Types of Letter of Credit: Sight, Usance, Inland, Foreign & SBLC

A letter of credit (LC) is a bank’s written undertaking to pay a seller once the seller presents documents that strictly comply with the credit’s terms — and in India the type of LC you choose decides who carries the risk, when payment lands, and whether the instrument even works across a border. The headline split is by payment timing (sight pays on presentation; usance/deferred pays at a future date), by geography (inland for domestic trade; foreign for cross-border), and by function (a standby LC, or SBLC, is documentary in form but behaves like a guarantee). Layered on top are revolving, transferable, back-to-back, red-clause and confirmed LCs — each solving a specific trade problem. Pick the wrong one and you either tie up working capital you didn’t need to, or leave a payment exposed that should have been covered.

Every LC sits inside your non-fund-based (NFB) limit, carries commission rather than interest, and is negotiated as part of your wider banking arrangement — which is exactly why getting the type right is structuring work, not a form. This guide maps the full menu, dates the governing rules, and tells you when each fits. For the instrument mechanics and the importer-side workflow, see our letter of credit page and our LC for importers guide, both under the corporate finance and debt syndication practice.

The governing rules — UCP 600, with RBI/FEMA on top

LCs are governed internationally by UCP 600 — the ICC’s Uniform Customs and Practice for Documentary Credits, Publication 600 — which runs to 39 articles and gives a bank a maximum of five banking days after presentation to examine the documents and decide to honour or refuse. The bank deals in documents, not goods: if the paperwork conforms, the bank pays, regardless of any side dispute about the underlying shipment.

The India-specific point that bears repeating: where there is a conflict, RBI and FEMA rules override UCP 600. The ICC framework is contractual — it does not displace Indian statutory or regulatory law on foreign exchange, end-use or reporting. A standby LC can also be issued under ISP98 (the ICC’s International Standby Practices, written specifically for standbys) rather than UCP 600. Get the rulebook right at issuance and you avoid the most expensive surprise — a refusal, or an instrument an Indian bank cannot honour as drafted.

Sight vs usance vs deferred — the payment-timing split

This is the first decision and the one that touches cash flow most directly.

• A sight LC pays the seller on presentation of compliant documents — money moves almost immediately. It favours the exporter and is the cleanest assurance of getting paid.
• A usance (or acceptance) LC pays at a fixed future date — say 60, 90 or 180 days after the bill of lading or after sight. The buyer gets a credit period; the seller can discount the accepted bill to get cash earlier.
• A deferred-payment LC is similar to a usance LC but works without a drawn bill of exchange — payment falls due at a defined later date against the bank’s undertaking.

The trade-off is plain: sight protects the seller’s liquidity, usance/deferred protects the buyer’s. Most negotiated trades land on usance because the buyer wants the working-capital breathing room.

Inland vs foreign — the geography split

An inland LC governs a domestic transaction — both buyer and seller in India — and is a routine way to give a domestic supplier bank-backed comfort without parting with cash up front. A foreign LC governs cross-border trade, brings FEMA reporting and exchange-control rules into play, and is where the RBI/FEMA-over-UCP-600 override actually bites. The mechanics are the same; the regulatory overlay is not.

The LC menu at a glance

Governing-rule column reflects UCP 600 (ICC Publication 600, 39 articles, max 5 banking days to examine), with RBI/FEMA overriding on conflict — indicative as at June 2026.

The specialised types — and the trade problem each solves

Confirmed LC. A second bank — usually in the exporter’s country — adds its own undertaking on top of the issuing bank’s. The exporter is then covered even if the issuing bank or its country runs into trouble. This is the right tool when the buyer’s bank or jurisdiction carries real risk.

Revolving LC. Instead of issuing a fresh LC for every shipment, one credit reinstates automatically up to a cap — by value or by time. It suits a continuous supply relationship and saves repeated issuance cost and paperwork.

Transferable LC. The named beneficiary can transfer all or part of the credit to one or more second beneficiaries — the structure trading houses and intermediaries use to pass an LC down to the party who actually supplies the goods. UCP 600 Article 38 governs it.

Back-to-back LC. A trader who holds an LC from the ultimate buyer (the master LC) gets its bank to issue a second LC, backed by the first, in favour of the actual supplier. Two separate credits, economically linked — the way an intermediary funds a purchase it could not otherwise finance.

