Letter of Credit

What is Letter of Credit?

A Letter of Credit (LC) is a financial instrument issued by a bank on behalf of an importer that guarantees payment to an exporter upon fulfillment of specified documentary conditions. Under Indian trade law and international banking standards (UCP 600 - Uniform Customs and Practice for Documentary Credits), an LC serves as a binding commitment that protects both the exporter and importer in cross-border transactions. The issuing bank undertakes to pay the exporter when all stipulated documents—commercial invoice, bill of lading, certificate of origin, and inspection certificates—are presented in compliance with the LC terms.

In the context of Indian EXIM operations, LCs are regulated under the Foreign Trade (Development and Regulation) Act, 1992 and governed by the Reserve Bank of India (RBI) through various circulars and guidelines. Indian exporters receiving LCs from foreign importers gain payment security, while importers benefit from verification of goods quality and compliance before funds are released. The LC effectively substitutes the creditworthiness of the importer with that of the issuing bank, reducing transactional risk in international trade.