This article discusses the importance of KYC in banking sector of India and talks about it’s implications. But before that, let’s find out what KYC stands for and how to deal with the KYC verification process in banks.
In the year 2002, RBI instructed that all the banks must obtain information about their customers’ identity and address. From that time onwards, it has been carried out by a process called KYC. KYC in banking stands for ‘Know Your Customer’. The main objective of this policy is to prevent money laundering, identity theft, terrorist financing, and financial frauds.
As given in a RBI circular, “The objective of KYC/AML/CFT guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently”.
The guidelines for KYC in banking are issued under Section 35A of the Banking Regulation Act, 1949. However, when it was introduced, the banks were not only asked to implement the rules with immediate effect, but were also asked to make sure all the existing accounts are KYC compliant by 31st dec 2005.
KYC policy is an indispensable part of banking operation, whether it’s about account opening or advancement of loans. Because it helps to ensure that the services are not misused.
Every bank, while framing its KYC policies following the RBI guidelines has to consider the following major aspects.
a) Customer Acceptance Policy– To ensure that explicit guidelines are in place for acceptance of customers.
b) Customer Identification Procedures– To identify the customer and verify his/her identity by using reliable, independent source documents, data or information.
c) Monitoring of Transactions– Understand as well as observe the normal and reasonable activity of the customer in order to identify transactions that fall outside the regular pattern of activity.
d) Risk management– Establish appropriate procedures and ensuring their effective implementation.
For the purposes of a Know Your Customer policy, a Customer/user may be defined as
- A person or entity that maintains an account and/or has a business relationship with the bank
- One on whose behalf the account is maintained (i.e. the beneficial owner)
- Beneficiaries of transactions conducted by professional intermediaries such as stockbrokers, Chartered Accountants, or solicitors, as permitted under the law
- Any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, for example, a wire transfer or issue of a high-value demand draft as a single transaction.
Basically, there are two types of documents required to comply with KYC norms. One is “Proof of Identity” and another is “Proof of Address”.
As stated in RBI’s website, “The Government of India has notified six documents as ‘Officially Valid Documents (OVDs) for the purpose of producing proof of identity. These six documents are Passport, Driving Licence, Voters’ Identity Card, PAN Card, Aadhaar Card issued by UIDAI and NREGA Card. You need to submit any one of these documents as proof of identity. If these documents also contain your address details, then it would be accepted as as ‘proof of address’. If the document submitted by you for proof of identity does not contain address details, then you will have to submit another officially valid document which contains address details.”
Depending on whether you are an individual, firm, or organisation, you will be asked to produce specific documents that authenticate your identity at the bank.
If You’re an Individual
Proof of Identity: Passport, Driving Licence, Voters’ Identity Card, PAN Card, Aadhaar Card issued by UIDAI and NREGA Card, Ration card, Identity card( subject to bank’s satisfaction)
Proof of address: Utility bill, Aadhaar card, ration card, letter from employer, driving license, Voter’s identity card, LPG registration documents, letter from recognized public authority, or any other documents again that will be subject to bank’s satisfaction.
If you’re a Partnership firm
certificate of registration,Company’s PAN card, partnership deed, proofs of identity and address of partners, Resolution of board of directors to open account and identification of those who has authority to operate such account, power of attorney or authorised signatory documents if any, other documents as per individual bank’s requirement.
If you’re a Sole Proprietorship Firm
Certificate of incorporation, PAN card, TIN number, telephone bill/ electricity bill, Certificate/licence issued by the municipal authorities under Shop and Establishment Act. Sales and income tax returns etc.
Likewise, the set of KYC documents required will vary depending on the type of constitution such as Companies, Trust and Foundation etc. Along with the documents, you are also required to furnish your recent passport sized photographs and also keep the bank updated on your KYC information on a periodic basis.
Here are some links to list of acceptable KYC documents required by some banks in India and these are given in pdf format. However, this may not be exhaustive as of now. I will keep updating this section in future.
But remember, the documents required for KYC compliance may vary depending on a specific purpose. Therefore, to be sure of exactly which documents you need, you should speak with someone in your bank.
Punjab National Bank KYC Documents, PNB KYC Dcument List for Account Opening, Bank of Baroda KYC Documents, Indian Bank KYC Documents, Canara Bank KYC Documents, Corporation Bank KYC Documents, Bank of Maharashtra KYC Documents, Central Bank of India KYC Documents, Dena Bank KYC Documents, IDBI KYC Documents, Federal Bank KYC Documents, HDFC KYC Documents,
KYC Forms of Different Banks
Following are the links to the KYC forms required for individuals by different banks in India. These are in pdf format.
When KYC is Required
KYC is required while,
- Opening a bank account
- Availing Locker facility
- Applying for credit card
- Applying for loans
- Existing documents are not enough
- Changing signatory, nominee
Currently, KYC is a legal requirement in many sectors, apart from banks. Whether it’s mutual Funds, insurance, broking, or commodity trading KYC has been made compulsory in order to verify the identity of the clients.
Why KYC is Important for Banks?
KYC is necessary as well as mandatory for the following reasons.
1. To Prevent Money Laundering
When the illegally obtained money are made to appear as though it has originated from legitimate sources, it is called money laundering. This is a serious threat to any economy as it shelters and breeds criminal activities such as tax evasion, smuggling, financial frauds and corruption. Prevention of Money Laundering Act, 2002 was was laid down alongside the KYC guidelines, so that a proper mechanism guided by stringent rules will be maintained by banks, which will help them track the entities involved in such unscrupulous activities.
2. To Combat Finance of Terrorism: As stated above, one of the major objectives of KYC is to enable the banks know and understand their customers as well as their financial dealings. KYC is a deliberate effort taken by banks to check suspicious monetary transaction by any of their customers which may involve financing of the activities related to terrorism.
3. To Manage Risk: Apart from AML and CFT, KYC also helps banks in managing risk quite prudently. By creating risk profiles and assigning risk categories to customers, banks can monitor any possible financial frauds and loan defaults. This is done by analysing a customer’s profile through Customer Identification Procedure and by considering their financial background, nature of account, purpose behind their account opening, and nature of transactions etc.
4. To check Identity Theft: As per the KYC guidelines, bank can not open benami or fictitious accounts on behalf of other persons whose identity has not been verified. Also, banks will not allow you to open an account until and unless you present valid documents that establish your identity.