Letter of Credit Charges, Margin and Limit Explained

TL;DR

• An LC costs more than the goods: charges, cash margin held, and limit room used.
• On a Rs. 120 lakh LC at 25 percent margin, you put up Rs. 30 lakh cash and the bank carries Rs. 90 lakh.
• The applicant normally pays the issuing bank charges, unless the LC says otherwise in writing.
• The full Rs. 120 lakh counts against your LC limit, not just the Rs. 90 lakh exposure.
• If you do not fund on the due date, the bank pays, applies your margin, and the Rs. 90 lakh balance becomes funded.

Priya runs a packaging film trading firm in Indore. She imports film worth Rs. 120 lakh under one letter of credit, with 90 days usance. Her bank asks for 25 percent cash margin, charges opening and usance fees, and marks the full LC amount against her LC limit. Priya had budgeted for the goods. She had not budgeted for Rs. 30 lakh of cash locked as margin, Rs. 54,000 of illustrative charges, and Rs. 10 lakh of limit headroom left after this single LC. This guide follows her file, because it shows the three questions every LC applicant should answer before the bank opens the credit: what will it cost, how much cash will it lock, and how much limit room will it leave.

One reading rule. This page is general information under Indian banking practice as of October 2026, not legal or credit advice. Where a rule comes from the Reserve Bank of India or from UCP 600, the ICC rules for documentary credits, this page says so. Where a number comes from bank practice or from a worked example, this page says that too. Only your sanction letter binds your bank on margin, charges and limit structure. This guide does not re-teach LC types or UCP 600 documents. For the bank guarantee versus LC question, see our bank guarantee borrower guide, which carries the comparison table.

What does a letter of credit cost you, beyond the goods themselves?

A letter of credit costs you in three places, and only the first is a fee. First, the bank charges for opening and running the credit. Second, the bank holds cash margin, which is your money locked up, not a fee. Third, the LC uses limit room, which can block your next purchase. Borrowers who compare only the fee rate miss the other two costs, and the other two are usually larger.

Opening charges are commonly split into two parts in bank practice. Commitment charges cover the period from opening the LC to the last date for negotiation of documents or the LC expiry, whichever is later. Usance charges cover the credit period the seller gives you, from 7 days to 90 or 180 days in common practice. Retirement charges are payable when the bill is retired, when the bank scrutinises the bill and levies charges based on the value of goods. Advising and confirming fees sit outside the issuing bank, and the next section shows who bears them.

The table below puts Priya numbers on all three costs at once. The charge rates are illustrative only, chosen so the arithmetic can be checked. No bank is claimed to charge these rates today. Your sanction letter and the bank schedule of charges govern your actual rates.

Read the table as a cash story, not just a fee list. On day one, Priya parts with Rs. 30 lakh of margin plus Rs. 18,000 of opening charge, and her limit room falls to Rs. 10 lakh. On the due date 90 days later, she must fund the balance. The Rs. 54,000 of illustrative charges is small beside the Rs. 30 lakh of locked cash. That is why margin, not the fee rate, is usually the first negotiation target.

Who pays each LC charge, you or the seller?

The applicant normally pays the issuing bank charges, unless the LC says otherwise. That default comes from ICC practice, not from an RBI rate card. An applicant is the party on whose request the credit is issued, so the issuing bank looks to the applicant for its own charges by default. The rest of the charges follow the LC text, charge by charge, which is why the charges clause deserves a full read before you accept LC terms.

UCP 600 Article 37(c) sets the rule for charges between banks. A bank instructing another bank to perform services is liable for any commissions, fees, costs or expenses incurred by that bank in connection with its instructions. If a credit states that charges are for the account of the beneficiary and charges cannot be collected or deducted from proceeds, the issuing bank remains liable for payment of charges. In plain words, the chain of banks does not go unpaid because the seller refused a fee. The issuing bank stays liable, and it will recover from the applicant under the sanction terms.

UCP 600 Article 37(d) adds a second applicant burden. The applicant shall be bound by and liable to indemnify a bank against all obligations and responsibilities imposed by foreign laws and usages. If a foreign law or usage imposes a cost on the bank for your LC, that cost lands on you. ICC opinions add a practical warning: if the issuing bank wishes to deduct its fees from proceeds, the credit should clearly state the amount or percentage of charges that will be deducted, so the beneficiary and the nominated bank know the level of deductions in advance. A silent LC invites a deduction dispute at payment time.

The practical move is simple. Before the LC is issued, ask for the charges clause in writing and walk through it line by line: which charges are for the applicant, which are for the beneficiary, and what happens if a beneficiary charge cannot be collected. If a charge you expected the seller to bear is missing from the clause, you will bear it. Silence is not a discount. Silence is an applicant liability.

How is cash margin set, and when do you get it back?

