What Is a Letter of Credit? How LCs Work for Indian Exporters and Importers in 2026

A new buyer in Dubai or Hamburg wants 90 days' credit. You have never met them, you can't sue them easily, and one unpaid container could wipe out a year's profit. A letter of credit solves this by putting a bank's promise between you and the buyer: ship the goods, present the right documents on time, and the bank pays — whatever the buyer's mood. This guide is for Indian exporters, importers and inland traders who are new to LCs or have lost money to a discrepancy. It covers what an LC is, the types you will meet, the UCP 600 rules on documents, what LCs really cost from published bank tariffs, a worked export example, and the FEMA and RBI rules that apply from October 2026.

Quick answer

A letter of credit (LC) is an irrevocable undertaking by the buyer's bank (the issuing bank) to pay the seller (the beneficiary) a stated amount if the seller presents documents that comply with the LC's terms within its deadlines. International LCs follow the ICC's UCP 600 rules. Banks deal only in documents, not goods — so a perfect shipment with a wrong document can still go unpaid.

• Sight LC pays on compliant documents; usance LC pays on a future date, giving the buyer credit

• A confirmed LC adds a second bank's promise — usually an Indian bank — against issuing-bank and country risk

• Present documents within 21 calendar days after shipment (and within expiry) unless the LC says otherwise; banks get up to five banking days after presentation to check them

• Export proceeds must be realised within nine months of shipment from 1 October 2026

• Typical costs: advising, confirmation, negotiation and discrepancy fees — see the published tariffs below

What is a letter of credit?

A letter of credit is a bank's written promise to pay a seller on behalf of a buyer, conditional on the seller presenting specified documents. It is also called a documentary credit. The buyer (the applicant) asks its bank to open the LC in favour of the seller (the beneficiary). The issuing bank sends it through a correspondent in the seller's country — the advising bank — which checks it is genuine and passes it on. The seller ships, collects the documents the LC asks for, and presents them to a nominated bank (often the same Indian bank), which checks them and pays, negotiates or forwards them to the issuing bank for payment.

Letters of credit at a glance (2026)

UCP 600

Rulebook for international LCs

ICC, in force since 2007

21 calendar days after shipment (and within expiry)

Default presentation deadline

UCP 600 art. 14(c)

five banking days after presentation

Maximum time for banks to check documents

UCP 600 art. 14(b)

nine months

Export realisation period

FEMA 2026 regs, from 1 Oct 2026

Three principles make LCs work, and every exporter should know them. First, an LC under UCP 600 is irrevocable — it cannot be changed or cancelled without the beneficiary's agreement, even if the LC doesn't say so. Second, it is independent of the sale contract: the bank's obligation doesn't depend on whether the buyer is happy with the goods. Third, banks deal only in documents. They don't inspect the cargo; they compare what you present with what the LC demands. If the documents comply, the bank must pay. If they don't, the bank may refuse — even if the goods are perfect.

Most international LCs say they are subject to UCP 600, the ICC's Uniform Customs and Practice for Documentary Credits, in force since 2007. Banks examine documents using the ICC's International Standard Banking Practice (ISBP) guide, and electronic presentations follow the eUCP supplement. Inland LCs between Indian buyers and sellers are governed by the bank's own terms and RBI's rules on non-fund based facilities, though many also incorporate UCP 600.

How a letter of credit works, step by step

Most problems with LCs start before shipment, when the exporter accepts an LC without reading it. The sequence below shows where the risk sits at each stage.

The life of an export LC

1. 1

   Agree LC terms in the contract

   Your proforma invoice or sales contract should name the LC type (sight or usance), the tenor, whether it must be confirmed, latest shipment date, expiry, port of loading and discharge, and the exact documents. Send the buyer a draft of the clauses you need.

   Tip: Ask for the LC to be available with your bank in India, not only at the issuing bank abroad.

2. 2

   Buyer opens the LC

   The buyer's bank issues the LC by SWIFT (MT700) to an advising bank in India.

