A letter of credit is an irrevocable undertaking by the buyer's bank (the issuing bank), at the buyer's request, to pay the supplier (beneficiary) a stated amount on presentation of documents that comply strictly with the LC's terms, within its validity. Most LCs are governed by the ICC's Uniform Customs and Practice for Documentary Credits (UCP 600). A sight LC pays on presentation; a usance LC pays at a fixed later date (for example 90 days from the bill of lading). Inland LCs are widely used in India for domestic supplies of steel, chemicals, textiles and machinery.
How a letter of credit works in India
- Buyer and supplier agree LC terms in the contract: amount, documents, latest shipment date, expiry, sight or usance.
- Buyer applies to its bank; the issuing bank issues the LC and advises it through the supplier's bank.
- Supplier checks every term against what it can actually produce, and asks for amendments before shipping.
- Supplier ships and presents the documents (invoice, transport document, packing list, inspection certificate, e-way bill or LR for inland LCs) within the presentation period.
- Bank examines; if compliant, pays at sight or accepts for payment at maturity; if discrepant, notifies refusal and the supplier may correct or seek the buyer's waiver.
Why it matters for getting paid
With an LC, the supplier's credit risk becomes the bank's, not the buyer's, and a usance LC can be discounted for immediate cash. But nearly all LC payment failures are caused by discrepancies: a misspelt name, a late presentation, a missing signature. Suppliers should have someone check documents against the LC before presentation. Compare bank guarantee and proforma invoice, which is often the basis for the LC application.
How FundRaksha uses it
FundRaksha advises clients supplying large or new buyers to insist on an inland LC or bank guarantee rather than open credit, and helps when a bank refuses payment on technical discrepancies, by pursuing the buyer for the underlying debt under the sale contract. Fee: 30% of recovery. 1,000+ businesses have worked with FundRaksha to recover and secure receivables.
Worked example (hypothetical)
A Jamshedpur steel processor supplies ₹80,00,000 of coils to a Pune fabricator under an inland usance LC payable 90 days from the LR date. The LR is dated 1 April; the processor presents invoice, LR, e-way bill and weighment certificate on 5 April; the bank finds them compliant and accepts for payment on 30 June. On 10 April the processor discounts the accepted bill with its own bank at 9% a year for about 81 days, receiving roughly ₹80,00,000 less ₹1,59,800 (₹80,00,000 × 9% × 81/365) of discount. On 30 June the issuing bank pays the discounting bank. The fabricator's later cash problems do not affect the processor.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.