KYC in India: everything you need to know www.deekpay.com

What is KYC?

Know Your Customer (KYC) YesIndiaThe due diligence process undertaken by financial institutions 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 important for identifying the risks associated with a customer.

Reserve Bank of IndiaThe KYC Guidelines were introduced in 2002 to make it mandatory for regulated entities such as banks, insurance companies and stockbrokers to implement KYC processes. The core reason behind this requirement is to protect financial institutions from the following:

money laundering Terrorist financing Identity theft

KYC is more than just a regulatory requirement; it is an important part of India's financial infrastructure, which is becoming increasingly digitised. With strong KYC compliance, the financial system is better equipped to prevent fraud. Failure to comply with KYC regulations can result in aRBI, andSecurities and Exchange Board of India (SEBI) orInsurance Regulatory and Development Authority of India (IRDAI) and other regulators.

Recommended Reading:Reserve Bank of India RBI

Types of KYC in India

In India, there are several ways to implement Know Your Customer (KYC), the choice of which usually depends on the requirements of the organisation and the convenience of the customer. rbi has outlined a variety of KYC processes that are compliant with the regulations. the following are the main types. Below are the main types:

Entity KYC

This is the traditional form of KYC where the customer must visit the bank or financial institution in person to complete the verification process. During this visit, the customer submits self-certified copies of documents such as Proof of Identity (POI) and Proof of Address (POA). These documents are cross-checked against the details submitted in the customer's application form. This method is very time consuming as it requires the customer to be physically present and perform manual document verification.

Aadhaar-based eKYC

With the rise of digital identity systems, the Government of India has launched a programme based on the Aadhaar 's eKYC, which allows customers to use their Aadhaar number for digital identity verification. This method is paperless and can be done both online and offline.

Recommended Reading:What is the Aadhaar card in India?

Online Aadhaar eKYC: This involves verifying the identity of the customer through an OTP sent to the Aadhaar registered mobile number or 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 can be scanned by financial institutions to retrieve the required information.

Digital KYC

This method is completely paperless, but requires an official representative to be physically present with the client. The representative captures real-time images of the customer and his/her documents, which are geo-tagged and verified in real-time. This digital KYC data is then cross-checked against the customer's application details.

Video KYC

The video KYC process was introduced to make customer verification more seamless, especially during the COVID-19 pandemic. In this process, a financial institution representative verifies a customer's identity and documents via a live video call.

The representative takes images of the customer's identification and proof of address documents in real time. The video is then reviewed by another representative to ensure accuracy and compliance.RBI believes that this KYC model is fully compliant with regulations.

Central KYC (cKYC)

The centralised KYC (cKYC) process was introduced to simplify KYC verification between financial institutions. Under cKYC, customers are assigned a KYC identification number (KIN), which can be used by financial institutions to access the customer's KYC information from a centralised KYC registry. This eliminates the need for the customer to perform multiple KYC validations with different institutions.

Central KYC (cKYC)

The Centralised KYC (cKYC) system was introduced to eliminate the redundancy of multiple KYC verifications by different financial institutions. Prior to cKYC, customers had to go through a separate KYC process for each financial product they chose, even if they had previously completed KYC with another institution. cKYC Registry simplifies this process and makes it easier for both customers and financial institutions to complete.

What is cKYC?

cKYC is a centralised registry managed by the Central KYC Records Registry (CKYCR) under the Central Registry for Restructuring of Securitised Assets and Security Interests (CERSAI). It stores customers' KYC records in a centralised repository that is accessible to all participating financial institutions. Once a customer completes KYC with any financial institution, their KYC details are stored in this centralised database and they are assigned a KYC Identification Number (KIN).

How cKYC works:

KYC Submission: When a customer completes the financial institution's KYC process, the financial institution uploads their KYC documents (proof of identity and address) to the cKYC registry. KYC Identification Number (KIN): Upon successful verification, the customer will be issued a unique KYC Identification Number (KIN). This number can be used as a reference for future KYC verification with any participating organisation. Access by other institutions: When a customer applies for another financial product with another institution, that institution can use the customer's KIN to retrieve their KYC details. This eliminates the need for the customer to repeatedly submit KYC documents.