3. 3

   Your bank advises it — check every clause

   Read it the day it arrives. Can you meet the shipment date? Are the documents ones you can actually obtain? Are names, addresses and goods descriptions right? Ask for amendments now, before you ship.

4. 4

   Ship and collect documents

   Produce, inspect and ship. Get the bill of lading or airway bill, invoice, packing list, certificate of origin, insurance and any inspection certificate exactly as the LC describes.

5. 5

   Present to the nominated bank

   Present within the LC's presentation period — 21 calendar days after shipment by default — and before expiry. The bank has up to five banking days to examine.

6. 6

   Get paid or discount

   Under a sight LC the bank pays on compliance. Under a usance LC the issuing bank accepts and pays at maturity; your bank can discount the accepted bill so you are paid early.

Types of letter of credit

Sight LC and usance LC

A sight LC is paid when the documents are found compliant. It suits exporters who need cash quickly and buyers who are willing to pay on shipment. A usance LC pays on a fixed future date — for example, 60, 90 or 180 days after the bill of lading date — and comes in two forms: a deferred payment credit, where the bank simply promises to pay on the due date, and an acceptance credit, where the bank accepts a bill of exchange drawn on it. Either way, the buyer gets credit while the exporter keeps a bank's commitment.

For an Indian importer, a usance LC is a way to buy on credit. If the overseas supplier gives that credit, or an overseas bank pays the supplier and the importer repays later (buyer's credit), it is a trade credit under FEMA and must stay within RBI's limits — covered further down.

Sight LC vs usance LC

Point	Sight LC	Usance LC
When the exporter is paid	On compliant presentation	On the maturity date (or earlier by discounting)
Credit to the buyer	None	30–180 days, sometimes longer
Cost to the buyer	Opening commission only	Opening + usance commission (+ interest if financed)
Exporter's financing need	Low	Higher — usually discounted with the bank
Counts against FEMA realisation window	Barely	Yes — tenor eats into the nine months

When the exporter is paid

Sight LC

On compliant presentation

Usance LC

On the maturity date (or earlier by discounting)

Credit to the buyer

Sight LC

None

Usance LC

30–180 days, sometimes longer

Cost to the buyer

Sight LC

Opening commission only

Usance LC

Opening + usance commission (+ interest if financed)

Exporter's financing need

Sight LC

Low

Usance LC

Higher — usually discounted with the bank

Counts against FEMA realisation window

Sight LC

Barely

Usance LC

Yes — tenor eats into the nine months

Confirmed LC

An LC issued by a bank you don't know, in a country with foreign exchange shortages or sanctions risk, is only as good as that bank and that country. Confirmation adds a second, independent undertaking from a bank you trust — usually your own Indian bank or an international bank. If the documents comply, the confirming bank pays even if the issuing bank doesn't. Ask for "confirmation" in the contract and make sure the LC carries the instruction "confirm" or "may add" — a bank can't confirm an LC that doesn't allow it. Confirmation is priced on the issuing bank's rating and the country risk.

Transferable and back-to-back LCs

Traders who don't make the goods themselves use two structures. A transferable LC lets the first beneficiary (the trader) transfer all or part of the credit to a second beneficiary (the actual supplier), usually with a lower price and a shorter shipment window; the trader then substitutes its own invoice to earn the margin. It works only if the LC is expressly marked "transferable". A back-to-back LC is a separate, new LC that the trader's bank issues in favour of the supplier, using the buyer's LC as comfort. It is more flexible but needs a credit limit with the trader's bank, because the bank takes the risk that the two LCs don't match.

Standby LC, revolving LC and inland LC

A standby letter of credit (SBLC) pays only if the applicant defaults — it works like a bank guarantee, and is common for advance payments and service contracts; our bank guarantee guide explains the difference. A revolving LC covers repeated shipments over a period, reinstating its value after each drawing. An inland LC is used between Indian buyers and sellers; it is common in steel, chemicals and textiles where suppliers sell to large buyers on 60–90 days' credit.

