents (5 banking days under UCP 600). If compliant, forwards to issuing bank. If discrepant, notifies exporter.
- Payment. Issuing bank pays (sight LC: immediately; usance LC: on the due date)
Key parties
| Party | Role |
|---|---|
| Applicant | Buyer. Applies for the LC |
| Beneficiary | Exporter. Receives payment under the LC |
| Issuing bank | Buyer's bank. Opens the LC, guarantees payment |
| Advising bank | Exporter's bank. Receives and authenticates the LC |
| Confirming bank | Adds its own guarantee (optional. Used when issuing bank's country has high risk) |
| Negotiating bank | Examines documents and pays the exporter (often same as advising bank) |
Types of LC
| Type | Payment timing | Best for |
|---|---|---|
| Sight LC | Immediate (5-7 banking days after compliant presentation) | New buyers, high-risk countries, when you need cash fast |
| Usance LC (30/60/90/180 days) | Deferred. On the due date after the credit period | Repeat buyers who need credit. Exporter can discount for early funds. |
| Confirmed LC | Same as underlying LC (sight or usance) | When issuing bank or country has weak credit rating |
| Standby LC (SBLC) | Only if buyer defaults on direct payment | Backup guarantee. Primary payment is by TT. LC is insurance. |
| Transferable LC | Same as underlying LC | Middleman/trading companies. Can transfer LC to the actual manufacturer |
| Back-to-back LC | Same as underlying LC | Trader opens a second LC to supplier, backed by the original LC from buyer |
| Revolving LC | Resets after each drawing | Repeat shipments to same buyer. One LC covers multiple shipments |
Sight vs usance. Exporter impact
| Factor | Sight LC | Usance LC (90 days) |
|---|---|---|
| Cash flow | Fast. 5-7 days | Delayed. 90 days (or discount for early funds) |
| Interest cost | None | If discounted: bank interest for 90 days |
| Pricing impact | Quote your standard price | Add interest cost to your price (buyer pays for credit) |
| EDPMS deadline | 9 months from shipment | 9 months from shipment (not from LC maturity) |
| Buyer preference | Costly for buyer (ties up credit line) | Preferred by buyers (delayed payment) |
UCP 600. Rules that govern LCs
UCP 600 (Uniform Customs and Practice for Documentary Credits, ICC Publication 600) is the international rulebook for LCs. Issued by the International Chamber of Commerce in 2007, it governs virtually all LCs worldwide. Key rules every exporter should know:
Critical UCP 600 rules for exporters
- Article 14. 5 banking day examination period. Banks have exactly 5 banking days (not calendar days) to examine documents and decide whether to accept or refuse. If the bank doesn't refuse within 5 days, it must pay.
- Article 14(b). Document consistency. Data in documents need not be identical but must not conflict. "Blue cotton shirts" on the invoice and "cotton shirts, blue" on the packing list is fine. "Blue cotton shirts" and "polyester shirts" is a discrepancy.
- Article 18. Invoice must mirror LC. The commercial invoice description of goods must match the LC description exactly. This is the strictest matching rule. Even minor wording differences are grounds for refusal.
- Article 20. Bill of lading rules. B/L must show the named port of loading and discharge, be signed by the carrier/master/agent, indicate "shipped on board" with a date, and show the full set of originals issued.
- Article 28. Insurance cover. Insurance must be for at least 110% of CIF/CIP value, cover risks specified in the LC, and be dated no later than the shipment date.
- Article 14(c). Presentation period. Documents must be presented within 21 calendar days of shipment (B/L date) unless the LC specifies otherwise, and within the LC expiry date.
- Article 16. Refusal notice. If the bank refuses documents, it must give a single notice listing all discrepancies. It cannot add new discrepancies later in a second notice.
Bank charges comparison
LC charges are split between the buyer (issuing charges) and the exporter (advising, negotiation, discrepancy charges). Here's what Indian exporters pay at major banks:
Exporter-side LC charges by bank
| Charge type | SBI | HDFC | ICICI / Axis / Kotak |
|---|---|---|---|
| Advising fee | Min Rs 5,000 | Rs 2,000-5,000 | Rs 2,000-5,000 |
| Negotiation/purchase | 0.10-0.20% | 0.15-0.25% | 0.10-0.25% |
| Confirmation (if added) | Min Rs 5,000 + 0.1-0.5%/qtr | 0.1-0.5%/qtr | 0.1-0.5%/qtr |
| Discrepancy | Rs 1,000-2,000 | Rs 1,500-3,000 | Rs 1,000-3,000 |
| Amendment | Rs 2,000 (min Rs 500) | Rs 1,500-3,000 | Rs 1,000-5,000 |
| SWIFT per message | Rs 500 | Rs 500-1,000 | Rs 500-1,500 |
| Documentation | Included | Rs 1,500 | Varies |
All charges attract 18% GST. SBI is typically 15-20% cheaper overall. Rates as of 2026; verify with your branch.
Worked example: Rs 50 lakh sight LC at SBI
| LC advising | Rs 5,000 |
|---|---|
| Negotiation (0.15% of Rs 50,00,000) | Rs 7,500 |
| SWIFT (2 messages) | Rs 1,000 |
| GST @ 18% | Rs 2,430 |
| Total exporter cost | Rs 15,930 |
Add Rs 1,000-2,000 per discrepancy if documents aren't clean.
Documents required under LC
The LC specifies exactly which documents you must present. Common document sets for Indian goods exports:
Typical LC document requirements
- Commercial invoice. In the number of copies stated (usually 3 originals + 3 copies). Description must match LC exactly.
