What Is KYC And Its Importance?
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).
Types Of KYC In India
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 In India
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.
Benefits of cKYC:
- Single KYC for Multiple Products: cKYC allows customers to undergo the KYC process only once, even if they apply for various financial products (bank accounts, insurance, mutual funds, etc.) with different institutions.
- Reduction in Redundancy: Financial institutions save time and resources as they can directly access the customer’s KYC information from the central registry instead of conducting the process from scratch.
- Enhanced Customer Convenience: Customers no longer need to provide their KYC documents repeatedly, making the onboarding process faster and smoother.
- Improved Regulatory Compliance: With cKYC, institutions can ensure compliance with the latest regulations, as the central registry is regularly updated.
Integration With Aadhaar And PAN:
The cKYC registry integrates with Aadhaar and PAN databases to provide a more comprehensive KYC process. Customers who provide their Aadhaar or PAN details can further streamline their verification process as these numbers are linked to the centralised KYC record.
Video KYC
In an increasingly digital world, financial institutions in India have embraced Video KYC as a convenient and secure method for customer verification. Introduced by the Reserve Bank of India (RBI) to support remote customer onboarding, Video KYC offers a fully compliant, paperless, and efficient solution for Know Your Customer (KYC) verification.
What Is 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.
Benefits Of Video KYC:
- Convenience: Customers can complete their KYC from the comfort of their homes without visiting a branch, making it highly convenient for individuals in remote areas or those with busy schedules.
- Faster Onboarding: Video KYC significantly reduces the time required to complete the verification process, enabling financial institutions to onboard customers faster.
- Regulatory Compliance: The RBI has approved Video KYC as a fully compliant method for customer verification, ensuring that all guidelines are adhered to without compromising security.
- Cost-Effective: By eliminating the need for physical document submissions and in-person visits, financial institutions can reduce operational costs.
Data Privacy And Security:
Video KYC is backed by strong data privacy measures. All video calls are end-to-end encrypted, and customer data is stored securely to prevent unauthorized access. Additionally, the use of biometric authentication and liveness detection further enhances the security of the process.
Re-KYC
The Re-KYC (Re-Know Your Customer) process is designed to ensure that customer information remains accurate and up-to-date over time. Financial institutions, particularly banks, are required by the Reserve Bank of India (RBI) to periodically update customer details, especially for accounts that are classified as high-risk. This helps institutions mitigate risks associated with money laundering, identity theft, and other fraudulent activities.
Why Is Re-KYC Required?
Customer information such as address, contact details, or financial status may change over time. To maintain compliance with Anti-Money Laundering (AML) guidelines and ensure the safety of the financial system, institutions are mandated to periodically verify and update customer data. Re-KYC helps in:
- Preventing Fraud: By keeping customer details updated, financial institutions reduce the risk of fraud or misuse of accounts.
- Maintaining Compliance: Financial institutions must adhere to RBI regulations, which specify regular intervals for updating KYC details depending on the customer’s risk profile.
- Enhanced Customer Safety: Regular updates help protect customers from unauthorized transactions or identity theft.
Re-KYC Risk Categories And Intervals
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.
KYC Documentation Requirements In India
The Know Your Customer (KYC) process in India requires customers to submit specific documents to verify their identity and address. These documents help financial institutions ensure the legitimacy of the individuals or businesses they are engaging with. Depending on the type of customer—individuals, minors, non-resident Indians (NRIs), or businesses—the required documents may vary.
KYC Documents Required For Individuals
For individual customers, the RBI has specified a set of Officially Valid Documents (OVDs) that can serve as both Proof of Identity (POI) and Proof of Address (POA). These include:
- Aadhaar Card: A government-issued unique identity card linked to biometric data.
- Passport: A widely accepted identity and address proof for both residents and NRIs.
- Voter ID Card: Issued by the Election Commission of India as a valid proof of identity and address.
- Driving Licence: Another commonly accepted document that includes the customer’s photograph and address.
- PAN Card: Primarily used for financial transactions but also required for KYC, especially for tax-related purposes.
If any of the submitted documents contain both identity and address details, additional documentation is not required. However, if the Proof of Identity document does not include the customer’s address, a separate Proof of Address must be submitted.
KYC For Minors
For minors under the age of 10, KYC must be completed by the parent or legal guardian who operates the account. In cases where the minor can operate the account independently (usually for minors above 10), they must provide KYC documents as required for any other individual.
KYC For Non-Resident Indians (NRIs)
For NRIs, the KYC process involves additional documentation due to their non-resident status. NRIs are required to submit:
- Passport: As both Proof of Identity and Proof of Address.
- Residence Visa: This proves the NRI’s legal status in the foreign country.
- Foreign Address Proof: Any document that verifies their address outside India, such as utility bills, bank statements, or an official letter from their employer.
Additionally, these documents need to be attested by the Indian Embassy, Notary Public, or a correspondent bank with verifiable signatures.
