Letter of Credit for Exporters. Types, Process & Discrepancies

What Is a Letter of Credit?

A Letter of Credit (LC) (also called a Documentary Credit) is a written undertaking issued by a bank (the issuing bank) on behalf of the buyer (the applicant), guaranteeing payment to the seller (the beneficiary / exporter) provided the exporter presents documents that comply strictly with the terms and conditions stated in the LC.

In simple terms, the LC shifts the credit risk from the buyer to the issuing bank. Instead of trusting a foreign buyer you may have never met, you are trusting a bank. And banks have credit ratings, capital adequacy requirements, and regulatory oversight that individual buyers do not.

Parties involved in an LC transaction

Why LCs Matter for Indian Exporters

India's merchandise exports crossed USD 450 billion in FY 2025-26, and a significant share of these transactions (particularly to Africa, the Middle East, South Asia, and CIS countries) are settled through Letters of Credit. Here is why LCs remain critical for Indian exporters.

• Payment security. Once the issuing bank opens an irrevocable LC, the exporter has a bank's commitment to pay. Even if the buyer faces financial trouble, the bank obligation stands independently.
• Pre-shipment and post-shipment finance. Indian banks extend packing credit (pre-shipment) and export bill discounting (post-shipment) against confirmed LCs at concessional rates. An LC transforms your export order into a bankable instrument.
• Buyer credibility filter. A buyer who can arrange an LC from a reputable bank has already passed that bank's credit assessment. The LC opening itself signals the buyer's creditworthiness and seriousness.
• Country risk mitigation. When exporting to countries with currency controls, political instability, or transfer restrictions, an LC (especially a confirmed LC) provides protection against sovereign risk that no amount of buyer goodwill can substitute.
• ECGC premium reduction. Export credit insurance premiums from ECGC are lower for LC-backed transactions compared to open account sales, because the bank guarantee reduces the insurable risk.
• FEMA compliance. LCs create a clear paper trail for RBI and AD bank reporting requirements under FEMA. The document-driven nature of LCs makes it easier to demonstrate that export proceeds were realized within the prescribed timeline.

Types of Letter of Credit

Not all LCs are created equal. The type of LC determines when you get paid, how much protection you have, and what it costs. Here are the types Indian exporters encounter most frequently.

Sight LC vs Usance LC

A Sight LC requires the issuing bank to pay immediately (within 5 banking days per UCP 600) upon receiving compliant documents. The exporter gets money fast. This is the most exporter-friendly payment timing.

A Usance LC (also called a Term LC or Deferred Payment LC) gives the buyer a credit period. Typically 30, 60, 90, 120, or 180 days from the bill of lading date, invoice date, or a specified event. The issuing bank accepts the documents and commits to paying on the maturity date.

Confirmed LC vs Unconfirmed LC

In an Unconfirmed LC , only the issuing bank guarantees payment. The advising bank merely forwards the LC to the exporter without adding its own payment commitment.

In a Confirmed LC , the confirming bank (usually in the exporter's country) adds its own independent undertaking to pay. The exporter now has two bank guarantees. If the issuing bank fails to pay (due to insolvency, sanctions, or country risk), the confirming bank steps in.

Confirmation is particularly valuable when exporting to buyers in Nigeria, Bangladesh, Sri Lanka, Egypt, Pakistan, Ethiopia, and CIS countries where banking system risk or foreign exchange availability can delay or prevent payment from the issuing bank.

Irrevocable LC vs Revocable LC

An Irrevocable LC cannot be amended or cancelled without the agreement of all parties. The beneficiary, the issuing bank, and the confirming bank (if any). This is the only type that provides real payment security.

A Revocable LC could historically be cancelled or modified by the issuing bank without the beneficiary's consent. However, UCP 600 (effective July 2007) eliminated revocable LCs entirely . Under Article 3 of UCP 600, all LCs are irrevocable by default, even if not expressly stated. If you see the word "irrevocable" on an LC, it is merely being explicit about what UCP 600 already mandates.

