KYC – Know Your Customer

Friends,

In earlier articles, we have discussed Type of Bank Accounts, Remittance, Internal Money Transfer, International Money Transfer as well as about the new Banknotes.

For last few years, there is one common buzz word among all the bankers – Conduct KYC or Complete KYC. Let us know discuss, this word in detail.

What is KYC?

KYC means Know Your Customer or Know Your Client. KYC or KYC check is the mandatory process of identifying and verifying the identity of the client during on-boarding as well as periodically over time.

The objective of KYC guidelines is to prevent banks from being used, by criminal elements for money laundering activities. It is a legal compliance to the Anti-money Laundering Act or AML Act. The main purpose of KYC norms was to restrict money laundering and terrorist financing. It also enables banks to understand its customers and their financial dealings to serve them better and manage its risks prudently.

The Reserve Bank of India has made it mandatory for banks, financial institutions and other organisations to verify identity and address of all customers who carry out financial transactions with them. To do it without much hassles, Reserve Bank of India directed all banks to implement KYC guidelines for all new accounts in the year 2002. RBI issued Master Direction -Know Your Customer (KYC) Direction, 2016 containing all the details of the process. The norms have now been extended to NBFCs and wallet service providers also.

There are three key components of KYC -

• Customer Identification Program (CIP) - How do you know someone is who they say they are?
• Customer Due Diligence.
• On-going Monitoring.

The Banks and Financial Institutions have now extended the process of KYC further to ascertain the credit risk of their customers and it has become an integral part of the lending process.

Banks need to ensure that customer transactions are consistent with their knowledge about the customers, customers’ business and risk profile; and the source of funds. For this, Periodic updation shall be carried out at least once in every two years for high risk customers, once in every eight years for medium risk customers and once in every ten years for low risk customers. These risk profile of customers have to be internally decided by the institutions themselves depending on the entity type and the transaction profile of the entity.

How does a bank conduct KYC or RE-KYC?

For different types of account and risk profile, there are different norms to conduct KYC. For individual customers with no changes in basic details, banks conduct Aadhar linked KYC. However, banks collect mandatory documents like photograph, identity and address proof and PAN of the customer. Few banks are now accepting digital mode of documents for KYC process. Depending on the nature of account, viz., business, trust or society account, banks also ascertain the beneficial ownership of the account. 

Banks have to periodically report to the RBI regarding the updation of KYC of its customer.

In further articles, we will elaborate the details of documentation required for different type of entities.

International Money Transfer

In the previous post, we learnt about the Internal Money Transfer

Let’s explore Modes of International Money Transfer

The transfer of funds from one country to another country can be termed as international money transfer or foreign remittance. It can be both Outward or Inward remittance and can be executed through bank issued Demand Draft, Personal Cheque, Wire Transfer or Online Transfer, Letter of Credit.

The different modes of foreign remittances are

Demand Drafts – A bank draft or demand draft is an order from one branch of a bank to another branch of the same bank or the correspondent bank to pay a specified sum of money to the person named therein or to his order. A person who wants to send money can buy a draft by paying the required amount to a bank and send to another who can encash it in his place. Banks issue drafts for a nominal commission. The purchaser of the draft need not to be a customer or account holder of the bank. A bank draft is a negotiable instrument and has all the attributes of a bill of exchange, such as an instrument in writing, containing an unconditional order, signed by banker.

Wire Transfer - A wire transfer is most often used to transfer funds from one bank or financial institution to another. No physical money is transferred between banks or financial institutions when conducting a wire transfer. Instead, information is passed between banking institutions about the recipient, the bank receiving account number and the amount transferred. To send money to a bank abroad using your Savings Account, you can make use of SWIFT (Society for Worldwide Interbank Financial Telecommunication), which is a quick and efficient online wire transfer option. However, the bank that you will be wiring the money to should be able to facilitate this transaction. Mail transfer and Telegraphic Transfer are the former variants of wire transfer which have now used seldom by the banks.