Cash margin is set by the bank under its loan policy and your sanction letter, not by an RBI percentage. Bank practice commonly described in older LC guidelines puts margin in a 10 to 25 percent band for regular customers, with 25 percent described as desirable in normal conditions, and lower margin on a case by case basis for borrowers with a clean record of retiring bills on time. Treat that band as background only. It is not a current verified schedule, and your bank may set a different figure for your file. Some files run on full cash margin: at least one Indian bank application form provides for LC and buyers credit against 100 percent or 110 percent cash margin, which shows how far margin can go where the bank wants full cover.

Margin is not a fee. It is your money held as security, and it does two jobs at once. It cuts the bank exposure on the LC, from Rs. 120 lakh to Rs. 90 lakh in Priya case, and it proves you can fund part of the purchase from your own resources. That is also why margin resembles the margin concept in working capital finance, where the borrower funds part of current assets from long term sources. Our margin money guide explains that wider idea, and the LC margin in this guide is the same principle applied to one import bill.

Margin is released when the LC obligation ends. On a retired bill, the bank applies the margin against the payment and releases any balance. On an LC that expires without presentation, the bank should release the margin, subject to unpaid charges or claims under the LC terms. Ask for the release in writing and check that limit headroom is restored. Margin held against a usance bill stays held until the due date, because the bank exposure runs until then. Margin is not working capital you can draw in the meantime.

How does an LC use up your sanctioned limit?

An LC uses your limit at its full amount, not at the exposure after margin. Priya LC is Rs. 120 lakh, so it uses Rs. 120 lakh of limit room, even though the bank exposure after her Rs. 30 lakh margin is only Rs. 90 lakh. Margin reduces risk. It does not reduce limit usage. Borrowers who plan around the Rs. 90 lakh figure will overstate their remaining room by Rs. 30 lakh, which is exactly the kind of error that blocks the next shipment.

The arithmetic is short. Sanctioned LC limit Rs. 150 lakh, minus existing outstanding LCs of Rs. 20 lakh, minus this LC of Rs. 120 lakh, leaves Rs. 10 lakh of headroom. Every new LC, amendment that raises the amount, and usance bill still outstanding counts until it is retired or expires. If the LC amount is stated as about a figure, keep room for the upper figure as well, because the drawing can land above the stated amount within the tolerance the LC allows. Limit planning that uses only the stated amount will fail on the shipment that draws high.

The Reserve Bank of India framework for non-fund based facilities is the backdrop here. The RBI (Non-Fund Based Credit Facilities) Directions, 2025 apply to non-fund based exposures such as guarantees, letters of credit and co-acceptances. The older RBI line carried in the same framework states that banks should open LCs only for genuine commercial and trade transactions of borrower constituents sanctioned regular credit facilities, and should not extend LC facilities to non-constituents. That rule shapes who can get an LC at all. It does not set your margin or your limit. Those come from appraisal and the sanction letter, which is why the limit conversation belongs in the credit appraisal, not in the LC application form. Our credit appraisal guide shows where non-fund limits are assessed in that process.

Is an LC inside your working capital limit or separate from it?

An LC can sit in either structure, and the structure changes what else you can borrow. In a sub-limit structure, the LC limit sits inside your overall working capital limit, so every rupee of LC used is a rupee less of cash credit room. In a separate-limit structure, the LC has its own non-fund limit, so it does not directly cut cash credit room, but the bank still counts the full LC exposure when it appraises your total exposure. Neither structure is free. The sub-limit costs you flexibility. The separate limit costs you a second appraisal and a second set of covenants.

The sub-limit route has a second interaction worth knowing. Older LC guidelines note that an LC presupposes an advance limit, usually cash credit, with sufficient undrawn balance, meaning drawing power, to pay the bill when it arrives. Where a lien is earmarked on the unutilised cash credit account for usance bills, cash margin against those bills may be added back to the advance value of security. In plain words, the bank already thinks about how the LC bill will be paid from your working capital system. If your drawing power is tight in the month the usance bill falls due, the LC can collide with your cash credit drawings. Our drawing power guide shows how that monthly calculation works, and our limit renewal guide shows how LC usage is reviewed at renewal.

The question to ask at sanction stage is direct: is this LC a sub-limit of my working capital limit, or a separate non-fund limit, and what happens to my cash credit room when an LC bill is outstanding. Get the answer in the sanction letter, not in a branch conversation. If the letter is silent, the bank system will apply its default structure, and you will discover it on the shipment that needs room.

Sight or usance: when do you actually fund the payment?

Sight and usance differ on one thing only: the funding date. Under a sight LC, payment falls due when compliant documents are presented, so you fund at presentation. Under a usance LC, payment falls due at a future date agreed in the LC, for example 90 days from the bill of lading date, so you fund on the due date. The goods, the documents and the bank promise are the same in both cases. Only the calendar moves.

Usance is not free credit. The bank charges usance fees for the credit period, as shown in Priya example, where 3 months of usance adds Rs. 36,000 of illustrative charges. If the seller wants payment before the due date, the seller can ask its bank to discount the usance bill, and the discount for the usance period is usually the seller cost in market practice, unless the contract says otherwise. That split matters in price talks: a seller who discounts will price the discount into the goods, so a usance LC that looks cheap on bank charges can still cost you through a higher invoice price.