- Full set of clean on-board B/L. Usually 3/3 originals, marked "shipped on board", with freight notation (prepaid or collect as per LC), consigned as LC specifies (usually to order of issuing bank).
- Packing list. Detailing contents, weights, dimensions of each package. Quantities must match invoice.
- Certificate of Origin. Issued by chamber of commerce or eCoO 2.0. Form depends on destination country.
- Insurance certificate/policy. If CIF terms: 110% of invoice value, ICC-A clause, dated no later than B/L date, covering risks stated in LC.
- Inspection certificate. If LC requires third-party inspection (SGS, Bureau Veritas, etc.)
- Beneficiary certificate. Self-declaration about shipment details, often required by the LC
- Draft/bill of exchange. Drawn on the issuing bank (sight or usance as per LC terms)
Document preparation checklist
- Read the LC clause-by-clause before preparing any document
- Copy the goods description from the LC word-for-word into the invoice
- Match quantities, unit prices, and total amounts across invoice, B/L, and packing list
- Ensure the B/L date is within the LC's latest shipment date
- Present documents within 21 days of B/L date (or LC-specified period)
- Check that the LC hasn't expired. The presentation must be within the LC expiry date
- Ensure B/L is "clean". No clauses noting damage or defective packaging
- Insurance dated on or before shipment date, not after
Discrepancies. And how to avoid them
ICC Banking Commission data shows that 70% of first LC document presentations contain at least one discrepancy . Each discrepancy costs you Rs 1,000-3,000 in bank charges and risks payment refusal.
Most common discrepancies (ICC data)
| Discrepancy | Frequency | How to avoid |
|---|---|---|
| Late shipment | 22% | Request LC amendment if shipment will be delayed. Don't ship late hoping the bank won't notice. |
| Description mismatch | 18% | Copy LC goods description verbatim into the commercial invoice. Character by character. |
| Missing B/L endorsement | 15% | If B/L is "to order", it must be endorsed (stamped and signed) by the shipper on the back. |
| Insurance inconsistency | 12% | Date insurance on or before B/L date. Cover 110% of CIF. Match currency and risks. |
| Expired presentation period | 9% | Calendar the 21-day deadline from B/L date. Present documents well before it. |
What happens when documents are discrepant
- Your bank notifies you. Lists all discrepancies found
- You can fix and re-present. If time permits (within presentation period and LC expiry)
- Or send on approval basis. Bank sends discrepant documents to the issuing bank, requesting the buyer's acceptance. Buyer can accept (pay) or refuse (reject).
- If buyer refuses. You don't get paid. Goods are at the destination port. You must arrange alternative payment or re-route goods.
LC negotiation at your bank
"Negotiation" in LC terms means your bank examines your documents, pays you (or agrees to pay), and then sends the documents to the issuing bank for reimbursement. For the exporter, it's the step where you get your money.
Steps to present documents at your bank
- Gather all documents. Per the LC requirements, in the specified number of originals/copies
- Do your own audit. Check each document against the LC clause by clause
- Submit to your bank's trade desk. With a covering letter listing all documents enclosed
- Bank examines (max 5 banking days). May raise queries or request corrections
- If compliant: bank negotiates. For sight LC: credits your account. For usance: accepts the draft and pays on maturity (or you can request discounting for early funds).
- Documents sent to issuing bank. Via courier. Issuing bank has 5 banking days to examine.
- Issuing bank reimburses your bank. Through the reimbursing bank or direct credit.
Usance LC discounting
If you have a 90-day usance LC but need funds immediately, your bank can "discount" the accepted draft. Pay you now and collect from the issuing bank on maturity. The cost is interest for the remaining credit period.
Cost: Bank's reference rate (typically MCLR/repo-linked) + 1-3% spread, for the credit period. On a Rs 50 lakh, 90-day usance LC at 9% p.a., the discounting cost would be approximately Rs 1,12,500. Factor this into your pricing.
EDPMS and FEMA implications
Key compliance points
- Realization deadline. 9 months from date of shipment (as of June 2026). LC payment must be received within this period regardless of the LC's usance terms. A 180-day usance LC on a shipment that took 3 months to arrange could breach the FEMA deadline.
- EDPMS entry. Created automatically when the shipping bill is filed. LC payment receipt is matched against this entry. Ensure the LC value matches the shipping bill FOB value.
- Purpose code. LC proceeds for goods exports should be credited with purpose code P0101 (general goods). Ensure your AD bank uses the right code. Wrong code blocks eBRC generation.
- Partial shipment. If the LC allows partial shipment and you ship in installments, each shipment creates a separate EDPMS entry. Manage partial payments carefully.
- FEMA penalty. Non-realization of export proceeds within the deadline carries penalties up to 3x the sum involved under FEMA. LC delays (discrepancies, buyer acceptance process) are not valid excuses.
Seasaw automates this
Track LC payments from negotiation to EDPMS closure
Seasaw matches your LC proceeds to EDPMS entries automatically, flags realization deadline risks, and ensures your purpose codes are correct for eBRC generation. No more spreadsheets tracking which LC payment matched which shipping bill.
See how Seasaw works →
Sources & citations
- ICC Uniform Customs and Practice for Documentary Credits (UCP 600), Publication No. 600. ICC Banking Commission data on documentary credit discrepancies.
- RBI Master Direction. Export of Goods and Services (updated June 2026). SBI Forex Transaction Service Charges (2026). HDFC Bank Trade Services Fees (2026). Axis Bank Trade & Forex Charges Schedule (July 2026).
Update history
- First published.