Letter of Credit in India: LC vs Open Account

A letter of credit (LC) is a bank’s written promise to pay an exporter once the exporter presents documents that comply with the credit’s terms. Most global trade now runs on open account, yet in India the letter of credit remains central to how many trade deals are financed and paid.

This guide explains how a letter of credit works, compares it with open account, sets out why Indian trade still relies on it, and shows what it means for banks and for the trade finance professionals who handle documentary credits every day.

Key takeaways

ICC has estimated that around 80% of trade runs on open account, but it still forecasts documentary trade to grow about 3.1% a year to 2029.
In India, LCs cover buyer risk, unlock finance for smaller exporters and give certainty on payment.
LC use tends to rise when risk rises, which makes the instrument a barometer of trust.
Margins are tightening and digitisation is coming, so document expertise and advisory skills matter more, not less.

What is a letter of credit?

A letter of credit, also called a documentary credit, is a bank’s undertaking to pay the seller once the seller presents documents that comply with the credit’s terms.

The bank deals in documents, not goods. If the invoice, transport document and other papers match the credit, the bank must pay. If they do not, payment can be delayed or refused. Commercial LCs are usually issued subject to the ICC’s UCP 600 rules.

How a letter of credit works

Four parties are usually involved: the applicant (the buyer), the issuing bank (the buyer’s bank), the beneficiary (the exporter) and the advising bank (normally the exporter’s bank). A confirming bank may add its own payment undertaking.

Contract: the buyer and seller agree to pay by letter of credit.
Application: the buyer asks its bank to issue the LC in the seller’s favour.
Issue and advice: the issuing bank issues the LC, and the advising bank passes it to the exporter.
Shipment: the exporter checks that it can meet every term, then ships the goods.
Presentation: the exporter submits the required documents to its bank.
Examination: the bank checks the documents against the LC. Under UCP 600, a bank has a maximum of five banking days to examine them.
Payment: if the documents comply, the bank pays at sight or on the agreed future date.
Release: the buyer receives the documents and collects the goods.

UCP 600 also expects documents to be presented within 21 calendar days of shipment, and never after the LC expires. Missing either date is one of the most common reasons for refusal.

Types of letter of credit

Type	What it means
Irrevocable	Cannot be changed or cancelled without everyone’s agreement. Under UCP 600, credits are irrevocable.
Confirmed	A second bank adds its own undertaking to pay, which helps when the issuing bank or country carries higher risk.
Sight	Paid as soon as complying documents are presented.
Usance (deferred payment)	Paid on a set future date after presentation, giving the buyer credit time.
Standby (SBLC)	A back-up payment promise, drawn on only if the buyer fails to pay. Usually subject to ISP98.
Transferable	The first beneficiary, often a trader or middleman, can pass all or part of the credit to a supplier.

Letter of credit vs open account: the key differences

	Letter of credit	Open account
Who takes the payment risk	The issuing bank (and confirming bank, if any)	The exporter
What triggers payment	Presentation of complying documents	The buyer paying the invoice on agreed terms
Cost	Higher: bank fees and document handling	Lower: few or no bank charges
Speed and paperwork	Slower, document-heavy	Faster, simpler
Best suited to	New, distant or higher-risk buyers	Trusted, long-standing relationships

Open account is cheaper and simpler. The letter of credit is safer. Which one a deal uses depends on how much the parties trust each other, and how much the exporter needs a bank on its side.

Why Indian trade still relies on the letter of credit

ICC has noted that governments in Asia have historically preferred documentary trade. India’s own evidence points the same way: in a DGFT study of India’s trade finance ecosystem, about 65% of surveyed exporters said they accessed export finance through LCs, bank guarantees or packing credit. Four reasons stand out.

1. Buyer risk in newer markets

Research by Federal Reserve economists using Swift data found LCs are used most where the buyer’s country offers only moderate legal protection. In the riskiest markets, exporters tend to ask for cash in advance instead.

2. Access to finance for smaller exporters

The DGFT study found 40% of MSME export credit applications were rejected, and exporters cite collateral demands of 100–150%. An LC from a sound bank can be the security a small exporter lacks.

3. Certainty on when payment arrives

Since 1 October 2026, the general period for realising export proceeds is nine months, down from 15. An LC fixes when and how payment arrives, provided the documents comply. Exporters should confirm current rules with their authorised dealer bank.

4. Import trade credit

When RBI discontinued Letters of Undertaking and Letters of Comfort for trade credit in March 2018, it confirmed that banks may continue to issue LCs and bank guarantees for import trade credit.

The LC as a barometer of trust

LC use rises when risk rises. Federal Reserve research found LC use picked up after the 2008 financial crisis. In September 2026, ICC’s Pulse Check on trade finance reported that tariffs, conflicts and shifting trade corridors are reinforcing demand for risk-mitigation products.

