Letter of Credit for Exporters: How It Works, Types, Documents, UCP 600, Costs, Discrepancies and Export Finance

A letter of credit (LC) is a written promise from the buyer's bank to pay you, the exporter, a stated amount if you present the documents the LC asks for, on time and exactly as written. The bank checks papers, not goods. Under UCP 600 the examining bank has up to five banking days to decide. In India, send the documents to your AD bank within 21 days of export, and bring the money home within nine months. Ask for an irrevocable LC, and consider a confirmed one when the issuing bank or country is unfamiliar.

A letter of credit is a written undertaking by the buyer's bank to pay the exporter a stated sum, within a time limit, against stipulated documents. APEDA's Agri Export Manual defines it this way. The bank pays on paper, not on the goods, so your job is to ship as agreed and present documents that match the LC.

Think of it as a bank standing between you and a buyer you may never have met. The buyer asks his bank to issue the LC in your favour. If you ship and your papers match the LC word for word, the bank pays you. If the buyer later changes his mind about the goods, that is a separate dispute; it does not undo the bank's promise.

The same APEDA manual states the key rule: banks deal only in documents and not in goods. The decision to pay rests on whether the documents, on their face, are in accordance with the terms of the LC. That one sentence explains most LC trouble, because a small spelling mismatch counts the same as a large one in the bank's eyes.

A US government explainer from the Export-Import Bank describes the same idea from the exporter's side: the LC moves the job of collecting payment from the exporter to the foreign buyer's bank. It also admits the cost, saying LCs can be burdensome and expensive for the foreign buyer, which is why some buyers push for open account instead (Ex-Im Bank).

If you are new to exporting, get your Importer-Exporter Code first, since no export can be made without one unless specifically exempt (APEDA manual). Our guide to the IEC code for agri exporters covers that, plus the APEDA registration, GST LUT and bank AD code that sit around an LC shipment.

There are four core parties. The applicant is your buyer, who asks for the LC. The issuing bank is the buyer's bank, which issues it. The beneficiary is you, who gets paid. An advising bank, usually in India, passes the LC to you, and a confirming bank adds its own payment promise if asked.

One practical point from the sources: every LC states where it is available, which is where you present documents, and it also has an expiry place. If the LC expires at a bank abroad, your documents must reach that bank by the expiry date, not just be dispatched. That is why many Indian exporters ask for an LC available with and expiring at a bank in India.

The flow has six steps: contract, LC issue, advising in India, shipment, document presentation, and payment. The buyer's bank issues the LC after a sales contract is signed. You ship only after the LC arrives and you have checked it. Your bank sends the documents abroad and pays or collects once they comply.

1. Sales contract. You and the buyer agree on goods, quantity, price, Incoterm, payment by LC and the last shipment date. Put the document list in the contract too, so the buyer cannot add surprises later.
2. Buyer applies. The buyer asks his bank to issue an LC in your favour. The bank checks his credit and, if approved, issues it (Ex-Im Bank steps 1 and 2).
3. LC reaches you through the advising bank. Your bank checks the LC looks genuine and forwards it. Read it line by line before you do anything else.
4. Fix problems by amendment. If a term cannot be met, ask the buyer to have the LC amended. An amendment needs the agreement of the parties involved; do not ship on a promise to fix it later.
5. Ship and collect documents. You ship, then collect the transport document, invoice, packing list and other items the LC asks for. In India these are processed through customs and your AD bank.
6. Present within time. Documents go to your bank within 21 days of export under RBI rules, and within the LC's own presentation period and expiry date.
7. Bank examination. The examining bank checks the documents. Under UCP 600 Article 14(b) it has a maximum of five banking days after the day of presentation.
8. Payment. If the documents comply, the issuing or confirming bank pays, directly or through your bank, which credits you (Ex-Im Bank steps 5 and 6). The AD bank reports the transaction in RBI's EDPMS.

