What is KYC? Why is it important?

After a few decades of independence, India was confronted by several cases of financial fraud, money laundering, and tax evasion. The scenario had begun to harm the Indian economy to the extent that the government recognized the need to implement a policy that would aid in the reduction of such cases.

In light of this, the Reserve Bank of India (RBI) issued KYC guidelines. The KYC policy was enacted in accordance with the Banking Regulation Act of 1949. The following article will assist you in comprehending the meaning of KYC, its objectives, and the procedures involved.

What is KYC?

The full form of KYC is 'Know Your Customer.' It is a method by which various financial institutions can verify their customers’ legitimacy. Whether you want to open a bank account, invest in the stock market, park your money in fixed deposits, or apply for a loan, the financial institution will require you to provide certain personal or business documents to verify your identity.

According to the RBI, no financial institutions can engage in any financial transactions with their customers until the KYC process is completed.

Now that you know what KYC means, it's time to discuss the objective behind its implementation.

Significance of KYC

• KYC assists banks and other financial institutions in determining whether their clients are legitimate and their transactions are legal.
• KYC performed during the customer onboarding process aids in the prevention of terrorism financing, money laundering, and the execution of illegal corruption schemes.
• The financial institutions are responsible for adhering to the KYC standards. They face severe penalties if they fail to comply.
• It assists financial institutions in tracking 'Benami Accounts' and monitoring high-value monetary transactions.

When is KYC Mandatory?

Adherence to the KYC norms is necessary for the following situations.

KYC for banks

When you go to the bank, either in person or online through their website, to open a new account, invest in time deposits, or submit a loan application, you must first complete the KYC procedure. If you are already a customer of the bank, you do not need to go through this process. The reason is KYC is a one-time process, after which your information will be stored in your bank's database.

KYC for insurance and investments

There have been numerous instances in the past where people invested in life insurance schemes in order to convert their black money. To combat this, KYC is now required when purchasing insurance. If you want to purchase life insurance, auto insurance, or health insurance, you must first submit your KYC document for health insurance and life insurance.

Similarly, to open a DEMAT account for trading or investing in mutual funds, you must complete the KYC process through KRA (KYC Registration Agency).

What are the Documents Required for the Completion of the KYC Process?

According to the Indian government, there are a total of six documents that serve as Officially Valid Documents (OVD). These, along with the other essential KYC documents, include

Identity proof

• Unique Identification Number (UIN), such as voter ID card, Aadhaar card, driving licence, passport
• PAN card
• ID cards that are issued by universities or professional bodies like ICWAI, ICAI, bar council, etc.
• Photo ID cards – issued by the central or state government, statutory bodies, and regulatory authorities.

Address proof

• Ration card, passport, voter ID card, residential property's lease or registered sale agreement, or house property insurance paper
• Recent three months utility bills such as electricity bills, telephone bills, or gas bills
• Recent three-month bank passbook entries or account statement
• Attestation from a High Court or Supreme Court judge for a change of address

Proof of residence issued by the following

• Multinational foreign banks
• Scheduled commercial banks
• Scheduled co-operative bank
• Gazetted officer
• Notary public
• Legislative Assembly's elected representatives
• Parliament
• Government bodies
• Statutory authorities

Different Types of KYC Procedures

In India, there are six different types of KYC processes. These are

• Paper-based KYC

  This type of KYC procedure requires the submission of physical and self-attested copies of identification and address proof. To complete this type of KYC, you must go to a fund house branch, bank, or KRA and submit the necessary documents along with a signed application form.

• Aadhaar-based eKYC

  This retrieves your personal information from the Unique Identification Authority of India (UIDAI). You can complete this KYC by using Aadhar for biometric or OTP-based verification. It is necessary to link your mobile number to your Aadhar card for OTP-based verification. For biometrics, certified scanners are used.

• Digital KYC

  In this process, the KYC is performed using the geotagging of your OVDs and a live photograph. You can complete this process by uploading your KYC documents after filling out the online form.

   

• Offline KYC

  The offline process differs slightly from the paper-based KYC. In this process, you must visit the UIDAI website to obtain the Aadhaar Paperless Offline e-KYC document. Following that, you must consent to the use of the information on the document for KYC verification.

• Video KYC

  This is a completely paperless process in which, after submitting your KYC documents, you must record a video using the app provided by the financial institution. Following that, your information will be manually verified by the financial institution's representative.

• Central KYC

  Central KYC, also known as CKYC, refers to the process of verifying your personal information, after which your KYC records are maintained with the central repository. The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) is in charge of maintaining the central repository. Once your details are added to the CERSAI database, you will be allotted a 14-digit number that will allow you to access your information in future.

Conclusion

KYC is essential for you and the financial institution. It enables you to invest in any investment scheme, purchase a life insurance policy, or conduct any large transaction without difficulty. From the financial institution's perspective, it aids in the prevention of financial fraud and money laundering while avoiding hefty penalties from the RBI or other relevant regulatory bodies. To know more, please read the relevant articles at our website PNB MetLife

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