Choose sight when you hold cash and want the lowest bank charges and the fastest limit release. Choose usance when the goods will sell before the due date and the sale proceeds will fund the payment. Do not choose usance only for the longer calendar. The calendar is priced, through usance charges and through the seller discount, and the margin stays locked for the whole period either way.

What happens if you cannot pay on the due date?

If you cannot pay on the due date, the LC devolves. Devolvement is the point where a non-fund promise becomes a fund liability. The bank must still pay the seller under the LC, because the bank promise does not depend on your cash position. The bank pays Rs. 120 lakh, applies your Rs. 30 lakh margin, and the remaining Rs. 90 lakh becomes a funded liability you owe the bank. The LC is no longer contingent. It is a loan on your books, with interest and charges governed by your sanction letter.

Devolvement hurts in three ways at once. First, you owe the funded amount immediately, usually with interest from the payment date at the rate in the sanction letter. Second, the devolved amount sits on your file when the bank appraises your next limit or renewal, and a devolved bill is a poor signal in that appraisal. Third, the limit room does not free up cleanly, because the exposure has changed form rather than ended. A devolved bill is not a closed LC. It is an unpaid borrowing that must be cleared.

The defence against devolvement is calendar discipline, not hope. Match the usance due date to the date the goods will sell and the sale proceeds will land. Keep a funding buffer for the week the bill falls due, because a sale delayed by a week is the common devolvement story. If a delay is visible early, tell the bank before the due date and ask what options the sanction terms allow. A bank told early has options. A bank told on the due date has only the devolvement route.

What should you check in your sanction letter before the bank opens the LC?

The sanction letter is the binding document for your LC, and eight items in it decide the economics in this guide. Check each one before the first LC is opened, because an LC once issued cannot be changed without agreement of the issuing bank and the beneficiary. Our sanction letter guide shows where these items sit in the letter itself.

• LC limit amount, and whether it is a sub-limit of working capital or a separate non-fund limit.
• Cash margin percentage, and whether margin is by cash, fixed deposit, or lien on the cash credit account.
• Opening, usance and retirement charge rates, and whether GST applies on top of them.
• Charges clause: which charges are for the applicant and which are for the beneficiary.
• Usance period allowed, and the funding date rule for each bill.
• Margin release rule on retirement, expiry without presentation, and cancellation.
• Devolvement terms: interest rate, repayment period, and effect on other limits.
• Validity period of the LC limit, and the renewal condition at the next review.

Two of these items cause the most disputes. The charges clause causes disputes because a silent clause leaves the applicant paying. The margin release rule causes disputes because borrowers assume release is automatic on expiry, while the bank system releases only after its own checks. Get both in writing, in the letter, before you need them.

How do you compare two LC offers on cost and limit room?

Compare two LC offers on the same LC amount, the same usance period, and the same limit structure, or the comparison will mislead you. The table below compares two offers on Priya Rs. 120 lakh LC, 90 days usance, with the same illustrative charge rates, so only margin differs. Offer A takes 25 percent margin. Offer B takes 15 percent margin. Everything else is held equal.

Offer B frees Rs. 12 lakh of cash on day one, which is real money for a trading firm. It also leaves Rs. 12 lakh more exposure if the bill devolves, and it may come with tighter covenants or a shorter validity period, because the bank carries more risk for less margin. The right choice depends on your cash position and your confidence in the sale proceeds landing before the due date. If the sale is firm and the proceeds date is certain, the lower margin wins. If the sale is uncertain, the higher margin is cheaper insurance, because it cuts the devolved amount.

The comparison method matters more than this one result. Always compare on day one cash out, limit headroom left, and devolved amount, not on the fee rate alone. A bank that wins on fee rate and loses on margin will cost you more cash and more risk on the same shipment. Run the three numbers for every offer, on the same LC amount, before you sign.

Sources

Primary sources: UCP 600 Articles 37(c) and 37(d), ICC rules for documentary credits, quoted from the ICC Banking Commission briefing on charges; ICC Banking Commission opinions R380, R656 and R741 on charges deductions from proceeds; Reserve Bank of India (Non-Fund Based Credit Facilities) Directions, 2025, and the RBI master circular line on LCs for genuine trade transactions of constituents; Axis Bank letter of credit and buyers credit application form against 100 percent or 110 percent cash margin. Secondary background, labelled as bank practice in the text: older LC management guidelines on the 10 to 25 percent margin band and drawing power interplay; Banking School and EximGuru LC charge breakdowns on commitment, usance, retirement, advising, confirming and reimbursing charges; a 2015 LC charges illustration for the rate structure used only as an illustration.

External links: RBI notification on discounting and LC facilities, Axis Bank LC application form against cash margin, and ICC Banking Commission briefing on UCP 600 Article 37 charges. All three returned HTTP 200 when checked on 2026-10-26.

Frequently Asked Questions

Last updated: October 2026. Framework cited: UCP 600 Article 37, ICC Banking Commission opinions, RBI (Non-Fund Based Credit Facilities) Directions 2025, and bank sanction terms for margin and charges.