KYC: Understand The Role And Importance In The Financial Industry

KYC stands for Know your customer is known to be a depository, which is captured centrally, to store valuable details of the customers. As per the banking regulation, any financial institution or other companies must collect the required data from their clients. These documents are known as KYC documents that help to identify the customers engaged in multiple types of financial transactions with the institution. All financial institutions in India need to make compulsory KYC verification of their customers to restrict money laundering.

KYC norms and policy

RBI has enacted the KYC norms in the year 2002. Since then, every new bank account opened need to get the KYC documents filed by the customer. The prime focus of implementing this norm is to stop money laundering and prevent terrorist financing. RBI also advised the banks to follow proper steps to make this rule compulsory. To grow the awareness among the mass about this rule, the banks

• Issue public notices in the local newspapers

• Identification of zonal customers has been made compulsory

• Customers are served with individual notices if they fail to follow the rule

It has also been noticed that if any bank violates the rule, then it gets penalized under the

Banking Regulation Act of 1949. Even for the old accounts, customers with banks and financial institutions need to visit the nearest branch and submit documents for KYC verification.

At present, the RBI has published new guidelines for the KYC policies. As per this new policy, every bank needs to classify the customers as per the risk categories. For example, high, medium, and low risk. Every bank should identify the customer’s identity with the help of independent and reliable data. Transactions of the customers are required to be monitored depending on the risk category of the customers. Periodic checking of the risk category of the customers is required and, the amendment should be made accordingly.

Type of KYC documents to be submitted by customers

Among other KYC documents, the two basic documents are passport size photo with identity proof and address proof. So, whether you are going to open a savings bank account, mutual fund, or insurance, any of the following six documents are required to be presented as identity proof. So, these documents are

• Pan card

• Aadhar Card

• Voter’s identity card

• Passport

• NREGA job card

• Driving license

If the address is not mentioned, in the above-mentioned documents, then you need to submit another acceptable document as address proof.

Now you can understand how important is KYC verification. It helps to establish the identity of the customers, and also it becomes easy to understand the nature of the activity of the customer.

Benefits of implementing KYC:

There are several benefits associated with the implementation of KYC.

• Restricting scammers from participating in ICOs for fulfilling malicious purposes

• Restriction of money laundering

• Ensuring the safety and protection of the assets of investors

• To avoid legal, reputational, or taxing issues

• For establishing strong credibility with the banks

The responsibility of checking and maintaining of the KYC documents remains with the risk containment unit of the banks and financial institutions.