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What is a Letter of Credit?
A Letter of Credit (LC) is a financial instrument used in international trade to provide payment security. It guarantees that the seller will receive payment from the buyer, as long as the seller fulfils the agreed-upon terms and conditions. LCs help mitigate risks for both parties involved in the transaction. It can be issued against a pledge of securities or cash. Banks typically collect a fee i.e., a percentage of the size/amount of the Letter of Credit.
Importance of a Letter of Credit
The nature of international trade includes factors such as distance, different laws in each country and the lack of personal contact during international trade. Letters of Credit make a reliable payment mechanism. The ‘International Chamber of Commerce Uniform Customs and Practice for Documentary Credits’ oversees Letters of Credit used in international transactions.
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Parties to LC
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Types of
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Importance of LC
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Importance of
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Collateral required
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Parties to a Letter of Credit
- Applicant (importer) requests the bank to issue the LC
- Issuing bank importer’s bank which issues the LC (also known as the opening banker of LC)
- Beneficiary (exporter)
Types of Letters of Credit
Following are the major categories of LCs:
- Sight LC
- Revocable/Irrevocable LC
- Confirmed LC
- Back-to-Back LC
- Transferable LC
Importance of Letters of Credit to an Importer
An LC offers assurance that the payment will only be made when the exporter meets the specified terms and conditions. This mitigates the risk of non-performance or delivery issues, ensuring the importer receives the goods as agreed and protects their financial interests.
Importance of Letters of Credit to an Exporter
An LC ensures that the exporter will receive payment for goods or services once they comply with the terms and conditions of the LC. This reduces payment risks, enhances trust and facilitates smooth international trade transactions.
Collateral requirement in an LC
The bank will require collateral depending on the credit arrangement with the applicant or even a Fixed Deposit.
Why apply LC through ICICI Bank?
Quick turnaround time and seamless processing
Apply for an LC digitally through Trade Online (ICICI Bank’s Corporate Internet Banking) and have the convenience of banking from the comfort of your home
Avail fast and hassle-free LC issuance service at competitive rates
Get the LC draft provided by the exporter vetted through us or get the LC draft prepared from ICICI Bank and have the LC issued on mutually acceptable payment terms
Get the advantage of our correspondent banks’ relationships and get the LCs advised through your preferred banks with our extensive global network.
Easy to apply
Letter of Credit FAQs
How does a Letter of Credit work?
- Step 1 - You (the buyer) and the supplier sign a contract stating that the payment will be made based on the Letter of Credit
- Step 2 - You approach ICICI Bank to issue a Letter of Credit in the supplier’s favour
- Step 3 - ICICI Bank issues the Letter of Credit, advised by its own branch or correspondent bank in the supplier’s country
- Step 4 - Advising Bank advises a Letter of Credit to the supplier
- Step 5 - The supplier receives the Letter of Credit, sends the shipment of goods and delivers documents to its own bank
- Step 6 – The supplier’s bank sends the documents to ICICI Bank for payment
- Step 7 - You now pay the amount due to ICICI Bank and get the documents in turn.
Types of Letters of Credit
- Sight Letter of Credit - The issuing bank makes the payment once the documentation is received in order
- Usance Letter of Credit - The issuing bank accepts the draft once all documentation received is in order and agrees to pay on the maturity date
- Standby Letter of Credit - This is typically used to ensure that the applicant will meet the payment or contractual obligations. A Bank Guarantee can also serve the same purpose.
The ICICI Bank edge
- Convenient - Sanctioned and issued quickly
- Wide Acceptance - Globally accepted by all beneficiaries
- Multi-choice – An ICICI Bank Letter of Credit can also be availed against 100% cash margin in the form of Fixed Deposits
- Competitive pricing.
