KYC norms are inevitable

Gone are the days when opening of a simple savings bank account was hassle free. There were times when banks used to open and allow operations in an account even without obtaining proper documents. But today opening a bank account is not so easy. You have to comply with certain regulatory formalities, before opening a bank account. All these regulatory formalities are mandatory and stand clubbed under ‘Know Your Customer’ banner with an acronym KYC.

KYC is not something which has surfaced in a jiffy. It was always there in banking. However, earlier the focus was more on the asset side (loans & advances) and not on the liability side (deposits) as no banker could risk lending to an unknown person. Over a period of time growing menace of black money coupled with lending financial support to subversive activities became a serious concern. This provoked the regulators to track movement of deposits through stringent KYC norms.

As far as Indian banking sector is concerned, some of the initial steps taken in respect of KYC date back to 1965 when banks were asked to ensure full and correct addresses of the depositors are recorded. In 1976 the concept of “Introduction” was prescribed for opening of accounts to establish the identity of account holders. In 1991 KYC norms included ‘no cash transaction above ` 50,000/- for TCs/ DDs/MTs/TTs’ and then after two more years banks were directed to keep vigil over heavy cash withdrawals by account holders which may be disproportionate to their normal trade/business requirements. Beginning of year 1994 witnessed mandatory practice of obtaining photographs of the depositors/account holders. This followed by monitoring and special reporting for cash transactions of value more than Rs.10 Lakh.

Even as regulators like Reserve Bank of India (RBI) have continuously been reshaping KYC parameters, the government directions making certain documents like Aadhaar number etc. mandatory to link with bank account details have made the process cumbersome as well as fearful.

To be precise, landscape of financial transactions has undergone tremendous transformation. Bringing a smallest financial transaction under the scanner of the regulatory authorities has unnerved even small bank account holders. Though this class of bank account holders is not cash rich, yet fear looms large among them for the fate of their hard earned money deposited in the bank accounts. Even as it may not be the case, the kind of strict regulatory guidelines announced day in and day out have unleashed a sort of terror among the account holders. Making PAN, Aadhaar mandatory etc. for opening new accounts and also keeping track on high-value transactions has already unnerved even small bank accountholders.

What are KYC norms?

Generally speaking, KYC is a process that individuals need to complete before opening a bank account. Even for purchase of any kind of financial product, be it a mutual fund, insurance policy or shares, you need to comply with the standing KYC norms.

KYC norms envisage verification of the individual’s identity, address and other key details. Normally, the verification was mandatorily to be done in person by a bank, mutual fund distributor or an insurance company. However, doing away with mandatory physical documentation and in-person verification, the Reserve Bank of India (RBI) on January 9, amended the Know Your Customer (KYC) guidelines to allow banks, lending companies and fintech startups to onboard customers remotely. It also mandated for the geo-tagging of the customer’s video to ensure that they are located within the borders of the country.

The apex bank not only allowed KYC documents to be submitted electronically, but also gave the green light to accept digitally signed documents, and documents issued to the digital locker account of the customer, as proof for the opening of an account. Notably, a Digi-Locker, as it is popularly called, allows citizens to store their personal documents online.

Notably, KYC is a one-time procedure for investing in mutual funds. The same KYC is valid for all mutual funds in India. However a bank KYC cannot work for investing in other non-bank financial instruments like mutual funds.

What is process governing video based KYC guidelines?

The guidelines have laid out the detailed process through which the video verification will be carried out by the regulated entities. This would include randomized set of questions to prevent spoofing, liveness checks on the applicant to ensure there is no scope for use of dummies. Also, the entire process needs to be encrypted to ensure protection from fraudulent attacks. In what could be an additional boost to the startup ecosystem, the regulator has also allowed application of artificial intelligence based software to ensure the integrity of the process.

Further the regulator has allowed the business correspondents to facilitate the process, which means that companies need to provide agents with a smartphone or a tablet with an application through which the video verification can be carried out.

Why KYC guidelines were introduced? 

As you know, KYC is an identification process consisting of two components – identity and address so that true identity and beneficial ownership of accounts, source of funds, the nature of customer’s business, reasonableness of operations in the account in relation to the customer’s business, etc are established. RBI issued guidelines to banks under Section 35A of the Banking Regulation Act, 1949 and Rule 7 of Prevention of Money-Laundering Rules, 2005. These guidelines have been amended (and continue to be amended) from time to time to meet the current requirements of the changing financial landscape owing to advanced technology.

Since financial institutions like banks, insurance companies and stock markets were found most vulnerable to intrusion of ill-gotten money, the need was felt to protect these institutions from the debilitating effect of laundered money. This led to the implementation of Know Your Customers (KYC) policy across the financial sector.

It has been found that bank, insurance and stock markets are the easiest targets which most often are used for the concealment and projection of tainted proceeds. The Act, while criminalising the act of money laundering and prescribing a stringent punishment for violators and abettors, under Section 4, also prescribes legal requirements to be complied with by banking companies, financial institutions and intermediaries for protecting the integrity of the sector.

So, the objective of KYC guidelines is to enable managers to examine and assess their customer’s financial dealings from anti-money laundering perspective, so as to make a proper risk assessment for preventing the tainted money from entering the institution.

Sometimes customers who have already complied with KYC norms at the time of opening of the account are asked by banks to resubmit KYC documents. Is this action of banks justified? 

Yes, it’s justified and falls under KYC guidelines. In order to ensure that the latest details about the customer are available, banks have to periodically update the customer identification data, mostly when banks observe behaviour of the account not in conformity with the customer profile recorded at the time of opening of the account.

It is pertinent to mention that if a customer fails to submit required information under KYC guidelines, the bank can consider closing the account after issuing due notice to the defaulting customer explaining the reasons for taking such a decision. It’s also notable that the bank has to keep the information provided by the customer under the KYC guidelines confidential.

There are individuals who don’t have relevant KYC documents. Can such individuals open bank accounts?

For this class of customers, especially low income group, who don’t possess any document to satisfy the bank about identity and address, the KYC norms are relaxed. In order to satisfy the bank about their identity and address, these kinds of customers can open bank account with an introduction from another account holder who has been subjected to full KYC procedure. The introducer’s account with the bank should be at least six months old and should show satisfactory transactions. Photograph of the customer who proposes to open the account and also his address needs to be certified by the introducer.

If at any point of time, the balance in these low income group customers’ accounts exceeds Rupees Fifty Thousand (Rs. 50,000/-) or total credit in the account exceeds Rupees One Lakh (Rs. 1,00,000/-) in a year, no further transactions will be permitted until the full KYC procedure is completed.

Isn’t there any possibility to accept one-time KYC compliance across financial and other service providers?

A possibility is visible in this regard. The Economic Survey, authored by Chief Economic Advisor KV Subramanian, has suggested the creation of a fintech hub for PSBs to allow banks to screen borrowers. He has advocated for the creation of a GSTN-like entity, called PSBN (PSB Network), to use technology for screening and monitoring those who take bank loans.

The report states that identity verification agencies like the UIDAI, which issues Aadhaar, and the income tax department, can validate identity of customers seeking bank loans. As per norms, KYC must be confirmed by banks for loan provision. Based on KYC and underwriting, the system will assess customer eligibility of loans and transfer all the information to the PSBs.