Documents and discrepancies: where LCs fail

Because banks examine documents, not goods, the documents are the payment. A typical export LC asks for a signed commercial invoice; a full set of clean, on-board ocean bills of lading (or an airway bill); a packing list; a certificate of origin; an insurance policy or certificate if the sale is CIF or CIP; and sometimes an inspection certificate, a beneficiary's certificate or a copy of a fax to the buyer. The LC tells you who must issue each document, what it must say and how many originals to present.

UCP 600 sets the clocks. Unless the LC specifies another period, documents that include an original transport document must be presented within 21 calendar days after shipment (and within expiry), and never after the LC's expiry. Each nominated, confirming and issuing bank then has a maximum of five banking days after presentation to decide whether the presentation complies. A bank that refuses must send a single notice listing every discrepancy and saying what it is doing with the documents; if it misses this deadline or the form, UCP 600 article 16 bars it from claiming the documents were discrepant.

When the bank finds discrepancies, it doesn't have to reject outright. Commonly it asks the applicant (the buyer) whether it will waive them. If the buyer still wants the goods, it waives and the bank pays, less a discrepancy fee. As an issuing bank, SBI's tariff charges USD 100 per bill on discrepant import bills and deducts it from the foreign seller's proceeds — and overseas issuing banks do the same to Indian exporters. If the buyer is looking for a way out, perhaps because prices have fallen, a discrepancy hands it one. Your LC has then become little better than a collection.

The discrepancies Indian exporters see most often are avoidable: shipment after the latest shipment date; presentation after 21 days because the bill of lading reached the exporter late; an invoice amount or quantity outside the LC's tolerance; a goods description on the invoice that doesn't match the LC word for word; a bill of lading without an "on board" notation or with a clause about damaged packaging; inconsistent addresses or LC numbers between documents; insurance cover lower than 110% of the invoice value when the LC says so; and certificates issued by the wrong body. Build a checklist from each LC and have someone other than the person who prepared the documents check them before presentation.

LC charges: what you will pay

There is no regulated rate for LC fees. Each bank publishes a tariff, and costs fall into a few buckets. The table below uses two published public sector bank schedules as reference points — SBI's forex tariff effective 1 October 2026 and PNB's credit tariff revised from 1 November 2026. Private banks and foreign banks quote their own rates, often negotiable for regular customers. All charges carry GST, and foreign bank charges and SWIFT costs are recovered at actuals.

Two concessions are worth knowing. Banks discount fees for cash-backed LCs: SBI charges 25% of its card rate where the LC or guarantee is backed by 110% cash margin, and PNB scales its inland LC commission down at 50%, 75% and 100% liquid margin. And many banks waive advising and negotiation fees for customers who take export credit from them — SBI charges nothing for advising or negotiating export LCs for its export-credit customers.

Worked example: a ₹34 lakh usance LC export

Suppose a brassware maker in Moradabad agrees to sell USD 40,000 of goods to a buyer in Germany. For illustration, assume an exchange rate of ₹85 per US dollar, so the order is worth about ₹34 lakh. The buyer offers a 90-day usance LC from a mid-sized German bank, payable 90 days after the bill of lading date, subject to UCP 600. The exporter asks for the LC to be available with its Indian bank by negotiation and to permit confirmation.

The LC arrives through the exporter's bank. Because the issuing bank is rated in the A range, the Indian bank quotes confirmation at 0.50% a year on SBI's published scale. For a credit running about four months from confirmation to maturity, that is USD 40,000 × 0.50% × 4/12 ≈ USD 67, roughly ₹5,700, plus GST. The exporter is an export-credit customer, so advising and negotiation fees are nil on that bank's tariff.

The goods are shipped on 1 November. The bill of lading reaches the exporter on 6 November, and documents are presented on 10 November — well inside the 21-day window. The bank checks them within five banking days, finds them compliant, and sends them to the German bank, which accepts the draft for payment on 30 January. The exporter doesn't want to wait, so its bank discounts the accepted bill. At an assumed discount rate of 7% a year for 81 days, the interest cost is about USD 40,000 × 7% × 81/365 ≈ USD 621, or ₹52,800. If the exporter instead finances the bill in rupees and qualifies for the interest subvention on MSME export credit — 2.75% a year on eligible rupee export credit — the effective cost can be lower.

