Standby Letter explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A letter of credit (LC), also called a documentary credit, is a payment mechanism in which a bank undertakes to pay a seller on production of the documents the LC lists. A standby letter of credit works as a back-up: the beneficiary draws on it only if the applicant fails to pay what it owes. This article gives a specimen irrevocable, revolving standby LC, the beneficiary's form of demand, and an explanation of the clauses and the types of LC.
The issuing bank, at the applicant's request, undertakes to the beneficiary to pay on receipt of a demand that meets the LC's terms, up to the face value, and to reinstate the value after each payment. The beneficiary draws by a written demand with the supporting documents the LC names. An irrevocable LC cannot be amended or cancelled without the consent of the interested parties, so the draw conditions, the expiry and the supporting documents must be drafted precisely. The Central Government fixes stamp duty on letters of credit under the Stamp Act: no rate is quoted here.
When you need a standby letter of credit
A standby LC is used where one party wants a bank's undertaking behind payment obligations under an agreement: a supply contract, a power purchase arrangement, a lease or a service contract. If the applicant defaults, the beneficiary presents a demand and the bank pays without needing to prove the default in court. A normal LC is used to pay for goods against shipping documents; a standby is used as security.
Parties to an LC
- Applicant (opener): the buyer or payer, at whose request the bank opens the LC.
- Issuing bank: opens the LC and undertakes to pay the beneficiary on submission of documents as per its terms.
- Beneficiary: the seller or the party entitled to be paid.
- Advising bank: the bank through which the LC is advised to the beneficiary, usually in the beneficiary's location.
Others may be involved: a confirming bank that adds its own undertaking, a negotiating bank that negotiates the documents, a paying bank nominated to pay, and a reimbursing bank with which the issuing bank keeps an account.
Types of LC
| Type | Meaning |
|---|---|
| Documentary and clean | Payment is conditional on documents of title such as a bill of lading, or no such condition |
| Fixed and revolving | A fixed credit is exhausted at the amount; a revolving credit reinstates as the applicant pays, without renewal in the period |
| Revocable and irrevocable | A revocable LC may be cancelled or modified by the bank without notice; an irrevocable LC cannot be, except with consent of the interested parties |
| Confirmed and unconfirmed | A confirming bank adds its own undertaking; the LC is unconfirmed otherwise |
| Transferable and back to back | The beneficiary may transfer the credit, or a new LC is opened on the security of one already issued |
| Red or green clause | Allows advances to the beneficiary before shipment, and in the green clause, for storage |
Our article on packing credit and pre-shipment advances against an export order or LC shows how LCs support export finance. For help preparing the documents, see our loan documentation support.
Specimen irrevocable revolving standby letter of credit
Date: To: IRREVOCABLE REVOLVING STANDBY LETTER OF CREDIT NUMBER At the request of (the Applicant), we, (the Issuing Bank), issue this irrevocable, revolving standby letter of credit (the Letter of Credit) in favour of (the Beneficiary) for (the Face Value), covering amounts owed to the Beneficiary under the Agreement, on the following terms. 1. DEFINITIONS 1.1 "Advising Bank" means the bank notified by the Beneficiary for the purpose of advising this Letter of Credit. 1.2 "Agreement" means the agreement titled dated between the Beneficiary and the Applicant, including their successors and permitted assigns. 1.3 "Banking Day" means a day on which commercial banks are open for general business in . 1.4 "Demand" means a written demand for payment in the form set out in the Schedule, supported by the documents required under clause 5.2. 1.5 "Expiry Date" means the date determined under clause 3. 2. TERMS 2.1 The Issuing Bank irrevocably and unconditionally undertakes to pay the Beneficiary, on the day it receives a Demand, the amount demanded, up to the Face Value, without demur. 2.2 Partial and multiple drawings are permitted. Each drawing is made by a separate Demand presented at . 2.3 After each payment, the Issuing Bank shall at once reinstate this Letter of Credit to the Face Value and notify the Beneficiary of the reinstatement. 2.4 If payment is not made at sight, interest shall be payable on the amount from the date of the Demand to the date of actual payment at . 2.5 This Letter of Credit is not discharged by any change in the constitution of the Issuing Bank, the Beneficiary or the Applicant, or by any change in applicable law. 2.6 All charges for opening, renewal, reinstatement, amendment and negotiation shall be borne by the Applicant. Non-payment of these charges by the Applicant does not affect the Issuing Bank's obligation to the Beneficiary. 2.7 If the Applicant fails to renew or replace this Letter of Credit at least days before the Expiry Date, the Beneficiary may draw the full value as security for amounts payable by the Applicant. 2.8 The Beneficiary may assign this Letter of Credit to its lenders, successors and permitted assigns. 2.9 The Issuing Bank shall not amend any term without the prior consent of the Beneficiary. 3. TERM, RENEWAL AND EXPIRY 3.1 This Letter of Credit is issued for an initial term of calendar months from the date above. 3.2 The Issuing Bank shall renew it not later than days before expiry for a further months, or, if the Agreement is not extended, for days after its end date. 3.3 The Beneficiary may terminate this Letter of Credit by written notice of not less than Banking Days to the Issuing Bank. 3.4 At the close of business on the Expiry Date the Issuing Bank is released except for any Demand validly presented on or before that date, which remains payable even if the payment date falls later. 