Know Your Customer (KYC)
Introduction
Banking in India has reached even to the outfit of Rural areas with wide campaigns by Banks and the Government. With the expansion in the Bank network, which involves the accumulation and distribution of lakhs of crores of rupees by way of Deposits and Loans, it is very much essential that the genuineness of Customers is confirmed so that the Public money gets high protection. It is possible for the banks only by knowing their customers in toto.
Against this backdrop, the Reserve Bank of India introduced the Know Your Customer concept in all Banks to ensure that the beneficiaries are genuine citizens and no terrorist financing and money laundering activities are taking place in the financial system.
To enable the Banks and other Financial Institutions to accomplish this task, the Central Bank (Reserve Bank of India) laid down various guidelines depending upon the nature of the Customers – be them, Depositors or Borrowers, under Section 35 (A) of the Banking Regulation Act, 1949, which stipulate the compliance of following Standard procedure by the Banks at the entry-level of a Customer:
To obtain recent Photograph(s) of the Customer(s)
To obtain Address Proof of the Customer(s)
To obtain Identity Proof
To obtain Aadhar Card
To obtain PAN Card(s)
To declare their financial position – Assets and Liabilities with other Banks/financial institutions
To obtain a Partnership Deed in case of Partnership concerns
To obtain a Memorandum of Association in the case of Private / Public Limited Companies
To obtain Board Resolution if the prospective customer is a Private / Public Limited Company
To verify with the Ministry of Company Affairs in case of Limited Companies
To verify with the Registrar of Companies in case of Private Limited Companies
To conduct proper Due Diligence of the prospective Customer at the entry level itself.
In the event of any contravention in complying with the above provisions will attract penalties under the relevant provisions of the Act. By conducting the above exercise the Banks can ensure that the guidelines and laws of the nation in the prevention of Money Laundering.
It is expected of a Bank/Branch that the relationship to be created does not violate the Customer Acceptance principles of the Bank.
What are Customer Acceptance Principles?
The Branch has not opened any account whether it is a Deposit or Loan account, the same is not in the name of a fictitious or benami person;
The risk profile of the Customer is drawn based on the information obtained about their source of income whether salaried, business activity, location, clientele portfolio, the volume of Turnover, Financial and Social status, and so on.
The Account Opening Form (AOF) should contain the Profile of the Applicant detailing various columns and rows relating to the particulars like their Social status, financial status, nature of business, Source of funds, Annual income, etc., and the information should be obtained and updated based on arriving at the resultant Risk Factor at periodic intervals as under :
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Low-Risk Customers
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Once in every Three Years
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Medium Risk Customers
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Every Year
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High-Risk Customers
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Every Year
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The periodicities given above are only indicative and wherever warranted, the updation should be done even for a lesser period by browsing their accounts and if anything alarming is found in the conduct and operations.
How to Identify the Right Customer?
After obtaining necessary documents and declarations from the Applicant, it is the duty of the Bank/Branch that a proper verification is conducted and it is ensured that the Know Your Customer norms are fulfilled. Here comes the concept of conducting Due diligence by making discrete inquiries with various sources like visiting the applicant’s residence/business place, making inquiries with the nearby residents/business entities, sending a communication to the address given to the Branch in the Account Opening Form, a thorough study of the financial statements/declaration by verifying the Salary slips (in case of individuals/Income Tax Returns), etc.
Proper Entry level interviews should be conducted with the prospective Customer and the Branch official should be convinced by the statements made by the applicant and satisfied before the opening of the Account or creating the Relationship. The proceedings should be recorded and authenticated by the Branch official. During the interview, it should also be ensured by the Branch about the purpose of opening the account or creating a relationship with the Bank.
In the case of borrowing customers, besides completing other formalities like conducting Pre-sanction inspection, Due Diligence, Financial Analysis, and Processing the Loan request application, it is mandatory for the Branch officials to interview the Introducer and the Guarantor.
Documents to be submitted along with the Account Opening Form:
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As per Risk Category
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Documents to be obtained
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Individuals / Low-Risk Category
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To confirm the Photo Identity of the Applicant :
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One of the following
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To confirm the Address proof of the Applicant
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· Latest Telephone Bill
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· Electricity Bill
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· Latest Bank statement (if already have an account with another Bank/Financial Institution)
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· Letter issued by the Employer
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· IT Returns duly bearing the address
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· Credit Card Statement
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For Medium and High-Risk Customers as under :
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Non-Resident accounts
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Introduction in the form of a passport and/or by another bank/Indian Embassy/ Notary Public/ Person known to the account opening branch.
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For opening accounts other than NRIs under Medium and High-Risk categories
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Introduction by an existing account holder or by a person known to the Bank
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For current accounts in all risk categories
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Introduction by an existing account holder or by a person known to the Bank
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For accounts of other than individuals in all risk
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Introduction by an existing account holder or by a person known to the Bank
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For customers who are legal persons or entities (i.e., other than individuals), branches shall verify the legal status of the legal person/entity through proper and relevant documents
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verify that any person(s) purporting to act on behalf of the legal person/entity is duly authorized and such person(s) is/are properly identified by calling for documents (as listed above for individual low-risk customers) and verify the identity of that person(s) b. understand the ownership and control structure of the customer and determine those natural persons who ultimately control the legal person.