The example's timeline

Step 1

1 Nov

goods shipped on board

Step 2

10 Nov

documents presented

Step 3

≤ 5 banking days

checked, sent abroad

Step 4

30 Jan

maturity — paid

Step 5

1 Aug

FEMA realisation deadline

Two compliance points follow. The proceeds reach India on maturity, roughly three months after shipment — comfortably within the nine months realisation period, which ends around 1 August next year. And the Export Declaration Form filed with the shipping bill gets closed in the bank's EDPMS system when the money arrives. Had the buyer offered a 270-day usance LC, the tenor alone would have used up the whole realisation window, leaving no room for delays — something to raise with your bank before agreeing.

RBI and FEMA rules for LCs and trade credit

The Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026, in force from 1 October 2026, replaced the 2015 export and import regulations. For exporters, the key rule is the realisation period: the full value of goods exported must be realised and repatriated within nine months from the date of shipment (or from the sale of goods from an overseas warehouse), or twelve months where the export is invoiced or settled in rupees. This was set at fifteen and eighteen months when the regulations were notified in January 2026, but an amendment of 22 September 2026 shortened it before the regulations took effect. Your authorised dealer bank can extend the period on request if the reasons are satisfactory.

LCs also act as a penalty box. Under regulation 13, if an exporter has bills outstanding for more than one year past the due date, the bank may allow further exports only against full advance payment or an irrevocable letter of credit until the overdue position is cleared. On the import side, banks may ask for a standby LC or guarantee from an international bank before allowing large advance payments, and must insist on one for future advances where an earlier advance was not repatriated on time.

For importers who use usance LCs or buyer's credit, RBI's trade credit framework (Part II of the Master Direction on ECB and Trade Credits, still in force after the ECB part was deleted from it in February 2026) sets the outer limits. The period of credit runs from the date of shipment: up to three years from shipment for capital goods and up to one year or the operating cycle, whichever is less for non-capital goods. Under the automatic route, trade credit is capped at USD 50 million per import transaction for most importers. The all-in cost — interest, fees and guarantee charges — may not exceed benchmark rate + 300 basis points for foreign currency credit, or benchmark plus 250 basis points for rupee credit. Indian banks may give a guarantee in favour of the overseas lender but may not issue letters of undertaking or letters of comfort for trade credit.

Common LC mistakes and how to fix them

Accepting an LC you can't comply with. Clauses like "inspection certificate signed by the applicant" put payment in the buyer's hands. Ask for these to be deleted or replaced with a third-party inspection before you ship. Amendments cost a small fee; non-payment costs the whole invoice.

Late documents. If your freight forwarder takes ten days to release the bill of lading, you have eleven left to prepare and present everything. Agree release timelines in writing and keep the 21-day count on a calendar from the shipment date.

Ignoring the issuing bank and country. Check the issuing bank's standing with your bank's trade desk. If in doubt, insist on confirmation or cover the buyer and country risk with ECGC export credit insurance. Forgetting realisation. A usance LC doesn't change your FEMA obligations; diarise the maturity date and the realisation deadline together.

Check these the day the LC arrives

0/9

• Your name, address and the goods description match your contract exactly
• LC amount and tolerance cover the quantity you will ship
• Latest shipment date and expiry leave time for production and presentation
• Presentation period and place of expiry (preferably India)
• Every document named is one you can obtain, from the issuer named
• No clause makes payment depend on the buyer's signature or approval
• Confirmation instruction present if you need it
• Charges clause: who pays the issuing bank's and your bank's fees
• Subject to UCP 600

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Official links

• FEMA (Export and Import of Goods and Services) Regulations, 2026Realisation period, EDF, advances, LC conditions
• FEMA 23(R)/(1)/2026-RB — amendment of 22 Sep 2026Nine-month realisation period
• RBI Master Direction — Trade CreditsUsance LC / buyer's credit limits
• DGFTIEC, RCMC and export schemes

What to do next

Before your next export deal, write the LC terms you need into your proforma invoice — the type, tenor, documents and confirmation — and send the buyer a draft. Ask your bank for its trade tariff and whether you qualify for fee waivers as an export-credit customer. If you are just starting, our guides to IEC registration, starting an import-export business and the RoDTEP scheme cover the rest of the setup, and the currency converter helps price your quotes.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is a letter of credit in simple words?

