Know Your Customer (KYC)

KYC stands for “Know Your Customer”. It is a systematic process through which banks obtain information about their customers’ identities. This article provides a comprehensive overview of KYC, including its meaning, objectives, benefits, norms, and more.

KYC Guidelines

The Reserve Bank of India (RBI) introduced KYC guidelines in 2002 under the Banking Regulation Act of 1949. These guidelines aim to prevent banks from being used for money laundering or terrorist financing activities.

KYC Process

KYC is typically completed when customers open accounts with banks. It involves collecting and verifying the following information:

• Name
• Address
• Date of birth
• Occupation
• Source of income
• Identification documents (e.g., passport, driver’s license, Aadhaar card)

Benefits of KYC

KYC provides several benefits to banks and customers, including:

• Reduced risk of fraud: KYC helps banks identify and mitigate potential risks associated with customers, such as identity theft and money laundering.
• Improved customer service: KYC enables banks to better understand their customers’ needs and provide tailored products and services.
• Enhanced compliance: KYC helps banks comply with regulatory requirements and industry standards.

KYC Norms

Banks are required to follow specific KYC norms, including:

• Customer identification and verification
• Risk assessment
• Ongoing monitoring of customer accounts
• Reporting suspicious transactions

Necessity of KYC

KYC is essential for preventing finance-related frauds and ensuring the integrity of the financial system. It helps banks identify and mitigate risks associated with customers and their transactions.

KYC is a critical component of banking and financial regulations. It helps banks comply with regulatory requirements, reduce the risk of fraud, and provide better customer service.

KYC (Know Your Customer) Regulations in Banking

Objectives:

• Identify money laundering and other potentially harmful activities
• Check the opening of Benami accounts
• Scrutinize and monitor large value transactions

KYC (Know Your Customer) regulations are essential banking regulations that banks and other financial institutions must follow to identify their customers. These regulations aim to obtain relevant information about clients before engaging in financial business with them.

Money Laundering and PMLA:

Money laundering poses a significant threat to the banking industry, affecting the integrity of the economic system and the financial stability of countries. In response, India enacted the Prevention of Money Laundering Act (PMLA) in 2002, aligning with the recommendations of the Financial Action Task Force (FATF) in 2009.

Banks’ Due Diligence:

Due diligence involves verifying the customer’s background and understanding their purpose for opening an account. It includes collecting recent photographs, confirming identity, verifying addresses, and gathering information on occupation, business, and source of funds.

Customer Identification:

Valid identification documents, such as passports, driver’s licenses, or national identity cards, are required for customer identification. Banks may also request additional documents, such as utility bills or bank statements, to verify the customer’s address.

Suspicious Transaction Monitoring:

Banks are required to monitor transactions for suspicious patterns that may indicate money laundering or other illegal activities. They must report any suspicious transactions to the appropriate authorities.

KYC regulations play a crucial role in combating money laundering and other financial crimes. By following these regulations, banks can help maintain the integrity of the financial system and protect their customers from financial risks.

Proof of Identity

• PAN Card
• Election ID
• Aadhaar Card

Proof of Residence

• Personal visits
• Utility bills
• Ration cards

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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:

• Passport
• PAN Card
• NREGA Job Card
• Voters’ Identity Card
• Driving License
• 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.

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RBI KYC Norms

Know Your Customer (KYC)

Once established, this mechanism would aid the KYC implementation while allowing intermediaries to access a prospective customer’s number for KYC status. Similar to e-Aadhaar, the RBI wants banks to provide customers with the ability to create their own electronic KYC (e-KYC).

What is e-KYC?

Electronic Know Your Client (e-KYC) is a concept where customers’ identities and residential addresses are electronically verified through Aadhaar authentication.

When using eKYC, customers must authorize their UIDAI (Unique Identification Authority of India) through explicit consent to release identity and/or address details. This is done through biometric authentication at bank branches or business correspondents (BCs).

UIDAI transfers data, including customers’ names, age, gender, and photographs, to the bank online.

Accounts opened based on eKYC in non-face-to-face mode must meet the following conditions:

• Selected consent from the customer for authentication through One Time Password (OTP)
• Total balance of all deposit accounts should not exceed ₹1 lakh
• Total credits during a fiscal year, across all deposit accounts, must not exceed ₹2 lakh

Important Points to Know

• KYC procedure relaxations apply to low-income customers under “No Frill Accounts,” introduced through the Pradhan Mantri Jan Dhan Yojana in August 2014.
• RBI revised KYC criteria to address challenges in customer identification:
  • High-risk customers: Once in 2 years
  • Medium-risk customers: Once in 8 years
  • Low-risk customers: Once in 10 years