Illegal activities like money laundering and fraud can make financial transactions quite risky. To counter this, KYC was introduced in 2002 in India. The full form of KYC is ‘Know Your Customer’ or ‘Know Your Client’. KYC refers to the process of authenticating and verifying the documents linked to the identity and address of customers before allowing them to avail any services. Once the KYC verification is complete, a unique number/code is assigned by the Central KYC Records Registry known as the Know Your Customer/Client Identifier.
In 2004, the Reserve Bank of India (RBI) made it mandatory for banks, financial institutions, and intermediaries to carry out KYC verification of all their old and new customers. In doing so, the RBI ensured that all transactions are carried out after careful assessment of the identity of a customer, which in turn will help prevent fraud. Soon, other regulatory bodies also made it mandatory to complete KYC verification for all customers and clients.
The full form of KYC is ‘Know Your Customer. It is a process carried out to verify your identity when opening new accounts with certain service providers. For financial services, the KYC process is mandatory and is an important way in which institutions verify the identity of their customers.
Simply put, KYC helps check how genuine a customer is. As per the RBI, the KYC process has been initiated in accordance with the Prevention of Money Laundering Act, 2002. After this, the RBI has mandated all financial institutions to conduct KYC checks for all their new and existing customers.
Knowing the KYC meaning helps, as it offers insight into the importance of the process. With increasing rates of financial crime and fraudulent activities, it is vital to conduct the KYC process.
As a part of the KYC documentation, you have to submit certain documents as mentioned below:
Proof of Identity (Any one): Aadhaar card, PAN card, Voter ID, Driving licence etc.
Proof of Address (Any one): Aadhaar card, Passport, Utility bills, Ration card etc.
Banks can reject your application in case they do not match the required KYC criteria. Note that KYC check is a regular ongoing process conducted by financial institutions.
KYC is needed to conduct any kind of financial transaction meaning that if you want to open a savings bank account, avail the benefits of a fixed deposit (FD) and third-party wallet, and initiate mutual fund transactions, you would need to complete the KYC process. In fact, as per the guidelines of the Securities and Exchange Board of India (SEBI), full KYC is now mandatory to open a Demat account or a stock trading account and avail the services of asset management companies and intermediaries.
From the above, you can clearly understand the meaning of KYC. Now, let’s focus on benefits of KYC:
Establishes the identity of a customer
Helps understand the nature of the financial activities of the customer
Monitors the activities of the customer that help in assessing the risk of money laundering
Protects lending institutions from losses and frauds that may arise from illegal transactions
Safeguards participants of various industries, as an individual’s financial portfolio as well as background information is provided
Offers a sense of security to the customer’s sensitive data through its in-depth verification procedure
Helps streamline the process of maintaining a close eye on any unauthorised activities taking place in the system
Builds trust between the financial institution and the individual, thereby improving client and supplier relationship
Simplifies the process of identification by handling personal data cautiously
Having understood the meaning of KYC, you can now dive into the basics of how a KYC process works.
An online KYC process includes three major steps that are listed below:
In the first step, a customer’s personal data is procured through a KYC form on an online portal that they prefer for their financial transactions.
The data collected has to be validated through the submission of relevant documents that will serve as substantial evidence to back the uploaded information.
After you have authenticated the data with the necessary documents, the information provided is examined to ensure that the documents provided are not fraudulent.
The verification can be done in the ways given below:
The data provided will be scanned using Optical Character Recognition (OCR) to extract necessary information such as address and identity proof. The information thus retrieved will be checked thoroughly for any anomalies.
In the absence of the Optical Character Recognition, the data will have to be entered manually on the online portal. The network’s Identity Verification (IDV) solution will check the data using the uploaded documents as reference.
An offline KYC process is quite similar to the online process mentioned above. The only major difference is that all the application forms and documents provided have to be submitted as physical copies. The offline KYC process takes about a week to achieve completion, meanwhile the online process takes a comparatively shorter time.
The KYC verification process can be completed by following any of the three ways mentioned below:
Aadhaar OTP-based KYC online verification can be done by following the process mentioned below:
Step 1: Visit the website of a bank, KYC Registration Agency, or fund house.
Step 2: Create your account by providing personal details.
Step 3: Enter your Aadhaar number and registered mobile number.
Step 4: Enter the OTP.
Step 5: Prepare a self-attested copy of your e-Aadhaar and upload it.
Step 6: Accept the declaration forms.
To complete online KYC verification via Aadhaar Biometric Authentication you need to follow the process mentioned below:
Step 1: Visit the website of a bank, KYC Registration Agency, or fund house.
Step 2: Follow the steps of Aadhaar OTP-based Online KYC as stated above.
Step 3: Choose the online biometric authentication option.
Step 4: An authorised representative will visit the given address to take your biometrics.
Step 5: Wait for your KYC approval.