Transferable LC

A Transferable LC allows the first beneficiary (typically a middleman or trading house) to transfer all or part of the LC to one or more second beneficiaries (the actual manufacturers or suppliers). The transfer can only happen once. The second beneficiary cannot transfer it further.

This is common in Indian export trade where a merchant-exporter sources goods from multiple manufacturers. The LC must explicitly state " Transferable ". Unless this word appears, the LC cannot be transferred regardless of the parties' intentions.

Back-to-Back LC

A Back-to-Back LC is used when the exporter (who has received an LC from the buyer) needs to open a separate LC in favour of their domestic or international supplier. The original (master) LC serves as collateral for the second (back-to-back) LC.

Unlike a transferable LC, the supplier does not see the original LC or the end buyer's details. This protects the exporter's commercial relationship. Back-to-back LCs are common in the Indian gems, garments, and pharmaceutical sectors where exporters procure from multiple domestic suppliers.

Standby Letter of Credit (SBLC)

A Standby LC functions more like a bank guarantee than a traditional documentary LC. It is a "payment of last resort". The beneficiary draws on it only if the applicant fails to perform their contractual obligation (typically, failure to pay on open account terms).

SBLCs are increasingly used in India-US and India-EU trade where buyers prefer open account terms but are willing to provide an SBLC as a safety net. The exporter ships on open account and only invokes the SBLC if the buyer defaults. SBLCs are governed by ISP98 (International Standby Practices) or UCP 600, depending on what the SBLC states.

Red Clause and Green Clause LC

A Red Clause LC allows the exporter to draw an advance payment (typically 20. 30% of the LC value) before shipping the goods. The advance is paid by the advising/negotiating bank and debited to the issuing bank. The remaining amount is paid upon presentation of shipping documents.

A Green Clause LC goes further. It also covers warehousing and storage costs in addition to the pre-shipment advance. Green Clause LCs are rare but occasionally used in commodity exports (cotton, spices, raw materials) where the exporter needs to aggregate and store goods before shipment.

Revolving LC

A Revolving LC automatically reinstates itself after each drawing, up to a specified number of times or a total cumulative amount, within a defined period. Instead of opening a new LC for every shipment, the buyer opens one revolving LC that covers multiple shipments. This reduces bank charges and administrative overhead for repeat shipments. Revolving LCs can revolve on a cumulative basis (unused amounts carry forward) or non-cumulative basis (unused amounts for a period lapse).

LC Process Flow. From Application to Payment

The LC process involves multiple steps across four parties (buyer, issuing bank, advising bank, exporter). Here is the complete flow as it typically works for an Indian exporter.

Step 1

Contract and LC Terms Agreement

The exporter and buyer agree on the sale contract including price, Incoterm, payment terms (LC at sight or usance), latest shipment date, and the documents the LC will require. This is the stage where you negotiate LC terms. Once the LC is opened, amendments are expensive and time-consuming. Get the terms right in the contract.

Step 2

LC Application by the Buyer

The buyer approaches their bank (issuing bank) with the LC application, providing the sale contract details, the exporter's bank details, required documents, and LC terms. The issuing bank evaluates the buyer's creditworthiness and either opens the LC against the buyer's credit facility or requires a cash margin (typically 10. 100% of the LC value depending on the buyer's relationship with the bank).

Step 3

LC Issuance via SWIFT

The issuing bank transmits the LC to the advising bank (exporter's bank in India) via the SWIFT MT700 message . The MT700 is the standardized format for documentary credits and contains all LC terms, conditions, document requirements, amounts, dates, and special instructions in coded fields.

Step 4

LC Advising to the Exporter

The advising bank authenticates the SWIFT message (verifying it came from a legitimate bank through valid SWIFT keys) and forwards the LC to the exporter. The advising bank checks the apparent authenticity but does not guarantee payment. That remains the issuing bank's obligation (unless the advising bank also confirms the LC).