Red-clause LC. Carries a clause (historically printed in red) authorising the advising/negotiating bank to pay the seller an advance before shipment — effectively pre-shipment finance built into the credit. Useful when the seller needs working capital to produce or procure the goods.

Standby LC (SBLC). The instrument that confuses everyone, because it is documentary in form but a guarantee in function. It pays against documents like any LC — but those documents are typically a simple statement of the applicant’s default, so in economic substance it does the job of a guarantee. Critically, an SBLC is not a bank guarantee: a BG pays on default under the RBI Master Circular on Guarantees, while an SBLC pays against documents under UCP 600 or ISP98. For an Indian corporate, an SBLC is most relevant cross-border, where a foreign counterparty wants guarantee-like comfort in a documentary wrapper they trust. Where you want guarantee comfort without consuming bank lines at all, weigh an insurance surety bond instead.

Why the right type needs a banker who structures the file

Choosing among ten LC variants — then sizing the limit, fixing the tenor on a usance credit, deciding whether to seek confirmation, drafting documentary terms a seller can actually satisfy, and reconciling it all with FEMA on a foreign LC — is structuring work. It interacts with the rest of your fund-based and non-fund-based lines, and a poorly drafted credit costs real money and real time: a sight LC where a usance one would have eased cash flow, or terms so tight the seller can never present compliant documents.

That is the work we do at Finnova Advisory — CA-led and lender-agnostic, with ₹4,250 Cr+ mobilised across 100+ corporate-finance mandates since 2011, active across PSU banks, private banks, NBFCs and SEBI-registered AIFs. We don’t mass-apply; we structure the non-fund-based file, match it to the right-fit lender, and walk it through to issuance — the right instrument, on the right terms, walked through to the counter. If an import, an export or a domestic supply is forcing the question, our corporate finance team sets the LC up correctly the first time, and our LC for importers guide covers the buyer-side workflow end to end.

Key takeaways

• Sight pays now, usance/deferred pays later — the split that decides whose working capital is protected.
• Inland is domestic; foreign brings FEMA in, where RBI/FEMA override UCP 600 on conflict.
• LCs are governed by UCP 600 (39 articles, max 5 banking days to examine); an SBLC may use UCP 600 or ISP98.
• Confirmed, revolving, transferable, back-to-back and red-clause each solve a distinct trade problem — match the type to the trade.
• An SBLC is not a bank guarantee — documentary in form, guarantee-like in function.

FAQ

What are the main types of letter of credit in India? The core types are sight (pays on presentation) and usance/deferred (pays at a future date), split further into inland (domestic) and foreign (cross-border). On top sit specialised forms: confirmed, revolving, transferable, back-to-back, red-clause and the standby LC (SBLC). All are governed by UCP 600, with RBI and FEMA rules overriding it on conflict.

What is the difference between a sight LC and a usance LC? A sight LC pays the seller immediately on presentation of compliant documents, protecting the exporter’s liquidity. A usance LC pays at an agreed future date — commonly 60, 90 or 180 days — giving the buyer a credit period; the seller can discount the accepted bill for earlier cash. The choice turns on whose working capital you want to protect.

Is an SBLC a letter of credit or a bank guarantee? A standby letter of credit is documentary in form — it pays against documents like an LC — but functions like a guarantee, because those documents are usually just a statement of default. It can be issued under UCP 600 or ISP98. It is not a bank guarantee, which pays on default under the RBI Master Circular on Guarantees; the SBLC sits in a documentary wrapper instead.

What is a back-to-back letter of credit? It is a second LC issued on the strength of a first (master) LC. A trader holding an LC from the ultimate buyer asks its bank to issue a fresh LC, backed by that master credit, in favour of the actual supplier. Two separate but economically linked credits — the standard way an intermediary funds a purchase it could not otherwise finance.

Which law governs letters of credit in India? Internationally, LCs follow UCP 600 (ICC Publication 600), which has 39 articles and allows a bank a maximum of five banking days to examine documents. In India, RBI and FEMA rules override UCP 600 wherever they conflict — particularly on foreign LCs, where exchange-control and end-use rules apply. A standby LC may alternatively be issued under ISP98.

When should I use a confirmed letter of credit? Use a confirmed LC when the issuing bank or the buyer’s country carries real risk. A second bank — usually in the exporter’s country — adds its own undertaking on top of the issuing bank’s, so the exporter is paid even if the issuing bank or its jurisdiction defaults. It costs more in confirmation charges, but it removes country and counterparty-bank risk from the seller.