Letter of Credit - A letter of credit is a document generally used by exporters for receiving payment against the delivery of the goods in foreign country. The correspondent bank of the importer issues the letter of credit and guarantees the payment. In case the buyer is unable to pay the amount, bank will cover the same. The bank that writes the letter of credit can act on behalf of the customer and confirm that each of the delivery conditions is met before the release of the payment to the exporter. It contains all the delivery and payment conditions agreed between both the parties and the correspondent banks.

Internal Money Transfer

In the previous post, we learnt about the Mode of Remittances in Banking

Let’s explore Some Modes of Internal Money Transfer

Consumers can use various ways to transfer money within the country. These are broadly classified as Demand Drafts/ Banker's Cheques /Pay Orders or electronic or online mode like ECS, NEFT, RTGS and IMPS.

Demand Drafts – A bank draft or demand draft is an order from one branch of a bank to another branch of the same bank to pay a specified sum of money to the person named therein or to his order. A person who wants to send money can buy a draft by paying the required amount to a bank and send to another who can encash it in his place. Banks issue drafts for a nominal commission. The purchaser of the draft need not to be a customer or account holder of the bank. A bank draft is a negotiable instrument and has all the attributes of a bill of exchange, such as an instrument in writing, containing an unconditional order, signed by banker. Demand drafts are also known as Banker’s cheque or Pay Order.

NEFT - National Electronic Funds Transfer (NEFT) is a nation-wide centralised payment system owned and operated by the Reserve Bank of India (RBI). It is an electronic funds transfer system to facilitate an efficient, secure, economical, reliable and expeditious system of funds transfer and clearing in the banking sector throughout India, and to relieve the stress on the existing paper based funds transfer and clearing system. An individual / firm / corporate willing to transfer funds through NEFT can use the internet/mobile banking facility offered by his/her bank for initiating online funds transfer request. The remitter has to provide details of beneficiary such as, name of the beneficiary, name of the bank branch where the beneficiary has an account, IFSC of the beneficiary bank branch, account type and account number, etc. for addition of the beneficiary to his/her internet/mobile banking module. Upon successful beneficiary addition, the remitter can initiate online NEFT funds transfer by authorizing debit to his/her account. Alternatively, the remitter can also visit his/her bank branch for initiating NEFT funds transfer through branch/off-line mode. The customer has to fill-in the beneficiary details in NEFT application form available at the bank branch and authorizes the branch to debit to his/her account to the extent of the amount requested in NEFT application form. The originating bank prepares a message and sends the message to its pooling centre, also called the NEFT Service Centre. The pooling centre forwards the message to the NEFT Clearing Centre, operated by the RBI, to be included for the next available batch. The Clearing Centre sorts the funds transfer transactions beneficiary bank-wise and prepares accounting entries to receive funds from the originating banks (debit) and give the funds to the beneficiary banks (credit). Thereafter, bank-wise remittance messages are forwarded to the beneficiary banks through their pooling centre (NEFT Service Centre). The beneficiary banks receive the inward remittance messages from the Clearing Centre and pass on the credit to the beneficiary customers’ accounts.

RTGS - The acronym 'RTGS' stands for Real Time Gross Settlement, which can be explained as a system where there is continuous and real-time settlement of fund-transfers, individually on a transaction by transaction basis (without netting). 'Real Time' means the processing of instructions at the time they are received; 'Gross Settlement' means that the settlement of funds transfer instructions occurs individually. The RTGS system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is ₹ 2,00,000/- with no upper or maximum ceiling. The RTGS service window for customer transactions is available to banks from 7 am to 6 pm on a working day, for settlement at the RBI end. However, the timings that the banks follow may vary from bank to bank. The procedure to conduct RTGS is same as that of NEFT except for the difference in capping of amount and time.