Step 5

Production and Shipment

The exporter manufactures/procures the goods and ships them before the latest shipment date specified in the LC. The exporter must ensure that the shipped goods match the LC description exactly. Not approximately, not substantially, but exactly . At the time of shipment, the exporter obtains the bill of lading (or airway bill), arranges insurance, and collects all other documents required by the LC.

Step 6

Document Presentation to the Negotiating Bank

The exporter presents the complete set of documents to the negotiating bank (usually the same as the advising bank) within the presentation period specified in the LC. If the LC does not specify a presentation period, UCP 600 Article 14(c) imposes a default of 21 calendar days after the date of shipment, but not later than the LC expiry date.

Step 7

Document Examination by Banks

The negotiating bank examines the documents against the LC terms. Under UCP 600 Article 14(b) , the bank has a maximum of 5 banking days following the day of presentation to determine if the documents are compliant. The bank checks each document against the LC terms and against each other for consistency.

If documents are compliant, the negotiating bank forwards them to the issuing bank. If discrepancies are found, the bank notifies the exporter and can either return the documents, hold them pending the exporter's instructions, or forward them to the issuing bank on an approval basis (with the exporter's consent).

Step 8

Payment or Acceptance

For a Sight LC : the issuing bank pays immediately upon finding the documents compliant. Payment flows from the issuing bank to the negotiating bank to the exporter. For a Usance LC : the issuing bank accepts the documents and commits to paying on the maturity date. The exporter can hold the accepted bill until maturity or discount it with their bank for immediate proceeds.

Documents Typically Required Under LC

The documents required are specified in the LC itself. However, most LCs for Indian exports require some combination of the following standard documents.

Bill of Lading (B/L) or Airway Bill (AWB)

The transport document proving that goods have been shipped. The LC will specify whether it requires a full set of originals (typically 3/3), whether it must be "shipped on board" (not just "received for shipment"), and whether it must be "clean" (no clauses noting defective condition of goods or packaging). UCP 600 Article 20 governs B/L requirements in detail.

Commercial Invoice

Must be issued by the beneficiary (exporter) and addressed to the applicant (buyer). The description of goods on the invoice must match the LC description exactly. Word for word. The invoice amount must not exceed the LC amount. Under UCP 600 Article 18, the invoice need not be signed unless the LC requires it.

Packing List

Details the contents of each package, carton, or container including net weight, gross weight, dimensions, and marks and numbers. Data on the packing list must be consistent with the B/L, invoice, and other documents. Inconsistencies in weights or quantities across documents are a leading cause of discrepancies.

Certificate of Origin

Certifies the country of origin of the goods. May be issued by the Chamber of Commerce, an authorized trade body, or in a specific format required by the destination country (e.g., Form A for GSP, EUR.1 for EU trade agreements). The LC will specify who must issue it and in what format.

Insurance Certificate or Policy

Required when the Incoterm is CIF or CIP (where the exporter arranges insurance). Under UCP 600 Article 28 , the insurance must cover at least 110% of CIF or CIP value and must be in the same currency as the LC. The insurance document must be dated no later than the date of shipment.

Inspection Certificate

If the LC requires pre-shipment inspection (common for exports to certain African and Middle Eastern countries), the certificate must be issued by the inspection agency named in the LC (e.g., SGS, Bureau Veritas, Intertek). Ensure the inspection is arranged well before shipment. Inspection agencies often need 5. 7 days lead time.

Common LC Discrepancies

Industry data suggests that 60. 70% of LC document presentations are rejected on the first submission due to discrepancies. A discrepancy gives the issuing bank the legal right to refuse payment. Here are the discrepancies that cost Indian exporters the most.

Late shipment

The goods were shipped after the "latest date of shipment" specified in the LC. The bill of lading date (on-board date) is later than the LC allows. This is non-waivable by the bank. If the B/L date is past the deadline, the documents are discrepant. Always build a buffer of at least 7. 10 days before the latest shipment date.

