KYC
KYC is the abbreviation for “Know Your Customer”. It is a part of a
systemized process through which the banks are able to procure
information about the identity of their customers. Banking and
finance aspirants are expected to have a clear understanding of the
Know Your Customer concept. In this banking awareness study
notes, we shall see more on the KYC with respect to its meaning,
objectives, benefits, norms, and more.
o The process of KYC and its guidelines were introduced by
the Reserve Bank of India (RBI) in 2002. These guidelines are
issued under the Banking Regulation Act of 1949.
o KYC is generally completed by the banks while opening
accounts for its customers. The process helps the banks to
ensure that their services are being used by the concerned
customers and that they are not misused.
o KYC details of the customers are also required to be updated
frequently by the banks as one of the norms.
Know Your Customer (KYC) – Meaning
& Overview
o One of the prime regulators of the banks and financial
institutions in India, the RBI, states that “The objective of KYC
guidelines is to prevent banks from being used, intentionally
or unintentionally by the criminal elements for money
laundering or terrorist financing activities.”
o Under the KYC Policy, a customer is defined as: “A person or a
group that maintains an account and/ or a business
relationship with the bank.”
o The KYC procedures also allow the banks to know and
understand their customers and their financial dealings in a
better way to help them manage their risks more efficiently
and prudently.
o In India, the eKYC or Electronic Know Your Customer/ Client is
a process wherein the customers’ identity and address are
digitally verified by way of their Aadhaar identity cards.
Necessity of implementing KYC is to:
o Keep a check on finance-related frauds
o Identify money laundering and other potentially harmful
activities
o Check the opening of Benami accounts
o Scrutinizing and monitoring large value transactions
Objectives
o The KYC (Know Your Customer) is one of the banking
regulations that the banks and other financial institutions are
required to perform to identify their customers. It is done in
order to obtain their clients’ relevant information before
entering into doing a financial business with them.
o Money laundering has quickly become a growing threat to the
banking industry as it not only poses a serious issue to the
integrity of the economic system but also the financial stability
and safety of the countries.
o In India, the PMLA (Prevention of the Money Laundering
Act) was passed in 2002 and it has been in line with the FATF
(Financial Action Task Force) recommendations in 2009.
o Banks are being comprehensively sensitized about the
concealment and updated KYC norms. As such, before 2002,
the banks in India were advised to follow certain customer
identification processes for the opening of accounts and
monitoring all the transactions with the aim to report them to
the appropriate authorities.
o To ensure appropriate customer identification and monitor
transactions of suspicious nature.
Banks’ Due Diligence
Due diligence refers to the process wherein the banks take
responsible efforts for verifying the customer’s antecedents and
understand their purpose of opening the account with the bank.
It includes the collection of recent photographs, identity
confirmation, address verification, and other data on occupation or
business and source of funds for the customer opening the account.
As part of the due diligence process, the bank would also need an
introduction from a person known to the bank, in case it seems
necessary to do so.
Customers’ valid identification can be obtained from their
documents like the PAN Card, Election ID, Aadhaar Card, etc.
Proof of residence and verification of address details can be done
through personal visits, utility bills, ration cards, etc.
Requirements of KYC
A particular set of documents are used to establish the bank
customers’ identity. Hence, banks are required to have two types of
documents – one for the identity of the customer and the other one
for their address along with a recent photograph.
Six documents have been notified by the government of India as the
OVDs (Officially Valid Documents) to fulfill the need for identity
verification for KYC. These documents are:
o Passport
o PAN Card
o NREGA Job Card
o Voters’ Identity Card
o Driving License
o Aadhaar Card
In case the documents submitted by the customers do not contain
their address details, then they will have to submit another OVD
containing their address details.
