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.

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).