Letter of Credit in India: How LC Works for Your Business

A Letter of Credit (LC) is one of the most reliable payment tools in trade finance. Whether you are importing machinery or exporting goods, an LC gives both buyer and seller a guarantee that the transaction will go through smoothly. Banks like SBI, HDFC, ICICI, Axis, and Kotak issue LCs daily for businesses across India.

In simple terms, a bank steps in as a guarantor. The buyer’s bank promises to pay the seller, provided the seller submits the right documents proving shipment. This removes the risk of non-payment for the exporter and non-delivery for the importer.

Overview of Letter of Credit

An LC is a formal document issued by a bank on behalf of its customer (the buyer or importer). It assures the seller (beneficiary) that payment will be made once the agreed conditions are met, typically submission of shipping documents like a bill of lading, invoice, and packing list.

RBI regulates LC transactions in India under the Foreign Exchange Management Act (FEMA) for international trade. For domestic trade, LCs are governed by the Uniform Customs and Practice for Documentary Credits (UCP 600), a globally recognised standard.

Types of Letter of Credit

• Sight LC: Payment is made immediately when documents are presented
• Usance LC: Payment is deferred for a set period, say 30, 60, or 90 days
• Revolving LC: Can be used multiple times up to a fixed limit
• Standby LC: Acts as a backup payment guarantee, similar to a bank guarantee
• Confirmed LC: A second bank (usually in the seller’s country) also guarantees payment

Interest Rates and Charges

LCs are not loans in the traditional sense, but banks charge fees for issuing and processing them. Here is a general breakdown:

Fee Type	Typical Range
LC Opening Charges	0.25% to 0.50% per quarter
Amendment Charges	Rs 500 to Rs 2,000 per amendment
Negotiation Charges	0.125% to 0.25% of LC value
Confirmation Charges	0.50% to 1.50% per annum

If you use a usance LC and your bank provides financing against it, interest rates typically range from 8% to 12% per annum depending on the tenure and your credit profile. Public sector banks like SBI tend to be slightly cheaper than private banks for LC charges.

Eligibility for Letter of Credit

Getting an LC issued is easier when your business is well-established. Most banks look for:

• Valid import/export licence (IEC code for international trade)
• Business vintage of at least 2 to 3 years
• Healthy bank account with satisfactory transaction history
• Good credit score (CIBIL score above 700 for the business or promoter)
• No overdue loans or NPA history
• Collateral or cash margin (typically 10% to 25% of the LC value)

Startups and new businesses can sometimes get LCs against 100% cash margin, especially for smaller trade amounts.

Documents Required

The documentation process varies slightly between banks, but you will generally need:

• LC application form (bank-specific)
• KYC documents: PAN, Aadhaar, business registration certificate
• Import licence or IEC code (for international LCs)
• GST registration certificate
• Last 2 to 3 years of audited financial statements
• Last 6 months of bank statements
• Proforma invoice or purchase order from the supplier
• Collateral documents if applicable

Application Process

Applying for an LC is straightforward once you have your documents ready. Here is how it works:

1. Approach your bank: Visit your trade finance desk at SBI, HDFC, ICICI, Axis, or Kotak. Most large banks have dedicated trade finance teams.
2. Submit application: Fill in the LC application form specifying LC type, amount, tenure, and the terms and conditions of the trade.
3. Bank assessment: The bank reviews your credit history, financials, and the nature of the trade. This takes 3 to 7 working days.
4. Cash margin or collateral: You deposit the required margin or pledge security against the LC.
5. LC issuance: The bank issues the LC via SWIFT (for international) or through internal messaging (for domestic LCs).
6. Payment on presentation: Once the seller ships goods and submits compliant documents, the bank makes payment.

FAQ

What is the minimum amount for an LC in India?

There is no fixed minimum, but most banks prefer LC amounts of Rs 5 lakh or more. Smaller amounts may attract higher percentage fees, making it less economical.

Can an LC be cancelled after it is issued?

An irrevocable LC cannot be cancelled without consent from all parties. A revocable LC (now rare under UCP 600) can be amended or cancelled by the issuing bank. Always check the type of LC before signing contracts.

Is a Letter of Credit only for international trade?

No. Domestic LCs are common in India, especially for large purchases of commodities, machinery, or raw materials between businesses in different states.

What happens if documents are discrepant?

If the seller submits documents that do not match the LC terms, the bank may reject them or seek the buyer’s approval to pay despite the discrepancy. This is called a discrepant presentation and can delay payment significantly.