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.