Late presentation of documents

Documents presented more than 21 days after shipment (or the shorter period specified in the LC) or after the LC expiry date, whichever is earlier. This is a strict deadline. Even one day late is a discrepancy. Collect all documents within a few days of shipment and present to your bank immediately.

Description of goods mismatch

The goods description on the commercial invoice does not match the LC description exactly. Under UCP 600, the invoice description must correspond to the LC. Other documents may use a general description consistent with the LC, but the invoice must mirror it. Even minor differences ("cotton fabric" vs "100% cotton fabric", "Grade A" vs "Grade-A") can be cited as discrepancies.

Short shipment or over shipment beyond tolerance

UCP 600 Article 30 allows a +/- 5% tolerance in quantity (but not in number of units/packages) provided the LC amount is not exceeded, and the LC does not state the quantity as a specific number of units. A +/- 10% tolerance applies to the LC amount if the word "about" or "approximately" qualifies the amount. Shipping outside these tolerances is a discrepancy.

Missing documents

Failing to present one or more documents required by the LC. This includes not only the main documents but also ancillary certificates, beneficiary statements, or declarations that may be buried in the LC's special conditions (Field 47A of the MT700). Read every line of the LC. Document requirements can appear in unexpected fields.

Inconsistent data across documents

The weight on the packing list does not match the weight on the bill of lading. The port of loading on the B/L differs from the invoice. The number of packages on the commercial invoice differs from the packing list. Banks check documents against each other. Any inconsistency, even if each document individually complies with the LC, constitutes a discrepancy under ISBP.

Stale documents

A bill of lading presented after the stipulated period (default 21 days after shipment) is considered "stale". Stale documents are a discrepancy even if they are presented before the LC expiry date. Some LCs specify a shorter presentation period (e.g., 14 days), which overrides the 21-day UCP default.

UCP 600 and ISBP Rules Exporters Must Know

UCP 600 (Uniform Customs and Practice for Documentary Credits, ICC Publication No. 600) is the international rulebook governing LCs. Published by the International Chamber of Commerce (ICC), effective since July 1, 2007, it applies to any LC that states it is subject to UCP 600. Which is virtually every LC issued today.

ISBP (International Standard Banking Practice, ICC Publication No. 745E, 2013 revision) supplements UCP 600 by explaining how bankers should interpret and apply the UCP rules in practice. While UCP 600 has 39 articles, here are the five that matter most to exporters.

Article 14. Standard for Examination of Documents

Banks have a maximum of 5 banking days following the day of presentation to examine documents. Examination is on the face of the documents. Banks do not verify underlying facts. Documents must "not be inconsistent with each other." The invoice description must correspond to the LC; other documents need not mirror the LC but must not conflict with it. Article 14(d) specifies that data in documents need not be identical but must not be inconsistent.

Article 16. Discrepant Documents, Waiver, and Notice

When documents are discrepant, the bank must give a single notice of refusal listing all discrepancies. It cannot reject on one discrepancy today and a different one tomorrow. The notice must state whether the bank is holding documents pending further instructions, or returning them. If the bank fails to give proper notice within 5 banking days, it is precluded from claiming that the documents are discrepant. This is a powerful protection for exporters.

Article 20. Bill of Lading

The B/L must indicate the name of the carrier, be signed by the carrier or their agent, indicate shipment from the port of loading to the port of discharge stated in the LC, and contain an on-board notation if the B/L is initially a "received for shipment" B/L. The B/L must appear to cover the entire voyage. No "gaps" in the transport chain.

Article 23. Air Transport Document

For air shipments, the AWB must indicate the name of the carrier, be signed by the carrier or their agent, indicate the airports of departure and destination stated in the LC, and indicate the date of shipment. Unlike a B/L, an AWB is never a document of title. It is a receipt and evidence of the contract of carriage.

Article 28. Insurance Document

The insurance document must be dated no later than the date of shipment (unless it is apparent from the document that cover is effective from a date not later than the shipment date). It must cover at least 110% of the CIF or CIP value of the goods and be in the same currency as the LC. Cover notes are not acceptable unless the LC expressly permits them.