The APEDA payment-terms page adds one Indian rule: after shipment it is obligatory to present documents to the bank within 21 days, for onward dispatch to the foreign bank. The RBI Master Direction says the same in paragraph B.1(iv): the duplicate EDF and shipping documents must be lodged with the AD bank within 21 days of export. APEDA also tells exporters to negotiate shipping documents only through authorised dealers, so RBI can track receipt of the proceeds.

The commonly used types are irrevocable, confirmed, at sight, usance, revolving, transferable and standby. They are not separate families: one LC can be irrevocable, confirmed and at sight at the same time. The first two describe the strength of the payment promise; the rest describe timing and structure.

The APEDA Export Documentation page names only two timing options: an LC payable at sight or payable at a stated number of days. The other types in the table are standard trade-finance terms, and one LC can combine several of them. Your bank can confirm which ones apply to the LC you receive.

Always insist on an irrevocable LC. Ask for confirmation when you doubt the issuing bank, the buyer's country or the paperwork risk. An irrevocable LC protects you from a unilateral cancellation; confirmation adds a second bank's promise, so you are not dependent on a foreign bank or on that country letting money leave.

The ECGC page explains why confirmation exists. An Indian bank that confirms a foreign LC takes on the risk that the issuing bank defaults or that political events (war, transfer delay, moratorium) block the money. ECGC offers a cover for exactly that bank risk, so confirmation is not an unusual, rare product (ECGC LC confirmation cover).

• Ask for confirmation when the issuing bank is small or unrated, when the buyer's country has a history of delayed remittances, or when this is your first shipment to that buyer.
• You may skip it when the issuing bank is a large, well-rated bank in a stable market and your shipment is small. The money you save is real; so is the risk you accept.
• Agree who pays. The sales contract should say whether confirmation charges are for the buyer's account or yours. Many exporters forget this and find the charge deducted later.

Under an unconfirmed LC your protection is only the foreign bank. Under a confirmed LC your Indian bank has examined the documents and committed to pay if they comply. The price of that comfort appears in the cost section below.

With an at-sight LC the bank pays when it has examined complying documents, within the examination period. With a usance LC, payment falls due after a stated period, for example a number of days after shipment. Choose at sight when you need cash fast, and usance only if you can finance the wait or the bank will discount the bill.

In practice, "at sight" does not mean "on the day you walk in". UCP 600 gives the examining bank a maximum of five banking days after the day of presentation to decide whether the documents comply. The ICC opinion cited in this guide quotes that wording: a maximum of five banking days following the day of presentation. Add the time for documents to travel if the LC is available abroad.

For usance LCs, your bank may advance money against the bill. APEDA says post-shipment finance can run up to 90 percent of the invoice value for the normal transit period and, for usance bills, up to the notional due date, with the maximum period for post-shipment advances at 180 days from shipment (APEDA Farmer Connect). Ask the bank for the rate in writing before you agree to usance terms with the buyer.

The LC lists the documents; nothing else counts. For agri exports the usual set is a commercial invoice, packing list, bill of lading or airway bill, phytosanitary certificate, certificate of origin and a quality or inspection certificate. Insurance certificates and bank-specific items appear when the Incoterm or the buyer demands them.

APEDA's manual lists commercial invoice, bill of lading, consular invoice, certificate of origin, inspection certification, dock and warehouse receipt, destination control statement, insurance certificate, export licence and packing list as documents commonly used in exporting, and says which ones apply depends on both governments' requirements. Under an LC, the LC's own list is the one that matters. A document you add voluntarily is a discrepancy risk, not a bonus.

For agrochemicals, fertilisers and biologicals, the destination country's registration rules decide what extra papers are needed; our posts on how to export agrochemicals from India and pesticide registration by country cover those. If the buyer asks for organic produce, read our guide to NPOP organic certification before agreeing to an LC clause that names a scope certificate.

UCP 600 is the Uniform Customs and Practice for Documentary Credits, published by the International Chamber of Commerce. It has 39 articles and took effect on 1 July 2007. Most LCs say they are subject to it, which means banks worldwide follow the same rules on examining documents and refusing them.