Advantages of cKYC:

Single KYC for multiple products: cKYC allows customers to go through the KYC process only once, even if they are applying for various financial products (bank accounts, insurance, mutual funds, etc.) with different organisations. Reduced redundancy: Financial institutions can save time and resources as they can access the customer's KYC information directly from the central registry instead of having to start the process from scratch. Enhanced customer convenience: Customers no longer need to provide duplicate KYC documents, making the onboarding process faster and smoother. Improved regulatory compliance: with cKYC, organisations can ensure compliance with the latest regulations as the central registry is updated regularly.

Integration with Aadhaar and PAN:

cKYC registry with Aadhaar and PAN Database integration to provide a more comprehensive KYC process. Customers providing Aadhaar or PAN details can further streamline their verification process as these numbers are linked to centralised KYC records.

Recommended Reading:What is an Indian PAN card?

Video KYC

In an increasingly digitalised world, financial institutions in India have embraced Video KYC as a convenient and secure method of customer verification. Introduced by the Reserve Bank of India (RBI) to support remote customer onboarding, Video KYC provides 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 where a customer's identity is confirmed through a live video call with a representative of the bank or financial institution. This method eliminates the need to physically visit a branch, making it a convenient option for both the customer and the financial institution.

Video How KYC works:

Initial verification: Before a video call can begin, the customer is subjected to Aadhaar eKYC and PAN verification checks. This ensures that the initial data matches the customer's identity before scheduling a video call. Live video call: During the video call, an official representative verifies the customer's Proof of Identity (POI) and Proof of Address (POA). The customer is required to present their original proof of identity document on camera. Live Detection: As a security measure, the system uses live 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 compares the customer's face with the photo in the document he or she provides to ensure authenticity. Optical Character Recognition (OCR) is also used to extract and verify details from documents. Geotagging: Geotagging is added to the customer's location during the call to ensure they are within the geographic range allowed by the financial institution. Review process: After the call, another representative reviews the recorded video and captures data for further validation. Once approved, the customer's KYC is marked as complete.

Advantages of Video KYC:

Convenience: Customers can complete KYC from the comfort of their homes without having to travel to a branch, which is very convenient for individuals in remote areas or with busy schedules. Faster onboarding: Video KYC dramatically reduces the time it takes to complete the verification process, allowing financial institutions to onboard customers faster. Regulatory Compliance: RBI has approved Video KYC as a fully compliant customer verification method, ensuring that all guidelines are adhered to without compromising on security. Cost Effectiveness: By eliminating the need for submission of physical documents 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 encrypted end-to-end and customer data is securely stored to prevent unauthorised access. In addition, the use of biometric authentication and live detection further enhances the security of the process.

Re-KYC

The Re-KYC process is designed to ensure that customer information is always accurate and up-to-date. The Reserve Bank of India (RBI) requires financial institutions, especially banks, to update customer details on a regular basis, especially for accounts categorised as high risk. This helps organisations to reduce the risks associated with money laundering, identity theft and other fraudulent activities.

Why do you need Re-KYC?

Customer information (such as address, contact details or financial status) may change over time. In order to comply with anti-money laundering (AML) guidelines and to ensure the security of the financial system, organisations must validate and update customer data on a regular basis. Getting to know your customers again helps:

Fraud prevention: By keeping customer details up to date, financial institutions can reduce the risk of fraud or account abuse. Maintaining Compliance: Financial institutions are required to comply with the RBI regulations, which mandates regular updation of KYC details based on the risk profile of the customer. Enhance customer security: Regular updates help protect customers from unauthorised transactions or identity theft.