LC Costs & Bank Charges for Indian Exporters

LCs are not free. Both the buyer and the exporter incur bank charges at various stages. As the exporter (beneficiary), here are the charges you will typically bear.

Negotiating LC Terms. What to Push Back On

The time to negotiate LC terms is before the LC is opened. Not after you receive it. Once the LC is issued, every change requires a formal amendment involving both banks, the buyer, and charges. Here are the key terms to negotiate and the red flags to watch for.

Terms you should always negotiate

• Latest shipment date. Build at least 15. 20 days of buffer beyond your realistic production and shipping timeline. Production delays, container shortages, and port congestion are routine. A tight shipment date is a trap.
• LC expiry date and presentation period. Ensure the LC expiry date is at least 21 days after the latest shipment date, and the presentation period gives you enough time to collect all documents. Ideally, the LC should expire at the counters of your advising bank, not at the issuing bank.
• Goods description. Keep it simple and broad enough to accommodate minor production variations. "Cotton T-shirts" is easier to comply with than "100% ring-spun combed cotton crew neck T-shirts, 180 GSM, pre-shrunk, Pantone 186C." The more specific the description, the more ways your documents can be discrepant.
• Partial shipments and transhipment. Insist that the LC allows partial shipments (so you can ship in batches if needed) and transhipment (since most Indian exports involve transhipment at hub ports like Colombo, Singapore, or Jebel Ali).
• Tolerance clause. Ask for "approximately" or "about" before the quantity and amount, which gives you a +/- 10% tolerance under UCP 600 Article 30.

Red flags in LC terms

LC vs Other Payment Methods

An LC is not always the right choice. The optimal payment method depends on the buyer relationship, country risk, transaction value, and cost tolerance.

When to insist on an LC

• First-time buyer with no payment track record
• Order value exceeds 10% of your annual working capital
• Buyer is in a country with foreign exchange restrictions or political instability
• Product is custom-made and cannot be resold to another buyer
• You need pre-shipment or post-shipment finance from your bank and the bank requires an LC as collateral
• ECGC cover is either unavailable or prohibitively expensive for the buyer's country

When you can move beyond LC

• Buyer has paid on time for 10+ consecutive shipments
• Buyer is a listed company or a subsidiary of a multinational with verifiable creditworthiness
• You have ECGC Whole Turnover or Specific Shipment policy covering the buyer
• The transaction cost of LC (confirmation + discounting) eats into your already thin margins

Digital LCs & ePresentation

The LC process is being digitized, though adoption in India is still evolving. Here are the key developments Indian exporters should be aware of.

SWIFT MT700. The current standard

All LCs today are transmitted via the SWIFT MT700 message format . The MT700 is a structured message with defined fields (Field 40A for form of credit, Field 31D for expiry date and place, Field 44E for port of loading, Field 45A for goods description, Field 46A for documents required, etc.). Understanding these field codes helps exporters read and verify LCs faster. SWIFT is migrating to the MX/ISO 20022 format , but MT700 remains the dominant format for documentary credits.

ePresentation (eUCP)

The ICC published eUCP Version 2.0 (effective July 2019) as a supplement to UCP 600, allowing documents to be presented electronically. Under eUCP, exporters can present electronic records (e-bills of lading, e-invoices, digital certificates) instead of paper documents. However, adoption requires both banks and all parties to agree on electronic presentation, and most Indian banks still prefer paper documents for LC transactions.

Blockchain-based LCs

Several banks globally (including HSBC, Standard Chartered, and DBS) have piloted blockchain-based LCs using platforms like Contour (formerly Voltron) and we.trade . These platforms promise to reduce LC processing time from 5. 10 days to under 24 hours by putting all parties on a shared, immutable ledger. In India, RXIL (Receivables Exchange of India) and some major banks have explored blockchain trade finance, but widespread commercial deployment is still in early stages.

