Letter of Credit (LC)
in Export Business
10-Step Complete Process · 4 Parties · 6 Documents · LC Discrepancies · GST Zero-Rated · FEMA · UCP 600
When an Indian exporter ships goods worth $50,000 to a buyer in the USA they’ve never met — how do they ensure payment? The answer is a Letter of Credit (LC). A Letter of Credit is a bank’s unconditional guarantee that the exporter will be paid, provided they submit the correct documents. Governed by UCP 600 (International Chamber of Commerce), the LC is the backbone of secure international trade.
Real LC Example — XYZ Textiles vs ABC Inc.
🧵 Cotton Bedsheets Export — India to USA (As Per Your Notes)
Parties Involved in an LC Transaction
Handwritten Notes — LC Complete Flow
Day 13 — Letter of Credit: 10-Step Process, Documents, Banks & GST/FEMA Compliance
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LC Transaction — 10-Step Flow
From Agreement to Payment — Letter of Credit Step by Step
XYZ Textiles (India) ↔ HDFC Bank ↔ Citi Bank ↔ ABC Inc. (USA)
Export Agreement Between Buyer & Seller
XYZ Textiles (Panipat) and ABC Inc. (USA) enter into a sales contract. Order: 5,000 Cotton Bedsheets · Value: USD 50,000 · Payment: LC at Sight · Shipping: FOB Mumbai Port. No GST arises at this stage — GST applies only at time of supply.
📋 Section 16 IGST Act — Zero-Rated SupplyABC Inc. Applies to Citi Bank (USA) to Issue LC
The importer (applicant) approaches its bank to issue an LC in favour of XYZ Textiles (beneficiary). Bank evaluates creditworthiness before issuing. ABC Inc.’s account will be debited upon payment.
🏛️ Issuing Bank: Citi Bank USACiti Bank Issues & Sends LC to HDFC Bank (Advising Bank)
Citi Bank issues the LC via SWIFT (banking messaging system). The LC is transmitted to HDFC Bank Panipat — the advising bank — with all terms: document requirements, shipment deadline, port details, and payment conditions.
📡 SWIFT Transmission · LC in Favour of XYZHDFC Bank Verifies LC & Advises XYZ Textiles
HDFC Bank verifies LC authenticity, checks bank credentials, confirms validity, and advises XYZ Textiles. XYZ must carefully verify: beneficiary name, shipment date, port details, document requirements, and payment conditions. Any discrepancy must be amended before shipment.
✅ Verify + Inform XYZXYZ Ships Goods from Mumbai Port → NYC
After verifying LC terms, XYZ Textiles manufactures and ships 5,000 cotton bedsheets. Shipment done from Mumbai Port to New York City. Export under FOB terms — risk transfers on loading. FEMA compliance: proceeds must be realized within prescribed period.
🚢 Mumbai Port → NYC · FOB TermsXYZ Prepares & Submits Documents to HDFC Bank
XYZ Textiles prepares all required documents exactly as specified in the LC: Commercial Invoice, Packing List, Bill of Lading, Certificate of Origin, Insurance Certificate, eBRC (after realization), and any other docs specified in LC. Checks documents against LC terms before submitting.
📁 Check Docs with LC TermsHDFC Bank Scrutinizes Documents
HDFC Bank examines documents strictly under UCP 600 principles. Banks deal with documents — not goods. Any discrepancy (wrong invoice amount, late shipment, missing signature) may cause rejection. Payment released at sight (immediate for LC at Sight) if documents comply.
✅ Compliant → Payment Released at SightHDFC Bank Sends Docs to Citi Bank & Claims Reimbursement
After verifying documents, HDFC Bank sends the documents to Citi Bank USA and claims reimbursement of USD 50,000. Citi Bank checks documents against the original LC terms.
🔄 Send Docs + Reimburse from Citi to HDFCCiti Bank Deducts from ABC Inc.’s Account & Pays
Citi Bank deducts USD 50,000 from ABC Inc.’s account and releases funds to HDFC Bank. Citi Bank gives the shipping documents to ABC Inc. so they can clear the shipment at US customs.
💳 Deduct from ABC A/c → Give Docs to ABCDocs Clear Shipment · HDFC Credits XYZ · FEMA Compliance
ABC Inc. uses the documents to clear the shipment at US customs. HDFC Bank credits USD 50,000 (converted to INR) to XYZ Textiles’ account. XYZ generates eBRC for FEMA compliance and DGFT benefits. Based on docs, shipment is cleared.
