KYC Norms

KYC Norms
06 May 2020

KYC Norms

KYC stands for ‘Know Your Client’ or ‘Know Your Customer’. KYC has been declared as a mandatory procedure for every financial institution or bank by the Reserve Bank Of India(RBI) and is a process to get information about the address and identity of the customer. This process has been made mandatory by Reserve Bank Of India(RBI) before opening an account, to guarantee that there must not be any misuse of any service provided by the banks. As per the order by Reserve Bank Of India(RBI), banks have to update the KYC details information at regular intervals of two, eight or ten years depending on the risk of the profile of the customer.

KYC is aimed to make it convenient for the banks and other final institutions to understand and know their customers. Implementation of KYC guidelines for every new bank account was made mandatory by Reserve Bank Of India(RBI) in the year 2002, which came into force from 1st July 2005. KYC Norms were made obligatory, aiming to restrict money laundering and to stop terrorist financing. Reserve Bank Of India(RBI) issues guidelines for KYC, through Banking Regulation Act, 1949 Section 35A along with Prevention of Money Laundering (Maintenance of Records) Rules, 2005. If there would be any contravention or violation by any bank, it would be subject to penalty under the Bank Regulation Act, 1949.

The key objectives are as follows :

  1. Stop money laundering,
  2. Terrorist financing and,
  3. To understand their customers and to avoid any risks in the future.

The Key criteria of KYC policy are as follows :

  1. Customer Identification Procedures,
  2. Customer Acceptance Policy,
  3. Monitoring of Transactions,
  4. Risk Management,

Types Of KYC

There are mainly two types of KYC which are as follows :

1. C-KYC: C-KYC stands for Central KYC. With uniform norms and inter-usability, a central KYC registry across all financial sectors has been set up as a depository for KYC records. This new procedure, without asking customers to provide multiple KYC undertakings will help banks, brokerage firms, mutual funds, and depository participants offer services. After complying with the new C-KYC norms, a unified customer identification code is generated, and it will be used whenever KYC will be required. This initiative has been started for the purpose of centralising and streamlining the KYC process. Duplication of KYC will be avoided after this, less scope of forgery will be there.

The government has authorized the Central Registry of Securitization Asset Reconstruction and Security Interest of India(CERSAI) for performing the functions of Central KYC Records Registry(CCR), also the duty of receiving the details and safely storing them and retrieving the KYC records in the digital form of a ‘client’. Earlier customers have to provide KYC documents separately to every financial institution but after the introduction of the one-time centralization process, C-KYC, customers will only have to complete the process once and it can be used for all different processes like opening savings bank accounts, buying life insurance or investing in mutual fund products.

2. e-KYC: It stands for electronic KYC. The service of e-KYC can only be used by those who have Aadhar numbers. Customers by their own consent need to authorize their Unique Identification Authority of India (UIDAI), to disclose their address or identity information through biometric authentication to their respective business correspondent or bank branches. After this, the UIDAI sends the customers data consisting of customer name, age, gender, and photograph electronically to the bank. It is a valid procedure for KYC verification and under PML Rules, information provided under the e-KYC process will be considered as an ‘Officially Valid Document’.

Documents required for KYC 

Documents are very important, for identifying a customer The documents vary for Banks, Partnership firms, Companies, and so on. The documents required in general are as follows :

  1. For Individual Accounts: For opening an individual account, six documents are declared as ‘Officially Valid Documents’ by the Government of India that can be presented as proof of identity which is as follows:
    1. PAN Card,
    2. Passport,
    3. Driving License,
    4. Voters’ Identity Card,
    5. Aadhaar Card issued by UIDAI,
    6. MGNREGA Job Card.
  2. Accounts for Companies: In the case of companies, they open Current accounts and the documents required are as follows:
    1. Certificate of Incorporation
    2. Memorandum of Association
    3. Any resolution made by the Board of Directors or any officially valid document with respect to the managers, officers, employees, etc.
  3. Accounts for Partnership Firms: The documents required are as follows :
    1. Partnership deed,
    2. Registration certificate.
  4. Trust Accounts: The documents required are as follows :
    1. Trust Deed and
    2. Registration certificate.
Steps Taken by RBI for Implementation of KYC norms 

When the guidelines regarding KYC were introduced in the year 2002, the correct implementation was not made possible, in order to complete their goal the Reserve Bank of India (RBI) asked banks to adopt certain measures for the existing bank accounts also. Some of these are as follows :

  1. Identification was made mandatory for zonal customers.
  2. Public notices were published in the national newspapers.
  3. Those customers who were not complying with the norms were forwarded with individual notices.
  4. Also, a final notice for ensuring proper documentation within seven days from that particular day in the newspapers.