KYC verification can be done offline by following the process mentioned below:
Step 1: Download the KYC form the website of a bank, KYC Registration Agency, or fund house.
Step 2: Fill in the form and mention the Aadhaar card and PAN details.
Step 3: Attach identity proof and address proof along with the application form.
Step 4: Visit the nearest KYC Registration Agency office. (You might be required to provide your biometrics).
Step 5: Submit the application form to an executive present there.
Step 6: Once the KYC application is submitted, you will get an application number. You can use this number to check the status of your KYC verification.
As stated in the introductory paragraph, banks are at constant risk of getting caught up in financial fraud which can result in monetary and reputational penalties. To mitigate the risk of money laundering and other fraudulent activities, banks need to run a background check.To put this into action, banks employ KYC services in order to validate the authenticity of a person/institution.
With financial crimes being committed every other day, it is imperative that the banks safeguard themselves against any such acts. Authentication of the customer’s identity plays a crucial role in banking, as the bank must verify whether the customer is who they claim to be. Such customer-onboarding procedures help identify and counter heinous acts like terrorism financing, money laundering and various other corruptive schemes.
Through the submission of documents and verification of the same, banks can ensure their safety as well as that of every other customer of the bank. If you fail to comply with the KYC procedure, heavy penalties shall be imposed.
The Government of India has a list of ‘Officially Valid Documents’ (OVDs) that can be submitted as proof for KYC verification. These documents are classified under the following categories:
Photo ID card
NREGA issued Job card
State/Central government issued ID Card
You can check this list of KYC documents here and submit them as proof of identity and proof of address. Post submitting the KYC documents, the financial institution can request you to share the documents again in a periodic manner, to update the KYC records. The periodicity of updating the KYC information is at the discretion of the bank and varies from one account type to another.
The KYC Verification procedure does not really have a standard eligibility criteria. For an offline KYC procedure you will be required to submit relevant documents. If you opt for an online or eKYC procedure, you must mandatorily submit an Aadhar number. When you offer your consent, the Unique Identification Authority of India (UIDAI) shares your Aadhar number with the financial organisation.
Earlier, the KYC procedure was complex and required you to submit hard copies of all the requested documents. However, the recent KYC policies have made the process extremely easy, quick and hassle-free. eKYC is a paperless and completely digitised process that allows you to complete the KYC process online. Most financial institutions today offer eKYC services.
There are various types of KYC depending on the verification procedure:
Aadhaar-based KYC verification can be done online. You can either opt for Aadhaar OTP-based online KYC or Aadhaar-based Biometric KYC. Do note that if you opt for this variant of KYC verification, you can invest only up to ₹50,000 in a mutual fund per year.
As the name suggests, this type of KYC verification is done offline. You can visit a KYC kiosk to complete the in-person verification (IPV). You can also call the KYC Registration Agency and request an executive to come to your home and carry out verification. There is no limit to the amount of money you can invest if you avail the in-person KYC verification service.
Under the centralised KYC procedure, you will be required to submit a CKYC form online only once. Additionally, you will have to upload copies of necessary documents as well. On submission, you will receive a unique 14-digit account number. The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) saves the data provided by you in their repository online.
One of the most exciting features of the CKYC is that, once you upload your information, you will not be required to submit your documents every time you wish to carry out a financial transaction. The 14-digit CKYC number will allow companies to access your documents for verification whenever necessary.
Some of the popular banks that offer KYC services include the State Bank of India (SBI), Axis Bank, HDFC Bank, RBL Bank, etc. You can opt for offline or online KYC services as per your convenience. If you wish to go digital, you can even avail eKYC services offered by these banks.
Know Your Customer (KYC) is the process of verifying the documents linked to the identity of a customer or client and helps to get an insight into that particular customer or client. KYC was introduced by the Reserve Bank of India to mitigate the risk of money laundering and other fraudulent activities. It is mandatory for all banks and financial institutions/intermediaries to complete KYC for all individuals transacting on their platforms. KYC verification can be done online, offline, or via Aadhaar-based biometric authentication.
To know your KYC status, you can use your application number or PAN card number on the application portal.
To update the KYC status periodically, you will have to provide a copy of the identity proof and a copy of the address proof, as mentioned in the list of Officially Valid Documents (OVDs) of the Government of India.
Yes, KYC is safe as it is carried out by designated KYC Registration Agencies (KRA).
No, you cannot make investments without completing your KYC registration. Once you have completed your KYC through any of the SEBI-approved entities, you are not required to immediately do another KYC. You might, however, be required to periodically update your KYC information.
Yes, KYC verification is completely free-of-cost
The main purpose of KYC is to help financial institutions from getting absorbed into illegal activities. Additionally, it facilitates trust by safeguarding sensitive information and thereby protecting the sanctity of a supplier-client relationship.