✅ Docs Clear Shipment · Payment to XYZ · eBRC Generated6 Key Documents Required Under LC
LC Discrepancies — What Can Block Payment
Incorrect Invoice Amount
Invoice value differs from LC amount — bank rejects documents immediately.
Shipment After Due Date
Goods shipped beyond LC expiry date — entire LC may be treated as expired.
Missing Signatures
Documents without required authorised signatures are treated as non-compliant.
Wrong Consignee Details
Consignee name or address differs from LC terms — document rejected by bank.
Quantity Mismatch
Invoice quantity differs from Packing List or Bill of Lading — inconsistency causes rejection.
Inconsistent Descriptions
Product description differs across documents — UCP 600 requires exact consistency.
Port Details Mismatch
Port of loading or destination differs from LC terms — treated as non-compliant shipment.
HS Code Errors
Incorrect HSN/HS Code on invoice creates discrepancy with LC product description.
Types of Letters of Credit
GST & FEMA Compliance in LC Transactions
GST Treatment
Section 16 IGST Act · Zero-Rated Supply
- →No GST at agreement stage — GST applies only at time of supply
- →Export is Zero-Rated under Section 16 IGST Act
- →Option 1: Export under LUT (Form RFD-11) — no IGST + ITC refund via RFD-01
- →Option 2: Pay IGST and claim automated refund via ICEGATE
- →Invoice must comply: Section 31 CGST Act + Rule 46 CGST Rules
- →Report in GSTR-1 Table 6A with Shipping Bill details
FEMA Compliance
FEMA 1999 · RBI Master Directions
- →Export proceeds must be realized within prescribed period (9 months for goods)
- →Reporting through Authorized Dealer Bank (HDFC Bank here)
- →eBRC generated after USD 50,000 received in HDFC Bank
- →eBRC enables DGFT benefits, export incentives & FTP compliance
- →AD Bank monitors export realization and reports to RBI
- →Failure to realize within time = FEMA violation + RBI enquiry
Key Takeaways — Day 13
🎯 What You Must Remember
- ✓LC (Letter of Credit) is a bank’s unconditional guarantee to pay the exporter upon presentation of compliant documents — governed by UCP 600 (ICC)
- ✓4 Parties: Exporter (Beneficiary) · Importer (Applicant) · Issuing Bank (Citi USA) · Advising Bank (HDFC India) · Confirming Bank (optional)
- ✓10-Step Process: Agreement → LC Application → LC Issuance → Advise → Shipment → Document Preparation → Scrutiny → Send Docs → Deduct → Clear Shipment
- ✓Critical UCP 600 Principle: Banks deal with documents — NOT with goods. Document compliance is everything in an LC.
- ✓6 Key Documents: Commercial Invoice · Packing List · Bill of Lading (most important — title doc) · COO · Insurance Certificate · eBRC
- ✓LC at Sight = immediate payment on compliant docs · Usance LC = deferred payment (buyer gets credit period)
- ✓Common discrepancies: Wrong invoice amount · Late shipment · Missing signatures · Quantity mismatch · Wrong consignee · Inconsistent descriptions
- ✓GST: Export is Zero-Rated under Section 16 IGST Act — choose LUT or IGST route. No GST at agreement stage.
- ✓FEMA: Export proceeds must be realized within 9 months (goods) · AD Bank generates eBRC after realization
- ✓eBRC (Electronic Bank Realisation Certificate) is mandatory for DGFT benefits, export incentive claims, and foreign trade compliance
Catch Up — Days 1 to 12
Day 1–12: Export Intro · IGST vs LUT · Invoice · LUT · Refund · Returns · Shipping Bill · Goods vs Services · CSB-V · Time Limit · Registrations · INCOTERMS
Day 13 Video Summary
Instagram Reel — Day 13 · Letter of Credit (LC) in Export Business
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The content shared on this channel is purely for educational purposes. As a Chartered Accountant, I strive to provide accurate and insightful information related to GST, Income Tax, Accounting, and Tax Planning. However, please note that the content should not be considered as professional advice or a substitute for personalized consultation. For specific matters, please consult a qualified professional.