USCIB, the ICC's US affiliate, notes that UCP 600 replaced UCP 500, cut the number of articles from 49 to 39, and was approved by the ICC Banking Commission on 25 October 2006 by a vote of 91 to 0. The ICC Academy describes the UCP as having governed LC transactions worldwide for more than 85 years, and says UCP 600 added a definitions article and a revised practice for notice of refusal (USCIB, ICC Academy).

UCP is a set of private rules that the parties choose to apply, which is why the LC text itself must say "subject to UCP 600". Read that line when the LC arrives.

Most rejections come from small mismatches: a spelling in the consignee name, a quantity that differs between invoice and packing list, a late shipment date, an expired LC or a missing document. Banks apply the LC wording strictly. The fix is a document checklist built from the LC itself, reviewed before you present.

An experienced exporter's habit is to ask the bank to pre-check the draft set before the goods leave the port. It costs little compared with a rejected set, and your bank can often spot the point that will worry the foreign bank.

The examining bank sends one refusal notice listing every discrepancy, and holds the documents at your disposal or returns them. The buyer may waive the problem and accept the documents, or you may correct and re-present within the time allowed. If nobody waives it, the bank's payment promise does not apply.

The ICC opinion cited here shows how seriously the rules treat the time limit. An issuing bank had received four presentations, and first replied months later. The ICC Banking Commission agreed that under sub-articles 14(b), 16(c) and 16(d) the bank was out of time, that sub-article 16(f) therefore stopped it claiming discrepancies, and that it had to honour the presentations (ICC opinion TA916rev). It also repeated that banks deal with documents, not with goods.

• Ask your bank what happened, in writing. Request the refusal notice and the dates it was sent.
• Check the clock. The bank's five banking days start the day after presentation. Many Indian banks count banking days with their own holiday calendar, so confirm the dates.
• Try a waiver. Ask the buyer to authorise the issuing bank to accept the documents. This only works with a buyer who wants the goods.
• Correct and re-present if the LC period still allows. This is why you should not wait for the 21st day.
• Do not hand over original title documents to the buyer until the bank has paid or the buyer has accepted. The buyer-side rules for releasing goods differ; ask your bank.

SBI's schedule even prices discrepancy handling. For customers without an export credit facility it lists a small discrepancy, crystallisation or returned-unpaid charge (see the cost table below). Export credit customers pay nothing for that line. That alone is a reason to talk to your bank about an export credit limit.

Costs depend on your bank, the issuing bank's rating, the country and whether you need confirmation. For example, one large bank, State Bank of India, publishes a schedule effective 1 October 2026 that charges nothing for advising an export LC to export credit customers, a flat fee for others, and 0.25 to 1.00 percent a year for confirmation by the issuing bank's rating.

These are one bank's published rates. The SBI schedule prices confirmation by the issuing bank's rating, so cost follows risk, and export credit customers pay a single upfront charge in place of many transaction charges. Other banks use different slabs, so ask your own bank for its schedule.

Two more costs sit outside your bank. First, the issuing bank may charge the buyer, and the LC may say who pays charges outside the issuing country; read that clause. Second, the buyer's cost of opening the LC can push him to ask for a lower price or to switch to open account (the Ex-Im Bank page notes LCs can be expensive for the foreign buyer). Put the cost question into your price quote, not after it.

RBI adds one protection for small transactions. Paragraph C.31(ii) of the Master Direction asks AD banks to review charges on small-value export transactions so they match the services rendered, and says banks shall not levy penal charges for delays in adhering to regulatory guidelines. It does not set a rate.

From safest to riskiest for the exporter, the order is usually advance payment, confirmed LC, unconfirmed LC, documents against payment (DP), documents against acceptance (DA), then open account. A buyer's order of preference is the reverse. The right choice depends on trust, country risk and how much margin you can afford to lose.