3.5 When no obligation remains, the Beneficiary shall return the original of this Letter of Credit to the Issuing Bank. 4. PAYMENTS 4.1 Amounts due in a foreign currency shall be paid in rupees at the exchange rate stated in the Agreement or, at the Beneficiary's request, in that currency. 4.2 Payments shall be made for the full amount in immediately available funds, without set-off, withholding or deduction, on the day of receipt of the Demand, to the account stated in the Demand. 5. DEMAND AND SUPPORTING DOCUMENTS 5.1 Each Demand must be in writing, and may be delivered in person, by post or by electronic communication with an electronic signature, which shall be treated as valid writing, to . 5.2 Each Demand shall be supported by a copy of the invoice or debit note under the Agreement against which payment is claimed. 6. GOVERNING LAW This Letter of Credit is governed by the laws of India. 7. JURISDICTION The courts and tribunals at have exclusive jurisdiction over this Letter of Credit. For By:
Specimen form of demand
Date: To: , Subject: Irrevocable Revolving Standby Letter of Credit number issued in favour of (the Letter of Credit) Sir / Madam, We refer to the Letter of Credit. Terms defined in it have the same meaning in this Demand. 1. We certify that the sum of is due to us under the Agreement as on , against invoice number dated and debit note number dated . We demand payment of that sum together with interest as provided in the Letter of Credit. 2. All documents required under clause 5.2 of the Letter of Credit are enclosed. 3. Please pay to the following account: Account name: ; Account number: ; Bank and branch: ; Payment code: . 4. The date of this Demand is not later than the Expiry Date. For
Clause-by-clause explanation
| Clause | What it does | Drafting tip |
|---|---|---|
| Opening paragraph | Names applicant, issuer, beneficiary and face value | The face value must match the exposure the LC secures |
| Definitions | Fix "Demand", "Agreement", "Expiry Date" | Define by reference to the Agreement and its successors |
| 2.1 Undertaking | The core promise to pay on demand | Use "irrevocably and unconditionally" |
| 2.2 and 2.3 Drawings and reinstatement | Allow repeated draws and restore the value | State that reinstatement is automatic |
| 2.4 Late-payment interest | Compensates delay | Express as a placeholder benchmark and margin; set per the bank's terms |
| 2.5 and 2.9 Stability | No discharge on a change in constitution or law; no amendment without consent | Protects the beneficiary |
| 2.6 Charges | Applicant bears the bank's charges | Provide that non-payment by the applicant does not affect the bank's duty |
| 2.7 Failure to renew | Lets the beneficiary draw as cash security | Fix the notice period in the LC |
| 2.8 Assignment | Lets the beneficiary assign to lenders | Check consent requirements in the Agreement |
| 3 Term and expiry | Initial term, renewal and release | Say that a Demand received by the Expiry Date is still payable |
| 4 Payments | Same-day, full, no set-off | Name the payment mode and the currency rule |
| 5 Demand and documents | Mode of delivery and what supports a draw | Keep the required documents short and objective |
| 6 and 7 Law and courts | Governing law and forum | Match the forum to the Agreement |
The law behind it
An LC is an undertaking by a bank given independently of the underlying contract: the bank looks at the documents and not at the dispute. Its form follows the standard practice of banks and the terms you agree. A guarantee operates differently, and an LC should not be confused with a bank or performance guarantee; see our specimen deed of guarantee, bank and performance. Where the LC supports export finance, see packing credit. If you accept demands by electronic communication, check the current law on electronic signatures before issue.
Stamp duty, registration and execution
Stamp duty on a letter of credit is fixed by the Central Government under the Indian Stamp Act, 1899; our article on the Schedule I entries for a bill of exchange, promissory note, letter of credit and protest explains it, and no rate is quoted here. An LC is not ordinarily registered. Execution: the authorised officer of the issuing bank signs, the LC is advised through the advising bank, the beneficiary checks it against the Agreement, and any discrepancy is corrected by amendment with all required consents. The beneficiary's demand is signed by its authorised signatory.
Common mistakes
- Leaving the face value or the aggregate liability unclear.
- Omitting the reinstatement clause in a revolving LC.
- Letting the LC expire before the Agreement's end date plus a claims period.
- Requiring documents the beneficiary can never produce.
- Allowing amendment without the beneficiary's consent.
- A demand dated after the expiry date.
Need help with an LC or a demand?
An LC works only if its terms match the underlying agreement and the beneficiary can comply with them. Our loan documentation support team can review LC terms and prepare demands against them.
Key takeaways
- A standby LC is a bank's undertaking to pay on a compliant demand if the applicant defaults.
- A revolving LC reinstates its value after each payment.
- Make it irrevocable and keep amendment subject to the beneficiary's consent.
- Stamp duty on LCs is fixed by the Central Government under the Stamp Act; no rate is given here.
- The form of demand and the supporting documents must match clause 5.
Read next
- Specimen deed of guarantee: bank and performance
- Packing credit and pre-shipment advance against export order or LC
- Deed of mortgage by conditional sale: format
- Indemnity bond format and clauses
Disclaimer: This specimen is a general model for information. Every document must be adapted to its facts and to the law, rules and forms in force when it is signed or filed; stamp duty, registration and court fees depend on the State and the forum. This article is general information, not legal advice; check the official text before acting.