Know your customer or commonly known KYC is an important procedure which the bank inculcates for smooth functionalities. As the name suggests KYC enables the bank to know and analyze their customer adequately. This helps in understanding their requirements and serving their needs better.
KYC is a regulatory and legal requirement following the directive by the Reserve Bank of India. As per the guidelines, all banks in India must follow a stringent KYC Procedure while opening new accounts and update the old ones. This procedure has been set up to ensure that there can be effective monitoring of a customer’s transactions against their expected behavior and recorded profile. Also it can further determine the customer’s risk in terms of inclination to commit money laundering, terrorist finance, or identity theft.
KYC is also required for reasons other than opening bank accounts like applying for a credit card, investing in mutual funds, changes in your particulars due to marriage/divorce or any other reason, opening a locker etc. The bank has also been given the right to investigate/verify K.Y.C documents to the point of their satisfaction.
If an individual account holder fails to produce the KYC Documents within the defined period, then the bank has the right to close your account. However, before taking an extreme step of closing the account, the bank may also use ‘partial freezing’ as an option. Partial freezing means initially allowing all credits and disallowing all debits while giving an option to you to close the account and take your money back. Later even all credits also would not be allowed. The ‘partial freezing’ however, would be exercised by the bank after giving you due notice.
For the purpose of the KYC Policy, a Customer is 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 Stock Brokers, Chartered Accountants, Solicitors, etc. as permitted under the law.
- Any person or entity connected with a financial transaction, which can pose significant reputation or other risks to the Bank, say, a wire transfer or issue of a high value demand draft as a single transaction.
KYC Guidelines of RBI mandate banks to collect three types of proofs from their customers. They are Recent Photograph, Proof of identity, and Proof of address.
An interesting question which is often asked by customers is ‘which are the documents that are required for producing proof of identity’? According to the regulation by government 6 documents are official valid.
- Driving License
- Voters’ Identity Card
- PAN Card
- Aadhaar Card issued by UIDAI
- NREGA Card
For small bank accounts (balance in such accounts at any point of time should not exceed Rs.50,00, total credits in one year should not exceed Rs.1,00,000, total withdrawal and transfers should not exceed Rs.10,000 in a month)
- Identity card issued by Central/State Government Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, and Public Financial Institutions
- Recent photograph
- Identity card with applicant’s photograph letter issued by a gazetted officer, with a duly attested photograph of the person
- Recent photograph
- Identity Proof
- NRI status proof
- Proof of address
Evaluation and verification of a customer’s identification is a crucial process which not only safeguards the customer but also empowers the bank to protect themselves against financial frauds. As per the RBI Guidelines, K.Y.C documents have to be periodically updated to ensure adequacy and transparency. It is necessary for the banks to have the latest details of their customers.