APEDA's Export Documentation page lists DP, DA and Letter of Credit as the payment terms. APEDA's manual adds a rule of thumb: where the buyer places an order without advance payment or an LC, get a credit limit on the foreign buyer from ECGC to guard against non-payment (APEDA manual).

There is also a government-linked option. The same manual explains that Exim Bank's Lines of Credit to overseas governments and institutions require the importer to pay about 10 percent in advance, and Exim Bank pays the balance, normally about 90 percent, through Indian negotiating banks on shipment. It is a different instrument from an ordinary LC, but you may meet it if your buyer is in a country with such a line.

Under the RBI Master Direction on Export of Goods and Services, export proceeds must be received through an AD bank and realised within nine months of the export date, with documents lodged with the AD bank within 21 days. DGFT's IEC is mandatory before exporting. Nothing in these rules replaces the LC's own terms.

The paragraph numbers above are from the RBI Master Direction as updated to 17 July 2026. The IEC itself is a DGFT matter, and our IEC code guide explains it.

One line deserves emphasis. RBI treats an irrevocable LC for the full value as a safe route even for exporters under a cautionary listing. So when a buyer or bank says an LC is "preferred", it is also a regulatory comfort for the bank, not only a sales term.

ECGC, the government export credit insurer, offers a Letter of Credit Confirmation Cover for the Indian bank that confirms a foreign LC, and packing credit covers for banks that lend to exporters. Together they make it easier for banks to confirm LCs and to finance you, even when the issuing bank or country is a risk.

ECGC was set up in 1957 and works under the Ministry of Commerce and Industry; APEDA's manual says it offers exporters insurance protection against payment risk, information on buyers and countries, and help in obtaining bank finance and recovering bad debts. The ECGC home page lists many covers, among them packing credit, whole-turnover covers, the Small Exporters Policy, the Shipments Comprehensive Risks Policy and LC confirmation (ECGC products list).

The key point for an LC exporter: ECGC covers the bank, and a bank that is covered can say yes to confirming and financing more readily. You do not buy the LC confirmation cover yourself; you ask your bank whether it will confirm and what it charges. See the ECGC LC confirmation page and, for pre-shipment lending, the INPC page.

If a buyer will not open an LC and you must sell on credit, the exporter-side policies are the relevant ones. APEDA's own advice in the manual is to take a credit limit on the foreign buyer from ECGC in that case.

Banks lend against a confirmed order or LC. Packing credit funds production and packing before shipment, and post-shipment finance funds you after shipment until the buyer's bank pays. APEDA says banks normally give 75 to 90 percent of the order value as packing credit, with the rest kept as margin.

These percentages come from the APEDA Farmer Connect page and describe banks' normal practice for new exporters. Your bank sets the final limit, margin and interest rate, so ask for them in writing.

A bank is more willing to lend against an LC that is irrevocable and, ideally, confirmed or issued by a strong bank. For a small exporter, that is another reason to prefer an LC over a mere purchase order for the first deal. Farmers' groups that want to use credit for production itself can also read our Kisan Credit Card guide, though KCC is a separate scheme from export credit.

The main risks are document errors, a weak issuing bank, country transfer problems, forged or conditional LCs, and amendments that never arrive. An LC removes buyer risk only if you comply exactly with it. It does not insure against a poor product, a late ship or a fraudulent document set.

• Document risk. One mismatch can turn a bank promise into a request for the buyer's waiver. This is the most common problem.
• Issuing bank risk. An unconfirmed LC is only as good as the foreign bank. Confirmation and ECGC cover on the confirming bank are the usual answers.
• Country and transfer risk. War, moratorium or a foreign exchange shortage can delay payment even if the bank is willing. The ECGC page lists these political risks.
• Unworkable terms. Some LCs ask for documents you cannot control, such as an inspection by a named agency that the buyer's agent controls. If you cannot obtain it, ask for amendment before shipping.
• Fraud. Verify the LC with your own bank, which authenticates it before advising. Do not rely on a PDF the buyer forwards.
• Cost. Confirmation, amendments and discrepancy handling add up, and the buyer's cost of opening an LC may reduce your negotiating room.

