Know Your Customer (KYC) is a due diligence process that financial institutions undertake to verify the identity and background of their customers. This verification helps to ensure that the services provided by banks and other financial institutions are not misused for illegal activities such as money laundering, identity theft, or terrorist financing. The KYC process is also vital in determining the risk associated with a customer.
The Reserve Bank of India (RBI) introduced the KYC guidelines in 2002, making it mandatory for regulated entities like banks, insurance companies, and stockbrokers to implement KYC processes. The core reasons behind this mandate were to protect financial institutions from:
- Money laundering
- Terrorism funding
- Identity theft
KYC is not just a regulatory requirement; it is an essential part of India’s financial infrastructure, which is becoming increasingly digital. With strong KYC norms in place, the financial system is better safeguarded against fraud. Non-compliance with KYC regulations can lead to heavy penalties from regulators like the RBI, Securities and Exchange Board of India (SEBI), or the Insurance Regulatory and Development Authority of India (IRDAI).
There are several methods of performing Know Your Customer (KYC) in India, and the choice of method often depends on the institution’s requirements and the customer’s convenience. The RBI has outlined multiple types of KYC processes that are compliant with the regulations. Below are the main types:
1. Physical KYC
This is the traditional form of KYC where the customer must physically visit the bank or financial institution to complete the verification process. During this visit, the customer submits self-attested copies of documents like Proof of Identity (POI) and Proof of Address (POA). These documents are cross-verified against the details submitted in the customer’s application form. This method is time-consuming as it requires the customer’s physical presence and manual document verification.
2. Aadhaar-Based eKYC
With the rise of digital identification systems, the Indian government introduced Aadhaar-based eKYC, allowing customers to use their Aadhaar number for digital identity verification. This method is paperless and can be done both online and offline.
- Online Aadhaar eKYC: This involves verifying the customer’s identity through an OTP sent to their Aadhaar-registered mobile number or by using biometric verification (fingerprint or iris scan).
- Offline Aadhaar eKYC: Customers can download their Aadhaar data in the form of an Aadhaar XML file or use the QR code on the Aadhaar card, which financial institutions can scan to retrieve the required information.
3. Digital KYC
This method is entirely paperless but requires an official representative to be physically present with the customer. The representative captures live images of the customer and their documents, which are geotagged and verified in real time. This Digital KYC data is then cross-checked against the customer’s application details.
4. Video KYC
The Video KYC process was introduced to make customer verification more seamless, particularly during the COVID-19 pandemic. In this process, the customer’s identity and documents are verified over a live video call with a representative from the financial institution.
The representative captures live images of the customer’s Proof of Identity and Proof of Address documents. The video is then reviewed by another representative to ensure accuracy and compliance. The RBI has deemed this mode of KYC to be fully compliant with regulations.
5. Central KYC (cKYC)
The Central KYC (cKYC) process was introduced to streamline KYC verifications across financial institutions. Under cKYC, customers are assigned a KYC Identification Number (KIN), which financial institutions can use to access the customer’s KYC information from a centralised KYC registry. This eliminates the need for customers to undergo multiple KYC verifications with different institutions.
The eKYC Process
eKYC, or electronic KYC, is a paperless and efficient alternative to the traditional KYC process. It leverages digital systems to verify a customer’s identity based on their Aadhaar number, making it quicker and more convenient. The Unique Identification Authority of India (UIDAI) provides the infrastructure to facilitate eKYC. Here’s how the eKYC process works in India:
1. Online eKYC
Online eKYC is often used by banks, digital wallets, and financial services to verify customers quickly and efficiently. It is performed in two ways:
- OTP-Based eKYC: The customer’s Aadhaar number is authenticated using a One-Time Password (OTP) sent to their Aadhaar-linked mobile number. Once the OTP is entered, the KYC service provider retrieves the customer’s identity data from the UIDAI database for verification.
- Biometric-Based eKYC: In this method, the customer’s identity is authenticated using their fingerprint or retina scan. If the biometric data matches, the KYC provider fetches the customer’s information from the UIDAI database.
2. Offline eKYC
Offline eKYC provides a way for customers to verify their identity without needing an internet connection or real-time access to UIDAI’s database. This is done through:
- Aadhaar XML File: The customer can download their Aadhaar XML file, which contains their demographic information (name, address, date of birth, etc.) from the UIDAI portal. This file is password-protected, and the customer shares it with the financial institution for verification.
- QR Code Scan: The QR code on the back of the customer’s Aadhaar card can be scanned to retrieve their demographic data. This method is also used for offline identity verification and does not require a live internet connection.