RBI KYC Norms
From 2002 onwards, the RBI made it compulsory to implement the
KYC norms for every new bank account opened. However, it came
into force only on 01st July 2005. The KYC norms were made
compulsory with the sole objective to limit money laundering and
terrorist financing activities. The RBI asked the banks to adopt the
following KYC norms for new as well as existing accounts:
o Public notices were published in the newspapers
o Identification was made mandatory for all the zonal customers
o The bank clients who failed to follow the norms were served
with individual notices
o A final notice was given within 7 days from that particular day
in the newspapers in order to ensure that proper
documentation is followed
Know Your Customer Policy
As per the most recent RBI guidelines for the KYC policy, banks
should frame their own KYC policies incorporating the following
aspects:
Customer Acceptance Policy: Classifying customers into risk
categories of high, medium-low
Customer Identification Procedures: Verifying customer identity via
independent sources of reliable information
Monitoring of Transactions: Monitoring transactions on the basis of
customers’ risk categories
Risk Management: Period check at the risk category of the existing
customers and making amendments
KYC Advantages
o Establishing customer identity
o Helps to understand the nature of the customers’ activities
o Assessing money laundering risks associated with customers
for the purpose of monitoring customers’ activities
o Providing protection from losses and frauds due to
inappropriate and illegal fund transactions
Indian Banks Aim for Unified KYC
As part of the Financial Inclusion initiatives, the KYC assumes critical
importance within the government’s perspective. Hence, banks
need to make sure a greater degree of KYC compliance aligns with a
robust regime.
In 2011, the SEBI (Securities and Exchange Board of India) said that
it might also begin with certain homogeneous norms in order to fix
a consistent KYC regulation authority.
Once established, this mechanism would help the KYC
implementation on one occasion while enabling all the
intermediaries involved to access a prospective customer’s number
for getting their KYC status. Then, just like the e-Aadhaar, electronic
proof of one’s identity, the RBI wants the banks to create a
provision for the customers to be able to create their own electronic
KYC or e-KYC.
What is e-KYC?
The Electronic Know Your Client or Electronic Know Your Customer
(e-KYC) is a concept wherein the customers’ identity and residential
address are electronically verified through Aadhaar authentication.
While using the eKYC facility, customers will have to authorize their
UIDAI (Unique Identification Authority of India) through explicit
consent to release the identity and/ or address details. It is done by
way of biometric authentication of the bank branches or business
correspondents (BCs)
The UIDAI helps in transferring the data comprising customers’
names, age, gender, and photographs, to the bank through the
online mode.
Accounts opened on the basis of eKYC in non-face-to-face mode
must fulfill the following conditions:
o There must be selected consent from the customer for
authentication through One Time Password (OTP)
o The total balance of all the deposit accounts of the customer
should not exceed rupees one lakh
o The total of all the credits during a fiscal year, altogether the
deposit accounts are taken together, must not exceed rupees
two lakh
Important Points to Know
o The relaxation in the KYC procedures is applicable for the
customers belonging to the low-income group falling under
the “No Frill Accounts”. The No Frill Accounts was introduced
through the Pradhan Mantri Jan Dhan Yojana in August 2014.
o The RBI has rectified the criteria of the KYC for dealing with
the problems arising in the completion of the process of
identification of the bank customers. The revised laws of RBI
for the Know Your Customer process must be fulfilled in the
following format:
o High-risk customers – once in 02 years
o Medium risk customers – once in 08 years
o Low-risk customers – once in 10 years
What is KYC?
KYC (Know Your Customer) is a part of a systemized process
through which the banks are able to procure information about the
identity of its customers.
Why is KYC important for the banks?
Implementing KYC is important for the banks as they are able to
identify their customers and limit potential threats such as terrorist
financing and money laundering activities.
What are the benefits of KYC?
It helps establish customer identity, allows the banks to understand
the nature of the customers’ activities, and assess money laundering
risks and other threats associated with the opening of new bank
accounts
What is e-KYC?
The Electronic Know Your Client or Electronic Know Your Customer
(e-KYC) is a concept wherein the customers’ identity and residential
address are electronically verified through the Aadhaar
authentication.
What are the documents required for KYC?
The six valid documents for KYC are passport, PAN Card, NREGA Job
Card, Voters’ identity card, driving license, and Aadhaar Card