Keep the risks in proportion. For most first-time agri exporters, an irrevocable LC remains safer than shipping on open account to an unknown buyer. The task is to pair it with careful reading, a bank you trust and, where the issuing bank is unfamiliar, confirmation.

Read the LC against your sales contract, line by line, before you buy goods or book a vessel. Check names, amount, goods description, ports, dates, document list and who bears charges. If anything cannot be met, ask for an amendment in writing and do not ship until the amended LC reaches you.

1. Is it irrevocable and subject to UCP 600? The text should say so.
2. Are names and addresses right? Applicant, beneficiary, notify party and consignee, letter for letter.
3. Do amount, quantity and unit price match the contract? Check any tolerance wording.
4. Is the goods description workable? You must reproduce it on the invoice.
5. Are the ports and the Incoterm right? And the latest shipment date: can you actually meet it?
6. Where is it available and where does it expire? Prefer a bank in India.
7. Which documents are required, from which issuer, and in how many originals? Can you get each of them in time?
8. What is the presentation period? In India, also keep within 21 days of export for the AD bank.
9. Who pays which charges? Confirm confirmation, amendment and discrepancy charges.
10. Is there any clause that depends on the buyer? Anything you cannot control is a risk; ask to remove it.

Share the checklist with your forwarder too. Many errors start with the booking and the transport document, not with the invoice. A short call with your bank's trade finance desk before shipment is cheap insurance.

Yes, the LC mechanism is the same for any goods. What changes is the document set and the regulatory approvals behind it: product registration in the importing country, labelling, certificates of analysis, and, for plants and produce, a phytosanitary certificate. If you cannot show those, a perfect LC will not help you ship.

Our guide on how to export agrochemicals from India lists licences and documents, and biopesticide registration in the EU, US and Africa explains why registration decides whether a market is open at all. If you are curious about the market side, our post on Indian agrochemical exports looks at demand countries. On the buyer's side, how to import pesticides from India shows what the importer must arrange.

For LC wording, agree in the contract exactly how the product is described, because registered trade names, active ingredient content and formulation codes must match the invoice and the certificate of analysis. A different product name on one paper is a discrepancy, even if the goods are the same.

Start small, use your own bank for advising, and let the LC drive your document plan. Read it before you commit, keep the shipment date realistic, and talk to your bank and, where the buyer is new, ECGC before agreeing payment terms.

• Get the basics ready first. IEC, APEDA registration where your product needs it, GST LUT and AD code on ICEGATE. Our IEC guide walks through them.
• Choose a bank with a trade finance desk. Ask for their export schedule of charges and whether they confirm LCs for your destination.
• Write the document list into the sales contract. Buyers sometimes add items later through the LC.
• Build the document checklist from the LC, not from memory. Use the discrepancy table above.
• Do not leave the 21 days to the last minute. Document processing, certificates and courier time all eat into it.
• Ask about ECGC. For LC confirmation your bank applies; for open account or DA sales, ask about a credit limit on the buyer.
• Track the nine-month realisation window. Your AD bank reports through EDPMS, and an extension needs a reason beyond your control.
• Keep copies of every amendment and refusal notice. If there is a dispute, dates matter.

Your bank's trade finance desk can check the details of a specific LC before you ship, and a trade finance specialist can help if a dispute arises. Use this guide to ask better questions and to read an LC with a clear head.

Conclusion

A letter of credit gives an exporter a bank's promise instead of a buyer's word, but only when the documents match the LC exactly and arrive on time. Ask for an irrevocable LC, consider confirmation for new or distant buyers, read the LC against the contract the day it arrives, and keep to the 21-day and nine-month RBI timelines. Talk to your bank about its charges and about ECGC-backed cover before you quote a price, and ask the bank for its current rates and for the latest RBI and ECGC terms before you commit.