Letter of Credit (LC) for Indian Handicraft Exports: How It Works and When to Use It

What Is a Letter of Credit?

A Letter of Credit (LC) — also called a Documentary Credit — is a payment instrument issued by the buyer's bank (issuing bank) that guarantees payment to the Indian exporter (beneficiary), provided that the exporter presents the specified documents within the specified time period and in full compliance with the LC terms.

In simple terms: the buyer's bank says to the Indian exporter, "If you ship the goods and give us these documents exactly as described, we will pay you — regardless of whether the buyer pays us or not." It is the bank's creditworthiness, not the buyer's, that backs the payment.

Why Handicraft Exporters Should Know About LCs

For small orders (under USD 5,000) from known buyers, T/T (telegraphic transfer) advance payment is simpler and more practical. But for:

• Large orders (USD 10,000+) from new international buyers
• Buyers in high-risk markets (certain African, Middle Eastern, or South Asian countries)
• Buyers who are large retail chains or government procurement agencies
• Orders where the production lead time is long (8–16 weeks for custom pieces)

...an LC provides the Indian exporter with ironclad payment security and the international buyer with certainty that goods will be shipped as specified before payment is released.

How an LC Transaction Works — Step by Step

1. Sales contract: Buyer and seller agree on the terms — product, quantity, price, shipment date, Incoterms — and specify that payment will be by LC.
2. LC application: Buyer applies to their bank (issuing bank) to open an LC in favour of the Indian exporter.
3. LC issuance and advice: Issuing bank sends the LC via SWIFT to a correspondent bank in India (advising bank, often confirming bank). The Indian exporter receives a copy of the LC.
4. Exporter reviews the LC: This is the most critical step — the exporter reviews every single term and condition and confirms they can comply. Any term that cannot be met must be amended before shipment.
5. Production and shipment: Exporter produces and ships the goods within the LC's shipment deadline.
6. Document preparation: Exporter collects all documents specified in the LC — commercial invoice, packing list, B/L, COO, inspection certificate, etc.
7. Document presentation: Exporter presents documents to the advising/confirming bank in India within the LC's presentation period (typically 21 days from shipment date).
8. Document examination: The bank examines documents against the LC terms. If "compliant," the bank sends documents to the issuing bank and claims payment.
9. Payment: Issuing bank pays the Indian bank, which credits the exporter's account. The issuing bank releases documents to the buyer, who uses the original B/L to collect the cargo.

Types of LC Relevant to Handicraft Exports

• Sight LC: Payment made immediately when compliant documents are presented. Most common type for handicraft exports.
• Usance/Deferred LC: Payment made 30, 60, or 90 days after document presentation. Provides the buyer with a credit period — less favourable for the exporter unless discounted.
• Confirmed LC: A second bank (usually in India) adds its guarantee to the LC — the Indian exporter gets paid even if the issuing bank or the buyer's country faces a financial crisis. Recommended for exports to politically or economically unstable markets.
• Transferable LC: Can be transferred by the first beneficiary (exporter) to a second beneficiary (the actual manufacturer/artisan collective). Useful when a trading house is sourcing from multiple artisan groups.
• Back-to-Back LC: A new LC opened by the exporter using the original LC as security — used to finance production from the artisan supplier before receiving payment from the buyer.

The Most Common LC Discrepancies in Handicraft Trade

A "discrepancy" is any difference between the documents presented and the LC terms. Banks charge for examining discrepant documents, and payment can be delayed or refused. The most common discrepancies:

• Late shipment (shipped after the LC's latest shipment date)
• Late presentation of documents (presented after the 21-day presentation period)
• Description of goods on invoice does not exactly match LC wording
• B/L not marked "on board" or "freight prepaid" as specified in LC
• Invoice amount exceeds the LC amount
• Wrong number of copies of documents (LC says 3 originals, you submit 2)
• Certificate of Origin not issued by the required authority
• B/L consignee does not match LC instructions ("To Order" vs named consignee)

Golden rule: Read the LC terms before you start production, not after you ship. Amendments are possible but require the buyer's cooperation and bank charges.

LC vs T/T: Choosing the Right Payment Method

• Use T/T advance (100%) for: small orders under USD 2,000–3,000, existing trusted buyers, platform-mediated transactions with escrow
• Use T/T 30% advance + 70% against documents for: medium orders with buyers you have transacted with 2–3 times
• Use LC at sight for: large orders, new buyers in unfamiliar markets, buyers who are institutional or government
• Use Confirmed LC for: any export to markets with political instability or currency controls

Conclusion

The Letter of Credit is international trade's most powerful payment security tool — but it demands precision. One missing document, one wrong date, one mismatched description, and payment can be delayed for weeks. The investment in understanding LC mechanics pays back many times over on your first large order from a new international buyer. For all LC transactions on Tannarix, our trade documentation team reviews the LC terms and prepares a compliance checklist for the vendor before production begins.