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In cross-border transactions where parties operate under different legal and regulatory frameworks, trust alone is not enough. A Letter of Credit introduces a third party (the issuing bank) that takes on the payment risk once the seller fulfills the contract. This financial safety net is especially important for businesses dealing with new suppliers, unknown markets or high value shipments.
A letter of credit is generally issued by a registered bank, but not all banks are equal. Some have faster turnaround times, some have lower charges, and some have a stronger global network. So, which bank to choose?
This article will compare the best banks in India for Letters of Credit, breaking down their LC charges, processing time, and trade finance capabilities to help you make an informed decision. But firstly, let’s begin with:
A Letter of Credit (LC) is a trade finance instrument that guarantees payment to a seller from a buyer, as long as certain conditions are met. Issued by a bank, an LC is an assurance that the exporter will get paid when the required shipping and trade documents are presented. This reduces the risk of non-payment and ensures importers get the goods as agreed.
Beyond risk reduction, Letters of Credit also help exporters can get financing so they can fulfill large orders without straining their working capital. Importers on the other hand, can get deferred payment options in certain LC structures so they can manage their liquidity better.
As trade grows and regulations evolve, choosing the right bank for an LC becomes an important business decision. The bank you choose affects your competitiveness in the market.
Different trade agreements require different levels of risk mitigation and payment guarantees. Here are the most common types of LCs in international trade:
A Sight LC pays the exporter immediately once the required documents are verified and approved by the issuing bank. Good for businesses that need quick access to funds and want to minimize cash flow disruptions.
A Usance LC, also known as a deferred payment LC, allows the importer to pay after a specified period. Good for businesses that need to manage liquidity better, especially for large orders that require more payment terms. The exporter gets a secure future payment backed by the bank.
A Standby LC is a secondary payment guarantee that the seller gets paid if the buyer defaults. Unlike traditional LCs used for trade transactions, a SBLC is more like a safety net, an extra layer of security in case of defaults.
A Revolving LC is good for businesses that do recurring business with the same partner. Instead of issuing a new LC for every shipment, a Revolving LC allows multiple withdrawals within a specified period under a single agreement, simplifies the trade finance process, and reduces administrative overhead.
A Confirmed LC has an extra level of security by requiring a second bank (usually in the exporter’s country) to confirm the payment obligation. Good for businesses that deal with buyers in unstable or high risk countries, ensures payment is guaranteed even if the issuing bank defaults.
A Back-to-Back LC is used in intermediary trade where a trader (middleman) buys from a supplier and sells to an end buyer. The trader uses the first LC (from the buyer) to issue a second LC to the supplier, so the transaction can be done without significant upfront capital.
A Red Clause LC allows the exporter to receive payment before shipping the goods. This is good for businesses that need upfront capital to buy raw materials, manufacture goods or cover logistics costs before fulfilling the order. However, since this LC is riskier for the banks, it comes with stricter conditions and higher fees.
As you can see, different types of LCs allow businesses to structure their transactions according to their financial strategy. Hence, it’s important to work with a bank that offers various trade finance solutions.
Now that we’ve understood the meaning, types and importance of LC, it’s time to take a look the best banks in India for Letter of Credit:
Beyond issuance fees, consider amendment charges, advising fees, and any hidden costs. Traditional banks are known to be obtuse about their pricing, but we will try to provide as many details as we can in our comparison table..
When it comes to issuing a Letter of Credit (LC), banks charge several types of fees that can add up to your trade finance costs. Here’s an expert breakdown of the common charges:
Issuance Charges:
Banks charge a fee as a percentage of the LC value - 0.75% to 2%. For instance, big private banks like HDFC or ICICI charge around 0.85% for standard export transactions. But fees can be higher for riskier or bigger transactions.
Amendment Fees:
Since trade terms can change, amendments to an LC are common. Banks charge a flat fee for each amendment—₹1,000 to ₹5,000 per change. This can add up if multiple amendments are needed, so negotiate clear terms from the beginning.
Advising & Confirmation Fees:
If an LC is issued by a foreign bank, your local bank may need to “advise” or “confirm” it. Advising fee is nominal but confirmation fee varies based on the bank’s risk assessment and the extra assurance to the exporter.
Negotiation & Discounting Charges:
When exporters choose to negotiate or discount their LC documents for early payment, banks charge a fee on the discounted amount. This fee structure is a percentage of the discounted amount and varies based on the bank’s policy and the risk of the transaction.
Usance Interest for Deferred LCs:
For usance or deferred payment LCs, interest is charged over the credit period till payment is due. Interest is usually calculated using a reference rate + margin and the rate will depend on bank’s lending rate, credit period and risk profile of the transaction.
Actual fees may vary based on the size and complexity of the transaction, and also the currency involved. Compare multiple offers and negotiate with your bank to get the best deal for your trade finance needs.
The global trade landscape is evolving. As geopolitical tensions, supply chain disruptions, and economic uncertainty continue to reshape international trade, your choice of trade finance partner will be a key differentiator.
Beyond comparing fee structures, seek banks that:
In the end, the most cost-effective Letter of Credit is not always the cheapest one, but the one that minimizes your transaction risks and supports your long-term business growth. For more information on international trade payments, consider speaking to an expert at Karbon or taking a look at our dashboard and features.
A Letter of Credit (LC) is a specific trade finance instrument that guarantees payment for international transactions, while a line of credit is a flexible borrowing arrangement. An LC is transaction-specific, providing a payment guarantee for a particular shipment or trade deal. A line of credit is a pre-approved borrowing limit that a business can draw from repeatedly for various purposes, without being tied to a specific transaction.
An irrevocable Letter of Credit provides the strongest possible guarantee. Unlike revocable LCs, which can be cancelled or modified without all parties’ consent, an irrevocable LC:
While both are financial instruments that mitigate risk, they serve different purposes. LCs are used in international trade, while bank guarantees can be used in construction projects, service contracts, and other business agreements.
The typical LC process goes like this:
Letter of Credit coverage means the extent of financial protection offered by the LC. It includes:
The coverage ensures the exporter gets paid and the importer gets the goods.
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