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Introduction of accounts to the Bank
Rejection of applications for opening accounts
Relaxations in KYC Norms to specific categories:
KYC norms for Remittances within India
What the Bank shall do if they are not in a position to comply with KYC Norms on account of non-cooperation from the customer?
The account holder shall be put on notice as per the stipulations of the Bank and RBI and will be given opportunities to rectify the irregularities. However, if the account holder does not comply with the laid down norms and rules, the account shall be frozen for Debit.
Original should be produced for verification and a copy, duly attested by the verifying official, shall be kept along with the account opening form.
For opening Joint accounts, applicants are required to independently establish their identity and address.
As per clause (C) of rule 114B of the Income Tax Rules 1962, it is mandatory for the customers to write down their PAN (Permanent Account Number) or GIR (General Index Register) Number, in the account opening forms pertaining to Term deposits exceeding Rs.50,000 and for opening an account of all other types. This also applies to those who are making a cash deposit of Rs. 50,000/- and above as per the above Clause of the IT Department.
Along with the Account Opening Form, the applicant should submit the required number of recently taken photographs relating to the prospective Customers. If the account is to be opened in joint Names or in the name of Partnership firms, Limited Companies, Clubs, Associations, Societies, Associations, Trust, Institutions, etc. the photographs of the person(s)/official(s) who are authorized to operate the account and in case of Hindu Undivided Family, the photograph of the Karta should be provided.
If the applicant desires to open only Term Deposit accounts, one copy of the photograph should be obtained provided the applicant does not have a Savings or Current account with the branch. This applies to all applicants, whether they are Indian citizens or NRIs, who are desirous of opening Term Deposits,
It is absolutely necessary that the Introducer (who is already having a relationship with the Bank/Branch) who introduces a prospective Customer, should know the applicant for a reasonably long time and his Introduction is acceptable to the Bank, i.e. the Introducer should having a genuine relationship with the Bank/Branch and the account is reasonably operated well to the satisfaction of the Bank/Branch. Some Banks insist that the Introducer should have a relationship with the Bank/Branch at least for a minimum period of Six months. The Introducer should be made aware of the legal implications of his introduction as per the Regulations and Law.
In case of introduction obtained in the absence of the Introducer (but with his signature obtained when away from the Bank/Branch), cheque/any other instrument shall NOT be collected till confirmation of his Introduction is confirmed to the Bank/Branch in writing.
Where the Bank is unable to apply appropriate customer due diligence measures i.e. unable to verify the identity and/or obtain documents required as per the risk categorization due to non-cooperation of the customer or the data/information furnished to the bank is not reliable, it may take a decision not to open the account.
- Relaxation in Introduction is permitted in the specific categories for Low Income Group customers, individuals falling under the “No Frill” classification, and applicants who suffered on account of natural calamities like floods, cyclones, earthquakes, etc.
- Relaxation in KYC norms is also permitted in Low-Income group customers are those who keep balances not exceeding Rs.50000/- in all their accounts (FDR/CA/SB) taken together and the total credit summation in all the accounts taken together is not expected to exceed Rupees One Lakh (Rs.100000/-) in a year
- For these customers, Banks are permitted to open accounts subject to the following conditions:
- a) An introduction (instead of the KYC documents) from another account holder who has been subjected to full KYC procedure should be given.
- b)The introducer’s account with the Bank should be at least six months old and should show satisfactory transactions.
The photograph of the customer who proposes to open the account and his address need to be certified by the introducer.
- c)When, at any point in time, the total balance in all his/her accounts (FDR/SB/CA) with the Bank taken together exceeds Rupees Fifty thousand (Rs.50000/-) or total credit summation in all the accounts exceeds Rupees one lakh (Rs.100000/-) in a year, no further transactions will be permitted until the full KYC procedure is completed.
It is pertinent to note that Know Your Customer norms are applicable not only for opening of accounts or creating a relationship with the Bank/Branch but also for making remittances in the form of obtaining Demand Drafts/Pay Orders/sending money through NEFT/RTGS etc. after depositing by Cash since the remitter may not have any account with the Bank/Branch.
Issue and payment of Travelers’ cheques, Demand Drafts, Electronic Funds Transfers, and other remittances of Rs.50,000 and above should be made only by debit/credit to customers’ accounts or against cheques and not against cash.
Further, the applicants (whether customers or not) for transactions with an amount of Rs.50,000 and above should furnish PAN (Permanent Account Number allotted by Income Tax Authorities) on the applications.
If the Bank is not able to adhere to the KYC norms in a particular account due to non-co-operation by the customer or non-reliability/faulty submission of the data/ information by the Applicant (or the Bank finds that the account holder had submitted misinformation/false declaration while opening the Account), it may close the account, after giving due notice to the customer explaining the reasons for such a decision.