Re-KYC risk categories and intervals

RBI categorises customers into three risk types 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 industries with a high risk of fraud. Medium Risk Customers: Must Re-KYC every 8 years. These customers are moderate risk and may include small businesses or individuals with moderate transaction volumes. Low Risk Customers: Re-KYC is required every 10 years. This category typically includes individuals with minimal financial activity, such as retirees or individuals with low transaction volumes.

Re-KYC process:

Notification to customers: The financial institution sends reminders to customers who need to update their KYC details. These notifications are sent via email, SMS or other registered communication channels.

Submission of Updated Documents: If there are any changes in the customer's details, updated Proof of Identity (POI) and Proof of Address (POA) documents must be submitted. If there are no changes, the customer can submit a self-declaration stating that the information remains the same.

Digital Re-KYC Option: For low-risk customers, many banks offer the option of completing Re-KYC digitally through online banking, mobile apps or ATMs. This reduces the need to visit a branch in person.

Processing: After submitting the documents, the institution will process the updated KYC details and revalidate the account within 10 days.

What happens if Re-KYC is not completed?

If a customer fails to comply with Re-KYC requirements, the financial institution may impose a partial freeze on the account. This means:

Initially, credits were allowed but debits were restricted. If the re-KYC is not completed within a certain period of time, credits and debits are not allowed, resulting in an invalid account. To reactivate the account, the customer 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 person or business they are dealing with. Depending on the type of customer (Individual, Minor, Non-Resident Indian (NRI) or Business), the required documents may vary.

KYC Documents Required for Individuals

For individual customers, RBI has specified a set of Officially Valid Documents (OVDs) that can be used as Proof of Identity (POI) and Proof of Address (POA). These documents include:

Aadhaar Card: A unique government-issued identity card linked to biometric data. Passport: A widely accepted proof of identity and address for residents and non-residents of India. Voter's Identity Card: Issued by the Election Commission of India as a valid proof of identity and address. Driver's Licence: Another commonly accepted document that contains the customer's photograph and address. PAN Card: Mainly used for financial transactions, but also requires KYC, especially for tax-related purposes.

If any of the documents submitted contain both identity and address details, no other documents need to be submitted. However, if the 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 managing the account. If the minor can operate the account independently (usually for minors over the age of 10), they must provide KYC documentation, just like any other individual.

KYC for Non-Resident Indians (NRIs)

For NRIs, due to their non-resident status, the KYC process involves other documents. which NRIs need to submit:

Passport: as proof of identity and proof of address. Residence visa: This proves the NRI's legal status in a foreign country. Proof of foreign address: Any document that verifies his or her address outside India, such as a utility bill, bank statement or official letter from an employer.

In addition, these documents need to be certified by an Indian embassy, notary public or correspondent bank with a verifiable signature.

KYC for businesses

KYC requirements for business entities vary by business type. The following is a breakdown:

Partnerships: Partnership deed, certificate of incorporation and PAN are required to be filed. KYC of individual partners and authorised signatories must also be completed.

Ownership Issues: The owner must submit any two of the following documents as proof:

registration certificate Local Municipal Licence Most recent tax return Utility bills within the last two months Professional licences, such as a chartered accountant's licence or import/export documents.

Companies: Companies are required to submit their Certificate of Incorporation, Memorandum and Articles of Association, Board Resolution authorising the operation of the account and KYC details of the directors and authorised signatories.

Proof of Acceptable Address (POA) document

If the identification document does not contain an address, a separate Proof of Address (POA) is required. Typically accepted POA documents include:

Utility bills: electricity, water, gas and telephone bills within the last three months. Bank statements: issued within the last three months. Lease agreement: Registered residential lease or sales agreement. Government-issued letter: For example, a letter confirming an address from a local municipality or government department.

concluding remarks

The KYC process is an important part of India's financial regulatory framework. Ensuring accurate and up-to-date KYC documentation helps financial institutions reduce risk, prevent fraud and maintain regulatory compliance. India has significantly modernised its customer verification process through the use of traditional and digital KYC methods, including Aadhaar-based eKYC, video KYC and central KYC.

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