Letters of Credit: A Practical Guide for Indian Exporters

A letter of credit does not guarantee you get paid. It guarantees you get paid if your documents are perfect — and the ICC's own estimate is that 65% to 80% of presentations are refused on first attempt. This guide is about closing that gap.

When an LC is actually worth its cost

An LC is a bank's conditional undertaking to pay against compliant documents: it swaps your buyer's credit risk for a bank's. That swap is not free. Between issuance commission on the buyer's side and advising, negotiation, discrepancy and confirmation charges on yours, an LC absorbs roughly 0.5% to 2.5% of invoice value, more on small shipments where minimum charges bite. Compare honestly against the alternatives.

• Advance payment (TT): cheapest and safest for you. Realistic for samples and trial orders. You now have up to three years to ship against an advance receipt or refund it, relaxed from one year in November 2025.
• DP (documents against payment): the bank releases documents only against payment, but nobody has undertaken to pay. If the buyer walks away, your container sits at a foreign port accruing demurrage while you negotiate a distress sale.
• DA (documents against acceptance): unsecured credit dressed as a banking instrument. Use it only with an ECGC policy behind it, or a buyer you have shipped to for years.
• Open account: normal for European and Japanese buyers. Manage it with ECGC cover, not with hope.
• LC: justified when a default would genuinely hurt, the buyer is new or in a country with transfer or political risk, or you need a bankable instrument to raise pre-shipment finance against.

Below roughly USD 25,000 a shipment, minimum charges and administrative load usually make advance payment or DP better economics. Above USD 100,000 with a first-time buyer, an LC pays for itself.

The rulebook, and why it is not changing

Commercial LCs are governed by UCP 600 (in force since 01-07-2007), read alongside ISBP 821 for document examination practice, with URR 725 for bank-to-bank reimbursements and ISP98 normally applied to standby credits. In March 2026 the ICC national committees voted decisively against opening a UCP revision, and the Banking Commission's 2026-2027 action plan shifts effort from rule revision to education, interpretation and digital-presentation guidance. Practical consequence: UCP 600 stays, and what you learn about it now keeps its value.

Three articles do most of the work in a dispute. Article 14(b) gives the examining bank a maximum of five banking days following presentation to decide. Article 14(c) requires presentation within 21 calendar days after shipment unless the credit says otherwise, and always within expiry. Article 16(c) requires a refusing bank to give a single notice stating each discrepancy — it cannot reject you today on one ground and tomorrow on another.

Mechanics, with the parties named

1. The applicant (your buyer) applies to the issuing bank against a sanctioned limit or cash margin.
2. The issuing bank transmits the credit by SWIFT MT700 to an advising bank in India, usually your own AD Category-I bank, which checks apparent authenticity and passes it to you. Advising costs roughly INR 1,500 for the bank's own customer, about double for an outsider.
3. If you want a second, independent undertaking, a confirming bank adds its confirmation.
4. You ship, then present documents to the nominated bank before expiry and within the presentation period.
5. The nominated bank examines, then negotiates or forwards. On a sight credit the issuing bank reimburses within its examination window; on a usance credit it accepts the draft and pays at maturity.
6. You close the shipping bill in EDPMS through your AD bank on realisation.

Types of LC and when an Indian exporter uses each

Reviewing the credit before you cut steel

The moment the MT700 lands, read it clause by clause against your proforma invoice. The amendment window is before you produce, not after you ship. Once goods are made and containers booked, an amendment request becomes a negotiation you will lose. Check, in order:

• Beneficiary name and address — must match your IEC records letter for letter.
• Amount and tolerance — "+/- 5%", or "about", which under UCP 600 means ±10%.
• Latest shipment date, expiry date, place of expiry, presentation period. Insist expiry is in India. A credit expiring at the issuing bank's counters means your documents must physically reach a foreign city before expiry, and the courier's delay becomes your loss.
• Partial shipment and transhipment — if your forwarder will tranship at Colombo, Singapore or Jebel Ali, transhipment must be allowed.
• Goods description — copy it verbatim into the commercial invoice. Other documents may use a general description, so long as it does not conflict.
• Every required document, and who issues and signs it. If the credit demands an inspection certificate signed by the applicant's nominated agent, the buyer controls your payment. That is a soft clause: push back, or price for it.
• Charges clause and applicable rules — "all charges outside issuing bank's country for beneficiary's account" is standard, and the credit should state it is subject to UCP 600.

The document set, and the discrepancies that actually cause rejection

A typical set: signed commercial invoice, packing list, full set of clean on-board bills of lading or air waybill, insurance certificate where the Incoterm requires it, certificate of origin, inspection certificate, beneficiary's certificate and the draft. Rejections cluster in a short list: late shipment or late presentation; expired credit; documents inconsistent with one another, typically weights on the packing list not matching the invoice or B/L; goods description not matching the credit; missing "shipped on board" notation or an incomplete full set of B/Ls; insurance dated after shipment or below 110% of CIF value; ports not as stated; unauthenticated corrections; signatures without a stated capacity.

Note what is not on that list: the quality of your goods. Banks deal in documents. A perfect shipment with a mis-typed HS code gets refused; a defective shipment with clean documents gets paid. Fix your HS classification at proforma stage so one code flows through invoice, shipping bill and certificate of origin.

What confirmation costs, and when to insist

Confirmation is priced as country risk plus issuing-bank risk over tenor. Indian bank tariffs start around 0.15% to 0.35% for sight and short-tenor credits with meaningful minimums, but for risky jurisdictions a confirming bank will quote 1% to 4% per annum, and for some countries decline outright. Insist on it when the issuing bank is small or unrated, or the country restricts foreign-currency transfers. Do not pay for it on a credit from a top-tier bank in a stable market. Where confirmation is unavailable or priced out, an ECGC policy covering commercial and political risk is the fallback.

Discounting a usance LC

A usance LC is a working-capital problem only until you discount it. Once the issuing or confirming bank has accepted your draft, that accepted bill is a bank obligation, and your AD bank will discount it — typically at SOFR plus a spread — crediting you within days of acceptance rather than at maturity. Discounting without recourse moves the non-payment risk to the discounting bank; with recourse it does not, and a maturity default comes back to you. Ask which one you are signing. The bill must still be closed in EDPMS on realisation.

How the LC ties into Incoterms and certificates

The credit and the Incoterm must agree. A CIF Hamburg credit will demand insurance for at least 110% of CIF value, and an insurance certificate dated after the on-board date is a discrepancy. On FOB Nhava Sheva, do not present an insurance document at all unless asked. Mismatches between the Incoterm in the contract, the Incoterm in the credit and the charges shown on the invoice are a routine cause of refusal; our Incoterms 2020 guide sets out which term puts which cost and risk where.

Certificates of origin are the second trap. If the credit demands a certificate from a named chamber, or a preferential certificate under a trade agreement, no other document will do — and preferential certificates carry lead times that must fit inside your latest shipment date. Inspection certificates should name a third-party agency you have already engaged, never the buyer's representative. None of this works without a valid IEC and AD bank mapping already in place; see IEC registration.

Where OZIANT and ZJELL fit

OZIANT is a B2B cross-border marketplace connecting overseas buyers with Indian suppliers, so payment terms are settled before an order is confirmed rather than argued after production. ZJELL Limited, the group's export consulting arm, handles registrations and compliance filings, including IEC, EDPMS reconciliation and certificate of origin work. If you have received a credit you are unsure about, contact the team before you start production.