ECS - ECS or Electronic Clearing Service is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium etc. Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa. ECS includes transactions processed under National Automated Clearing House (NACH) operated by National Payments Corporation of India (NPCI).

In next post, we will understand about the various Modes of International Money Transfer.

Remittance

In my earlier posts, a brief idea was given about the Banknotes  and Bank Accounts in India, Now Today, Let's understand something about remittances.....

MODE OF REMITTANCES IN BANKING

Apart from accepting deposits and lending money, Banks also carry out, on behalf of their customers the act of transfer of money - both domestic and foreign - from one place to another. This activity is known as "remittance". A remittance refers to money that is sent or transferred to another party. The term is derived from the word remit, which means to send back. Remittances can be used for any type of payment including invoices or other obligations.

INTERNAL MONEY TRANSFER – The transfer of funds within the country can be termed as internal money transfer or domestic remittance. Banks issue Demand Drafts, Banker's Cheques, and Pay Orders etc. for transferring the money. Banks also have the facility of quick transfer of money through electronic or online mode like ECS, NEFT, RTGS and IMPS.

INTERNATIONAL MONEY TRANSFER  – The transfer of funds from one country to another country can be termed as international money transfer or foreign remittance. It can be both Outward or Inward remittance and can be executed through bank issued Demand Draft, Personal Cheque, Wire Transfer or Online Transfer.

Coming Up.....Internal Money Transfer

Bank Accounts in India

After knowing about the salient features of our Banknotes, now we will learn something about the type of bank accounts available in India. 

Banks in India have typically four types of deposit accounts namely Current Account (CA), Saving Bank Account (SB), Recurring Deposit (RD) and Fixed Deposit (FD). Of late, the new regime banks have combined the features of two or more types of above accounts to create new type of accounts. These include the Demat account, Sweep FD account, Overdraft account etc. All the variants, however, are covered in these four types only.

Current Account

Current Accounts are basically meant for businessmen and generally opened in the names of firm or business unit. However, there is no restriction in opening a current account in the name of individuals also. No interest is paid by banks on these accounts; therefore this account is never used for the purpose of investment or savings. Typically, bank charges certain service charges on such accounts as per the variant offered to the client. This variant also decides the number of transactions or the amount of transactions in specified time period that can be carried out.  Various facilities of cash and cheque deposit, remittance, online banking and cheque book is made available to the account holder along-with facility to transact in multiple branches or cities. Different limit and overdraft accounts are also treated as current account.

Savings Bank Account

The Saving Bank account or SB a/c is the most popular account for individual persons wherein general public can deposit and withdrawal funds. As the name suggests, it is mostly used for keeping the savings where duration of keeping the deposit is not certain or fixed. Typically it is used by individuals for their routine but not frequent transactions. Generally, this account provides branch banking as well as online banking facility. The unique feature that separates a saving account from current account is that banks provide interest on the amount kept in the account. Since 25th October, 2011, RBI has deregulated Saving Fund account interest rates and now banks are free to decide the same within certain conditions imposed by RBI.  Under directions of RBI, now banks are also required to open accounts which do not have any minimum balance requirements. Interest earned upto Rs. 10,000 in a financial year on Saving Bank accounts is exempted from tax making them a very lucrative small savings tool.

Fixed Deposit Account

Fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years are offered to Indian public by all the banks. These are also popularly known as FD accounts or Term deposits. The term "fixed" in Fixed Deposits (FD) denotes that the period of maturity or tenor of the deposit is fixed unless the depositor asks for closing (or breaking) the fixed deposit prematurely by paying a penalty (usually of 1%, but some banks either charge less or no penalty). Usually a bank FD is paid in lump sum on the date of maturity.  However, most of the banks have also facility to pay/ credit interest in saving account at the end of every month or quarter at a marginal discounted rate. A similar variant of such deposits are the linked FD or Automatic Sweep Accounts wherein amount in saving bank account above a pre-decided threshold limit is converted into Fixed Deposit for a particular period. These deposits close automatically when the balance in the SB account falls below the threshold limit. 

