In India, the term KYC isn’t that known by everyone, and it’s only in the past few years that it has started to be discussed among the masses. However, the not-so-informed minds generally lead to wrong discussions also at times, which can strike few misconceptions or further doubts. To get rid of that, we will be taking a brief look at KYC so that you clearly know what it’s.
What’s KYC & EKYC?
Know Your Customer (KYC) is an acronym that refers to the requirement for financial institutions to understand whomever customers are engaging with.
eKYC is an abbreviation for Electronic Know Your Customer (KYC). eKYC is a paperless, Aadhaar-based approach for completing Know Your Customer (KYC) requirements to begin participating in mutual funds. Aadhaar-based KYC has lately been permitted for mutual fund investments, either for the ease of investors or to minimize paperwork burdens on the regulatory body. Identity and address verification are done electronically with Aadhaar Authentication in the context of electronic Know-Your-Customer (eKYC) procedures.
A bank would normally fetch the following information for KYC from an individual:
- Identity: Consists of all that appears on an identifying paper, such as a person’s complete name, date and place of birth, nationality, residence address, and other personal information. Due to the general FATCA regulations, financial institutions in several nations also are required to determine whether or not you are a “US Person.”
- Political Identity: If the customer or a family member is still retaining a major political position, this information should be provided.
- Whether or not the client is associated with any fraudulent activity, extremism, or penalties.
- Source of funds: Obviously, the source of funds must be legitimate.
- The expected volume of the transaction: If the task involves an unusually significant sum of money, the Bank will need to confirm that the funding source is legitimate.
They must be aware of the following information for an entity:
- Beneficial Owner: The person or entity who has ultimate authority over this entity. Documentation of identification is necessary.
- Who has been acting as the Owner’s representative in order to operate this organization?
- Documentation of identification is necessary.
- Status in terms of politics: Is the firm a Government enterprise? (SOE).
- The relationship between criminality, extremism, and penalties.
- The source of the funds.
- The number of transactions that are expected.
Let us now have a look at the process, because we have covered the requirements:
When a new Customer joins, the Bank starts building a healthy relation with him or her and collects all of the necessary identity or company registration paperwork.
- The customer’s information would be verified upon a directory to see if it is associated with any leaders, lawbreakers, attackers, or other recognized individuals or organizations. If there are no matches, that is a good thing because they can proceed with current business relationships.
- In case, the officers determine that there are connections, they will begin the time-consuming process of validating if the records are genuine or fake. If there’s then the company now has to determine what to do with the client now that there is a match with the databases. They will most likely have to suspend their account and file a complaint with the competent authorities if the Customer is connected to illegal or terrorist activity.
- Another type of filtering is to keep track of almost all of the activities and look for anything out of the ordinary. If a transfer appears to be out of ordinary, the bank must investigate to ensure that almost nothing suspicious is taking place.
- Screening should be repeated. Since both the Client’s standing as well as the information might change and evolve, the screenings procedure will be continued on a periodic basis.
Importance of KYC:
Know Your Customer (KYC) is perhaps the most important step in every commercial banking firm’s credit research process. The fundamental aim of this activity is to avoid laundering, as well as to monitor risks and avoid financial crimes from occurring.
According to RBI regulations on Know Your Customer (KYC), the goal of KYC guidelines is to protect banking institutions or Financial Firms (FIs) from being utilized by organized criminals for laundering money or terror organization funding activities, whether intentional or unintentional, according to the guidelines. Banking and financial institutions can also benefit from Know Your Customer (KYC) protocols by getting to clearly understand their clients as well as their banking transactions, allowing them to handle risks more sensibly.
The Know Your Customer (KYC) process is a crucial aspect of the banking system. KYC regulations are non-negotiable, irrespective of whether they apply to consumer banking or corporate finance services.
As previously discussed, the Reserve Bank of India (RBI) has provided a list of papers that can be presented to banks and other financial institutions (FIs) for additional investigative work and approval.
The Know Your Customer (KYC) process is extensive and time-consuming due to heavy paperwork, regulatory inspections, and identity verification required. It could take up to 2-3 weeks to process, and it comes at a significant financial price to banks and other financial institutions.
Despite the fact that it is a legal requirement for banks and financial institutions, Know Your Consumer (KYC) generates a negative consumer perception. The technology adoption to streamline KYC processes by banks and financial institutions (FIs) has increased over the past year. Customer involvement and interaction should be kept to a minimum mostly through the KYC process, given the vast majority of information is available publicly. Inviting the consumer to provide the very same information will simply serve to prolong the procedure.
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The KYC scenario in India is still in its booming stage, and it may take a couple of years more to actually make every citizen understand the importance of it. The strict policies and actions being taken upon not submitting or updating KYC documents in time is what’s playing a major role in making the individuals opt for them at the earliest. A few years back in India the online financial wallet and similar services app used to work primarily on very few basic details.
For instance, a phone number and email were more than enough to register for Paytm’s wallet services. However, when RBI made KYC submission a strict and legal requirement even for such financial apps, it’s then that the idea of KYC documents got more spread across the masses. That being said, we hope that you would have understood the main details about KYC, and how it carries importance in today’s day and time.