A letter of credit (LC) is a bank's written promise to pay a seller a fixed amount, provided the seller presents the documents the LC lists — usually an invoice, transport document, packing list and certificates — on time and without discrepancies. The buyer's credit risk is replaced by the bank's. It is the most common way exporters secure payment from buyers they don't yet trust.

What is the difference between a sight LC and a usance LC?

Under a sight LC, the bank pays as soon as it has checked the documents and found them compliant — within a maximum of five banking days under UCP 600. Under a usance (deferred payment or acceptance) LC, the bank accepts the documents and pays on a future date, such as 90 days after the bill of lading date, which gives the buyer credit. Exporters can usually discount an accepted usance bill to get paid early.

What is a confirmed letter of credit?

A confirmed LC carries a second, independent payment promise from a bank in the exporter's country (the confirming bank), in addition to the issuing bank's. If the issuing bank or its country can't or won't pay, the confirming bank still must, provided the documents comply. Exporters ask for confirmation when the buyer's bank is weak or the country carries transfer risk; it costs a confirmation fee based on that risk.

What are the most common LC discrepancies?

Late shipment or late presentation, an expired LC, descriptions on the invoice that don't match the LC, amounts or quantities beyond the tolerance, a bill of lading that isn't clean or 'on board', missing endorsements, inconsistent data between documents, and missing or wrongly issued certificates. Each discrepancy lets the bank refuse to pay until the buyer waives it, and attracts a discrepancy fee.

Is a letter of credit safer than advance payment?

No — advance payment is the safest for an exporter because you hold the money before shipping. But few buyers agree to pay fully in advance. An irrevocable LC, especially a confirmed one, is the next safest, because a bank must pay against compliant documents. It is safer than open account or documents against acceptance, where you depend entirely on the buyer paying.

How long does an Indian exporter have to realise LC proceeds?

Under the FEMA (Export and Import of Goods and Services) Regulations, 2026 as amended on 22 September 2026, export proceeds must be realised within nine months from the date of shipment, or twelve months if invoiced or settled in rupees, unless your bank extends it. A usance LC's tenor counts towards this window, so long-tenor LCs need planning.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 9 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026 — FEMA 23(R)/2026-RB (amended up to 22 September 2026) — Reserve Bank of India · accessed 9 October 2026
2. 2.FEMA 23(R)/(1)/2026-RB — amendment of 22 September 2026 — Reserve Bank of India · accessed 9 October 2026
3. 3.Master Direction — External Commercial Borrowings, Trade Credits and Structured Obligations (updated 8 September 2026) — Reserve Bank of India · accessed 9 October 2026
4. 4.SBI — Schedule of Foreign Exchange Transaction Related Service Charges (w.e.f. 1 October 2026) — State Bank of India · accessed 9 October 2026
5. 5.PNB — Credit Related Service Charges (revised w.e.f. 1 November 2026) — Punjab National Bank · accessed 9 October 2026
6. 6.ICC — Trade finance rules (UCP 600, ISBP, eUCP) — International Chamber of Commerce · accessed 9 October 2026
7. 7.UCP 600 article 14 and 16 — presentation and refusal (ICC opinions and commentary) — ICC Banking Commission forum · accessed 9 October 2026
8. 8.UCP 600: Return of Documents — The Clock is Ticking — Jones Day · accessed 9 October 2026
9. 9.Export realisation period from 1 October 2026: nine months, not fifteen — Taxmann · accessed 9 October 2026