That is why ICC’s 2025 Trade Register still forecasts documentary trade to grow about 3.1% a year to 2029. In an uncertain world, the letter of credit is not a relic. It is insurance.

Common LC discrepancies and how to avoid them

A discrepancy is any document that does not comply with the credit, the applicable rules or standard banking practice. The same few errors cause most refusals:

Late shipment or late presentation: check the shipment date, the 21-day presentation period and the expiry date before you ship.
Goods description mismatch: the invoice description must match the LC wording, not a shortened version.
Missing or inconsistent documents: every document in the list must be present, and details such as names, quantities and amounts must agree across them.
Insurance shortfall: the cover must be of the type and amount the LC requires.

The practical fix is to examine every document against the LC before submitting, and to ask for an amendment early if any term cannot be met.

What it means for banks

LCs remain valuable, but they are no longer easy money. In ICC’s 2026 Pulse Check, around 40% of respondents reported declining margins on LCs, the most of any product.

Risk is low but not zero. ICC’s 2025 Trade Register shows import LC defaults close to their seven-year average, while export LC defaults were almost entirely concentrated in Russia.

Technology is also changing the work. About half of ICC’s respondents are piloting or already using AI for document checking and compliance screening. India has not yet adopted MLETR, the UNCITRAL model law that gives electronic trade documents legal standing, though the DGFT study recommends it.

The opportunity for banks is to pair the LC with what clients need next: confirmation, discounting or supply chain finance.

The skills that make a documentary credit specialist

The professional who only processes LCs is exposed. The one who understands why a client needs one is not. Four capabilities matter most:

Rules mastery: UCP 600, ICC’s International Standard Banking Practice (ISBP), ISP98 for standbys and URR 725 for reimbursements.
Document examination: spotting discrepancies in transport, commercial and financial documents before they delay payment.
Risk awareness: recognising fraud, money laundering and sanctions red flags in trade transactions.
Advisory judgement: knowing when an LC, a collection, insured open account or supply chain finance suits the client better.

If you are new to trade finance, the Certificate in International Trade and Finance (CITF) is a good first step before specialising in documentary credits.

How CDCS builds documentary credit expertise

The Certificate for Documentary Credit Specialists (CDCS) is endorsed by the International Chamber of Commerce and was created with leading industry experts. It covers:

types, characteristics and uses of documentary credits and standby letters of credit
UCP 600, ISP98, Incoterms® 2020 and URR 725
the parties to a transaction and their roles and obligations
transport, commercial and financial documents
related products such as letters of indemnity and steamship guarantees
the consequences of breaches, including money laundering and terrorist financing

CDCS is studied online and assessed through two online exams, with a 70% pass mark in each. Plan for about 300 hours of study, and your registration stays valid for 12 months, so it fits around a full-time role. At LIBF India the CDCS fee is £730, which includes your first exam attempt for both units. For the full format, see the CDCS exam pattern and pass mark, and if you are deciding whether it suits you, read is CDCS worth it in India.

For trade finance operations staff, document checkers, relationship managers and compliance teams, it is a globally recognised way to show documentary credit expertise.

Explore the CDCS certification

Frequently asked questions

What is the difference between a letter of credit and open account?

Under a letter of credit, a bank undertakes to pay the exporter against complying documents, so the bank carries the payment risk. Under open account, the buyer pays the invoice on agreed terms after receiving the goods, so the exporter carries the risk.

Are letters of credit still used in international trade?

Yes. Open account dominates global trade, but ICC forecasts documentary trade to grow about 3.1% a year to 2029, and LCs remain common where buyer risk is higher or finance is harder to obtain.

Why do Indian exporters use letters of credit?

Mainly for payment security with newer or distant buyers, for access to export finance when collateral is hard to find, and for certainty on when payment will arrive. In the DGFT study, about 65% of surveyed exporters said they accessed export finance through LCs, bank guarantees or packing credit.

Which rules govern letters of credit?

Commercial letters of credit are usually issued subject to UCP 600, published by the ICC. ICC’s International Standard Banking Practice (ISBP) explains how documents are examined under UCP 600. Standby letters of credit are often issued subject to ISP98.

What is a discrepancy in a letter of credit?

A discrepancy is a document that does not comply with the terms of the credit, the applicable rules or standard banking practice. A bank can refuse a discrepant presentation, which delays payment to the exporter.

How long does a bank have to examine LC documents?

Under UCP 600, a bank has a maximum of five banking days after presentation to decide whether the documents comply.

What is CDCS and who should take it?

CDCS is the ICC-endorsed Certificate for Documentary Credit Specialists. It suits professionals who work with letters of credit, including trade finance operations staff, document checkers, relationship managers and compliance teams.

Sources

Figures were last checked on 22 October 2026 and may change. This article is general information, not legal or financial advice.