Application Guide and Field-by-Field Reference
This guide is for EU buyers (applicants) opening a Letter of Credit for payment to an Indian exporter (beneficiary), and for Indian exporters reviewing an LC before accepting it as a payment instrument. It covers LC structure, key fields, common discrepancy traps, and a pre-shipment LC review checklist.
1. What Is a Letter of Credit?
A Documentary Letter of Credit (LC or L/C) is an irrevocable undertaking by the Issuing Bank (the buyer's bank) to pay the Beneficiary (the seller/exporter) a specified amount, provided the Beneficiary presents, within the stipulated time, a set of documents that strictly comply with the terms and conditions of the LC.
LCs are governed by the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits, Publication 600 (UCP 600), which is the definitive international rulebook for LC operations. All LCs should state that they are subject to UCP 600.
Key characteristics of a compliant LC:
Irrevocable: Cannot be amended or cancelled without the agreement of all parties (Issuing Bank, Confirming Bank if any, and Beneficiary).
Independent: The bank's payment obligation is independent of the underlying commercial contract between buyer and seller.
Documentary: Payment is triggered by compliant documents, not by actual delivery of goods.
Strict compliance: Banks pay only against documents that strictly comply with LC terms — even minor discrepancies can result in refusal.
2. Parties to a Letter of Credit
3. Types of Letter of Credit
Sight LC: Payment is made immediately upon presentation of compliant documents. Fastest form of payment for the exporter.
Usance / Deferred Payment LC: Payment is made at a fixed number of days after sight or after shipment date (e.g. 60 days, 90 days, 180 days after B/L date). Gives the buyer a credit period.
Acceptance LC: The Beneficiary draws a Bill of Exchange (draft) on the bank, which the bank accepts — creating a bank acceptance that can be discounted.
Transferable LC: The Beneficiary can transfer part or all of the LC to a second Beneficiary (e.g. where the exporter is a trading house sourcing from a manufacturer).
Back-to-Back LC: A second LC opened by the original Beneficiary using the first LC as collateral, to pay a supplier.
Red Clause LC: Contains a clause authorising the Advising or Confirming Bank to make advances to the Beneficiary before shipment, against a written undertaking to present documents later.
Revolving LC: Automatically reinstated for successive shipments without requiring a new LC for each shipment. Suitable for regular supply contracts.
Standby LC: Functions as a guarantee — payment is only demanded if the Applicant fails to perform their contractual obligation.
4. Field-by-Field Guide — Key LC Terms
5. Pre-Shipment LC Review Checklist
Every exporter should complete this checklist immediately upon receiving an LC — before commencing production or packing.
6. Presentation of Documents under an LC
Prepare all documents required by the LC strictly in accordance with the LC terms. Each document must be exactly as specified — including the number of originals and copies, the party who signs, the language, and the content.
Check every document against the LC using the pre-presentation checklist (see Doc 21 — LC Discrepancy Prevention). Common discrepancies: late shipment; late presentation; B/L not marked "shipped on board"; description of goods contradicts the LC; and inconsistencies between documents.
Present the complete document set to the nominated/confirming bank in India within the presentation period specified in the LC and before the expiry date.
The bank examines documents within 5 banking days under UCP 600. If compliant, the bank pays at sight or accepts the draft for payment at the usance date.
If the bank finds discrepancies, it notifies the exporter within 5 banking days. The exporter can: correct documents if time permits; request the buyer's waiver of the discrepancy; or request that the documents be sent on collection basis (forfeiting the LC security).
