The Reserve Bank of India made it mandatory for all the financial institutions to implement KYC (Know Your Customer) in 2002, and it came into force on 1st July 2005. RBI issued this guideline through the section 35A of Banking Regulations Act, 1949. The objective behind this KYC implementation was to restrict money laundering and stop banking frauds.
Thus, in order to eliminate this problem, awareness about what is KYC needs to be generated to keep customers safe and secure.
KYC: What is it?
KYC or Know Your Customer is a process through which any business verifies the identity of its clients and assesses risk and future business relationship. Still, in terms of financial institutions, it is referring to the banking regulations and AML (Anti Money Laundering) which administers these activities.
It allows financial institutions to authenticate the identification of a customer. With the help of this process, financial institutions can gather information on a customer.
However, there is a lack of knowledge among ordinary citizens regarding what is KYC, which needs to be addressed to mitigate several problems. The objectives of KYC are as follows:
- Understanding customers and assessing future risks associated with a particular customer.
- Avoid having ghost portfolios in the organisation.
- Stop money laundering.
- Eliminating illegal activities like terrorism funding.
Financial institutions can form their KYC policy guidelines based on the RBI guideline. But they have to incorporate their policy based on four elements. These are:
Customer acceptance: Categorising customers in three risk categories, high, medium and low.
Customer identification: Verifying customer’s identity through the provided documents as well as independent and reliable sources.
Monitoring: Monitoring transactions made by customers according to their risk categories.
Risk management: Keeping a tab on customers according to their risk category and making regular amendments accordingly.
Consumers must understand what is KYC, as the financial institutions derive the following benefits from the process.
- Verifying activities of customers and whether they are credible enough or not.
- Assessing risk, be it lending money or allowing customers to invest.
- For customers submitting KYC means they have established their credibility and in future, they can make smooth and hassle-free transactions.
- It will protect both financial institutions and customers from any unforeseen incidents.
Customers can complete this process through two different methods, which are:
- Offline: In case of an offline application, customers can download the KYC form from the website of the financial institution or can visit their nearest office and collect it. They can fill up and sign the form and attached attested photocopies of their ID proofs along with photos and submit it to the financial institution they want to deal with.
- Online: This process is also known as e-KYC. In case of e-KYC, individuals have to ask Unique Identification Authority of India (UIDAI) to release the necessary information of their Aadhar card. Once they receive your consent, they will transfer the data to the bank electronically. Information gathered through e-KYC is treated as valid under PML (Prevention of Money Laundering) rules. This process is only accessible to individuals who have an Aadhar card.
Apart from Aadhar card, the Government of India has listed 5 other ID proofs as Officially Valid Documents (OVD). These are:
- Voter ID card
- Driving license
- Pan card
- NREGA job card
Customers should know that to complete this KYC process successful, they need an ID card that has a photo on it.
Apart from their ID proof customers have to submit their address proof also. These documents include:
- Ration card
- Lease or sale agreement of residence
- Utility bills like electric, telephone, gas etc. but they can’t be more than 3 month old.
KYC is very important for customers to have a hassle-free experience. For instance, if a customer is looking to avail a credit card, a KYC is mandatory.
Submitting KYC documents successfully will allow customers to gain this credit card quickly. NBFCs like, Bajaj Finserv is offering Bajaj Finserv RBL SuperCard collaborating with RBL bank with a successful KYC document submission.
Card holders should never share their CVV number or PIN number with anyone to mitigate credit card fraud. If you feel your Pin is compromised, they should change the credit card pin number immediately.
Failure to complete your KYC can be the reason why your credit card application may have been declined.
Once you know what KYC is, you can move on to more important aspects, such as how to repay your credit card debt.