Key Benefits of eKYC:
- Speed and Efficiency: eKYC can be completed in a matter of minutes, unlike traditional methods that may take days.
- Cost-Effective: Being a paperless process, eKYC significantly reduces operational costs for financial institutions.
- Security: eKYC uses encrypted data transfers, which makes it a secure process, protecting the customer’s identity and personal information.
- Convenience: Customers can complete eKYC from the comfort of their homes or anywhere else, without needing to visit a branch.
With Aadhaar being linked to mobile numbers, bank accounts, and other critical services, eKYC is becoming the preferred method for identity verification across various sectors in India.
Central KYC (cKYC)
The Central KYC (cKYC) system was introduced to eliminate the redundancy of multiple KYC verifications for different financial institutions. Before cKYC, customers were required to undergo separate KYC processes for each financial product they opted for, even if they had completed KYC earlier with another institution. The cKYC registry streamlines this process, making it easier for both customers and financial institutions.
What Is cKYC?
cKYC is a centralised registry managed by the Central KYC Records Registry (CKYCR) under the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI). It stores the customer’s KYC records in a central repository, accessible to all participating financial institutions. Once a customer completes KYC at any financial institution, their KYC details are stored in this centralised database and are assigned a KYC Identification Number (KIN).
How cKYC Works:
- KYC Submission: When a customer completes the KYC process with a financial institution, the institution uploads their KYC documents (identity and address proof) to the cKYC registry.
- KYC Identification Number (KIN): After successful verification, the customer is assigned a unique KYC Identification Number (KIN). This number acts as a reference for all future KYC verifications with any participating institution.
- Access by Other Institutions: When the customer applies for another financial product with a different institution, that institution can retrieve their KYC details using the customer’s KIN. This eliminates the need for the customer to submit their KYC documents repeatedly.
Video KYC
Video KYC is an online, real-time verification process in which a customer’s identity is confirmed over a live video call with a bank or financial institution representative. This method eliminates the need for in-person visits to branches, making it a convenient option for both customers and financial institutions.
How Video KYC Works:
- Preliminary Verification: Before the video call begins, the customer undergoes an Aadhaar eKYC and PAN verification check. This ensures that the initial data matches the customer’s identity before the video call is scheduled.
- Live Video Call: During the video call, the official representative verifies the customer’s Proof of Identity (POI) and Proof of Address (POA). The customer is required to show their original identification documents on the camera.
- Liveness Detection: As a security measure, the system uses liveness detection technology to ensure that the customer is physically present and interacting with the representative during the video call.
- Face and Document Matching: The representative checks the customer’s face against the photo in their provided documents to ensure authenticity. Optical Character Recognition (OCR) may also be used to extract and verify details from the documents.
- Geotagging: The location of the customer is geotagged during the call to ensure they are within the geographical boundaries allowed by the financial institution.
- Review Process: After the call, another representative reviews the recorded video and captures data for additional verification. Once approved, the customer’s KYC is marked as complete.
Re-KYC
The RBI has categorised customers into three risk profiles, and the frequency of Re-KYC updates depends on the category:
- High-Risk Customers: Re-KYC is required every 2 years. High-risk customers typically include those engaged in high-value transactions or operating in sectors with elevated risks of fraud.
- Medium-Risk Customers: Re-KYC must be done every 8 years. These customers pose moderate risks and might include small businesses or individuals with moderate transaction volumes.
- Low-Risk Customers: Re-KYC is required every 10 years. This category usually includes individuals with minimal financial activities, such as retirees or individuals with low transaction volumes.
The Re-KYC Process:
- Notification to Customers: Financial institutions send reminders to customers whose KYC details are due for an update. These notifications are sent via email, SMS, or other registered communication channels.
- Submission of Updated Documents: Customers must submit updated Proof of Identity (POI) and Proof of Address (POA) documents if there has been any change in their details. If there is no change, customers may submit a self-declaration stating that the information remains the same.
- Digital Re-KYC Options: For low-risk customers, many banks offer the option to complete Re-KYC digitally through Internet Banking, mobile apps, or ATMs. This reduces the need for physical visits to branches.
- Processing: Once the documents are submitted, the institution processes the updated KYC details, and the account is re-verified within 10 days.
What Happens If Re-KYC Is Not Completed?
If customers fail to comply with Re-KYC requirements, financial institutions may impose partial freezing on the account. This means:
- Initially, credits are allowed, but debits are restricted.
- If the Re-KYC is still not completed within a certain timeframe, both credits and debits are disallowed, rendering the account inoperative.
- To reactivate the account, customers must complete the Re-KYC process by submitting the required documents.