Each bank can individually decide on the rate of interest for Fixed Deposits to be offered to customers and can have varied interest rate structure. The present trends indicate that a few new generation private sector and foreign banks offer higher rate of interest.  

Recurring Deposit Account

Popularly known as RD accounts, these are special kind of Term Deposits and are suitable for people who do not have lump sum amount of savings, but are ready to save a small amount every month.  Normally, such deposits earn interest on the amount already deposited (through monthly installment) at the same rates as are applicable for Fixed Deposits / Term Deposits. Under these types of deposits, the person has to usually deposit a fixed amount of money every month (usually a minimum of Rs. 500/- p.m.).  These accounts can be funded by giving Standing Instructions by which bank withdraws a fixed amount on a fixed date of the month from the saving bank of the customer (as per his mandate) and the same is credited to RD account.  Maturity period for Recurring Deposit accounts are normally allowed from 6 months to 120 months. Premature withdrawal of accumulated amount permitted is usually allowed (however, penalty may be imposed for early withdrawals).

Next, we will discuss about the various ways of transferring the money (Remittance).

Banknotes

Reserve Bank of India has introduced new banknotes in denominations of 2000, 500, 200, 100, 50, 20 and 10. These banknotes not only have more security features but also depict our country's heritage and development. This is a welcome change from previously circulated Ashoka Pillar and Mahatma Gandhi series notes.

The new notes we are using daily have very distinctive features so that they can be identified easily by visually impaired persons also.

While the security features in the current series of bank notes, such as water mark, security thread, latent image of denomination numeral, denomination numeral in colour shifting ink, number panels, see through register, electro-type, bleed lines, etc., continue to remain, their relative positions may have changed in the new design notes.

The new elements added are the numerals in Devnagri script and logo of Swachh Bharat.

All the new banknotes in the Mahatma Gandhi (New) Series bear signature of the Governor, Reserve Bank of India.

2000

The Reserve Bank of India has introduced new design banknotes in the denomination of ₹2000 as part of Mahatma Gandhi(New) Series. The new denomination has motif of the Mangalyaan on the reverse, depicting the country's first venture in interplanetary space. The base colour of the note is magenta. The size of the new note is 66mm x 166mm.

500

The new ₹500 notes in the Mahatma Gandhi (New) Series are different from the present series in colour, size, theme, location of security features and design elements. The size of the new note is 66mm x 150mm. The colour of the notes is stone grey and the predominant new theme is Indian heritage site - Red Fort.

200

The new ₹200 denomination banknotes in the Mahatma Gandhi (New) Series bear motif of 'Sanchi Stupa' on the reverse, depicting the country's cultural heritage. The base colour of the note is bright yellow. The size of the new note is 66mm x 146mm.

100

The new ₹100 denomination banknotes in the Mahatma Gandhi (New) Series bear motif of 'Rani ki Vav' on the reverse, depicting the country's cultural heritage. The base colour of the note is lavender. The size of the new note is 66mm x 142mm.

50

The new ₹50 denomination banknotes in the Mahatma Gandhi (New) Series bear motif of 'Hampi with Chariot' on the reverse, depicting the country's cultural heritage. The base colour of the note is fluorescent blue. The size of the new note is 66mm x 135mm.

20

The new ₹20 denomination banknotes in the Mahatma Gandhi (New) Series bear motif of the Ellora Caves on the reverse, depicting the country's cultural heritage. The base colour of the note is Greenish Yellow. The size of the new note is 63mm x 129mm.

10

The new ₹10 denomination banknotes in the Mahatma Gandhi (New) Series bear motif of 'Sun Temple, Konark' on the reverse, depicting the country's cultural heritage. The base colour of the note is chocolate brown. The size of the new note is 63mm x 123mm.

The detailed features can be studied from RBI website.

Next Topic - Bank Accounts in India