Electronic Bill of Lading (eBL)

The adoption of electronic bills of lading through platforms like Bolero, essDOCS, and CargoX is gaining traction. The UK Electronic Trade Documents Act 2023 and UNCITRAL's MLETR (Model Law on Electronic Transferable Records) are providing the legal framework. For Indian exporters, eBL adoption will accelerate once Indian courts and the RBI formally recognize eBLs as equivalent to paper B/Ls under Indian law.

Frequently Asked Questions

What is a Letter of Credit in export trade?

A Letter of Credit (LC) is a written commitment issued by the buyer's bank guaranteeing that the exporter (beneficiary) will receive payment as long as the terms and conditions stated in the LC are met and compliant documents are presented within the stipulated time. It transfers the payment risk from the buyer to the issuing bank, making it the most secure payment method in international trade after advance payment.

What is the difference between a Sight LC and a Usance LC?

A Sight LC requires the issuing bank to pay the exporter immediately (typically within 5 banking days) upon presentation of compliant documents. A Usance LC allows the buyer a credit period (usually 30, 60, 90, 120, or 180 days from the date of shipment or bill of lading) before payment is made. Exporters can discount usance LCs with their bank for immediate cash at a discounting charge.

What are the most common LC discrepancies that cause document rejection?

The most common discrepancies are: late shipment (shipping after the latest shipment date in the LC), late presentation (presenting documents more than 21 days after shipment), description of goods mismatch between the invoice and the LC, short or over shipment beyond the tolerance, missing or incomplete documents, inconsistent data across documents (different weights, quantities, or marks), and stale documents. Banks reject approximately 60. 70% of LC document presentations on first submission.

What is a Confirmed LC and when should exporters insist on one?

A Confirmed LC is one where a second bank (usually in the exporter's country) adds its own guarantee of payment on top of the issuing bank's guarantee. Exporters should insist on confirmation when the issuing bank is in a country with political or economic instability, when the issuing bank's creditworthiness is uncertain, when the transaction value is large, or when the buyer is in a high-risk jurisdiction. The confirmation fee typically ranges from 0.1% to 2% per quarter depending on country risk.

What documents are typically required under a Letter of Credit?

Standard documents include: Bill of Lading (or Airway Bill for air shipments), Commercial Invoice matching the goods description in the LC exactly, Packing List with weights and measurements, Certificate of Origin (preferably from the Chamber of Commerce), Insurance Certificate covering at least 110% of CIF value, and Inspection Certificate if specified. The LC may also require a Beneficiary Certificate, Fumigation Certificate, Phytosanitary Certificate, or other specialized documents.

What are the key UCP 600 articles that exporters must know?

The most important UCP 600 articles are: Article 14 (standard for examination of documents (banks have 5 banking days to examine), Article 16 (discrepant documents) bank must give a single notice of refusal listing all discrepancies), Article 20 (bill of lading requirements), Article 23 (air transport document requirements), and Article 28 (insurance document requirements. Must cover at least 110% of CIF/CIP value).

How much do banks charge for LC transactions in India?

Typical exporter-side charges include: LC advising fee (0.05%. 0.1%, minimum Rs 2,000. 5,000), confirmation fee (0.1%. 2% per quarter depending on country risk), negotiation/handling fee (0.1%. 0.15%, minimum Rs 1,500. 3,000), usance discounting charges (SOFR/MCLR + 1. 2% for the credit period), amendment charges (Rs 2,000. 5,000 per amendment), and SWIFT charges (Rs 500. 1,500 per message). Total cost typically ranges from 0.5% to 3% of LC value.

When should an exporter insist on an LC instead of open account?

Insist on an LC when dealing with a new buyer with no payment track record, when the order value is large relative to your working capital, when the buyer is in a country with transfer or convertibility risk, when the product is custom-made and cannot be resold easily, or when you need bank financing against the export order. For repeat buyers with established trust, you may gradually move to DA or open account terms to reduce costs.

Update history

• 2026-08-12 First published.