KYC For Businesses
The KYC requirements for business entities differ depending on the type of business. Here’s a breakdown:
- Partnership Firms: Need to submit the partnership deed, registration certificate, and PAN of the business. KYC for the individual partners and authorized signatories must also be completed.
- Proprietary Concerns: Proprietors must submit any two of the following documents as proof:
- Registration certificate
- Local municipal license
- Recent tax returns
- Utility bills dated within the last two months
- Professional licenses such as a Chartered Accountant’s license or import/export documentation.
- Corporations: Corporations need to submit the certificate of incorporation, articles of association, board resolution authorizing account operations, and KYC details of the directors and authorized signatories.
Acceptable Proof Of Address (POA) Documents
For cases where the Proof of Identity document does not contain the address, a separate Proof of Address is required. Commonly accepted POA documents include:
- Utility Bills: Electricity, water, gas, and telephone bills, dated within the last three months.
- Bank Statements: Issued within the last three months.
- Rental Agreement: A registered lease or sale agreement for the residence.
- Government-Issued Letters: For example, a letter from the local municipal authority or a government department that validates the address.
Conclusion
The KYC process is a critical component of India’s financial regulatory framework. Ensuring accurate and up-to-date KYC documentation helps financial institutions mitigate risks, prevent fraud, and maintain regulatory compliance. India has significantly modernised the customer verification process by using traditional and digital KYC methods, including Aadhaar-based eKYC, Video KYC, and Central KYC.
FAQs around KYC in India
KYC (Know Your Customer) was first introduced in India by the Reserve Bank of India (RBI) in 2002. It became mandatory for all banks in 2004 as part of anti-money laundering measures to verify the identity and address of customers.
As per the latest government proposal, you must submit KYC details when opening an account with a reporting entity. Once registered, you’ll receive a unique 14-digit CKYC identifier linked to your ID proof.
In India, KYC is not required annually but must be updated periodically. Low-risk customers update every 10 years, medium-risk every 8 years, and high-risk every 2 years, as per RBI guidelines.
In the Indian context, the 5 stages of Know Your Customer (KYC) are:
- Customer Identification: Verifying identity through documents like Aadhaar, PAN, Voter ID, or Passport to ensure the individual is who they claim to be.
- Customer Due Diligence (CDD): Assessing the risk of the customer by checking their financial background, transaction patterns, and financial history to prevent fraud and money laundering.
- Risk Profiling: Categorizing customers into risk levels (low, medium, high) based on the information gathered to tailor the monitoring and scrutiny processes.
- Ongoing Monitoring: Continuously tracking customer transactions and activities to identify any suspicious behavior, ensuring compliance with regulations.
- Record Keeping: Storing KYC data for a prescribed period, allowing financial institutions and regulatory bodies like the RBI to access it for audits or investigations.
The e-KYC (electronic Know Your Customer) system in India was introduced by the Unique Identification Authority of India (UIDAI) in 2012, under the chairmanship of Mr. Nandan Nilekani.
Under the provisions of the PML Act, 2002, and PML Rules, 2005, as amended by the Government of India, Regulated Entities (REs) must follow specific customer identification procedures when establishing an account-based relationship or conducting transactions. They are also required to monitor these transactions.
Yes, all banks in India require KYC (Know Your Customer) compliance. The Reserve Bank of India (RBI) mandates that banks must complete the KYC process to verify the identity and address of their customers. This process is essential for preventing fraud, money laundering, and other financial crimes. Without completing KYC, customers cannot open or operate accounts, access loans, or use other financial services.
In the Indian context, if KYC (Know Your Customer) is not completed, individuals may face several restrictions, including:
Bank Account Freezing: Access to bank accounts and financial services may be suspended until KYC is updated.
Service Limitations: Non-KYC-compliant users may face limits on transactions, like reduced withdrawal or transfer limits.
Access Denied to Loans and Credit: Financial institutions may deny loans, credit cards, and other services if KYC is not completed.
Account Closure: Persistent failure to update KYC may result in account closure, as per RBI regulations.
Compliance Penalties: Businesses may face fines and penalties for not adhering to KYC norms under the Prevention of Money Laundering Act (PMLA).
In the Indian context, the following documents are compulsory for KYC (Know Your Customer):
Proof of Identity (PoI):
- Aadhaar Card
- Passport
- Voter ID
- Driving Licence
- PAN Card
Proof of Address (PoA):
- Aadhaar Card
- Passport
- Utility Bills (Electricity, Water, Gas) not older than 3 months
- Bank Account or Post Office Savings Account statement
Yes, in India, KYC (Know Your Customer) can be completed at any branch of a bank or financial institution where you hold an account. Most banks allow customers to update or complete their KYC documentation at any branch by submitting valid identity and address proofs. Some banks also offer online or mobile app-based KYC processes for added convenience.