Doc 40 — Letter of Credit (LC) Application Guide and Field-by-Field Reference — Neutral Template
| Party | Role |
|---|---|
| Applicant | The buyer who instructs their bank to open the LC. Bears the cost of LC issuance and bank charges on their side. |
| Issuing Bank | The buyer's bank — issues the LC and provides the primary payment undertaking. |
| Beneficiary | The seller/exporter who is entitled to payment under the LC upon presentation of compliant documents. |
| Advising Bank | A bank in the seller's country that notifies the seller of the LC. Does not add a payment undertaking. |
| Confirming Bank | A bank (usually in the seller's country) that adds its own independent payment undertaking to the LC — protecting the seller against risk of the Issuing Bank or the buyer's country. Highly recommended for India-EU LCs from less established buyers. |
| Nominated Bank | The bank authorised by the Issuing Bank to pay, accept, or negotiate documents. Often the same as the Confirming Bank. |
| LC Field | What the Exporter Should Check |
|---|---|
| LC Type | Must be "Irrevocable." Revocable LCs offer no protection and are prohibited under UCP 600. |
| Applicable Rules | Must state "Subject to UCP 600." |
| Confirmation | Request "Confirmed" LC from a bank in India to protect against buyer country risk and Issuing Bank risk. |
| LC Amount | Sufficient to cover the full invoice value including freight and insurance if CIF. Check if tolerance is stated (e.g. +/- 10%). |
| Currency | Invoice and payment currency should match. USD and EUR are standard for India-EU transactions. |
| Beneficiary Name and Address | Must match the exporter's legal name exactly. Any mismatch causes a discrepancy. |
| Expiry Date and Place | Date by which all documents must be presented to the nominated/confirming bank. Expiry in India is preferred for the exporter. |
| Latest Shipment Date | Date by which goods must be loaded (on-board date on B/L). Build in adequate lead time. |
| Presentation Period | Number of days after the B/L date within which documents must be presented (UCP 600 default: 21 calendar days, but not beyond expiry). Standard is 21 days — confirm this is achievable. |
| Port of Loading | Must match the intended port of shipment exactly (e.g. "JNPT, Mumbai, India" not just "India"). |
| Port of Discharge | Must match the intended destination port exactly. |
| Partial Shipments | "Allowed" or "Not Allowed." If the quantity is large and may need multiple shipments, ensure partial shipments are allowed. |
| Transshipment | "Allowed" or "Not Allowed." Many India-EU routes involve transshipment — confirm with freight forwarder before accepting LC. |
| Incoterms | Freight terms (CIF, FOB, DAP etc.) stated in LC must match the commercial invoice and the B/L freight notation. |
| Documents Required | List of all documents required for payment: commercial invoice, packing list, B/L, certificate of origin, test reports, inspection certificate, etc. Each document requirement must be achievable exactly as specified. |
| Description of Goods | The description on the commercial invoice must mirror the LC description. Other documents can use general terms but must not contradict. |
| Special Conditions | Any additional conditions (e.g. "the B/L must show freight prepaid" or "inspection certificate from SGS") must be achievable and compliant. Reject any conditions that are impossible to fulfil or within the control of a third party. |
| Charges | "All charges outside the issuing country are for the account of the Beneficiary" means the exporter pays advising, confirming, and negotiation bank charges. Negotiate "charges shared" where possible. |
| Review Item | OK |
|---|---|
| LC is irrevocable and subject to UCP 600. | [ ] |
| LC amount is sufficient to cover the full invoice value (including freight if CIF). | [ ] |
| Tolerance stated (e.g. +/- 5% or 10%) — required if quantity may vary. | [ ] |
| Beneficiary name and address match exactly. | [ ] |
| Latest shipment date allows sufficient production and logistics lead time. | [ ] |
| Presentation period (days after B/L) is achievable — 21 days is standard. | [ ] |
| Expiry date and place — expiry in India or at beneficiary's bank is preferred. | [ ] |
| Port of loading matches the intended port of shipment. | [ ] |
| Port of discharge matches the buyer's intended destination. | [ ] |
| Partial shipments allowed (if multiple shipments are anticipated). | [ ] |
| Transshipment allowed (confirm with freight forwarder — India-EU routes often transship). | [ ] |
| Incoterms match the commercial contract. | [ ] |
| All documents required are obtainable — no impossible conditions. | [ ] |
| Description of goods in LC matches the commercial invoice. | [ ] |
| No "soft clause" conditions (e.g. "LC is only operative upon buyer's written approval"). | [ ] |
| No conditions within the control of the buyer or a third party. | [ ] |
| Charges and bank fee allocation confirmed. | [ ] |
| Confirmation of LC requested from Indian bank (to eliminate buyer/country risk). | [ ] |
| Confirmation that the Issuing Bank is a reputable and solvent institution. | [ ] |
| Amendments required — requested in writing from buyer before shipment. | [ ] |