What is KYC? Why is it important in Indian banks?

KYC stands for Know Your Customer.

The Reserve Bank of India requires banks to making reasonable efforts to determine the true identity and beneficial ownership of accounts, source of funds, the nature of customer’s business, reasonableness of operations in the account pertaining to the customer’s business. This in turn helps the banks manage their risk.

According to RBI, KYC has two components Identity and Address. Especially, the address of individuals and entities keep changing from time to time. So, the banks may collection additional information in this regard.

There are four major aspects on which the banks have been advised to frame their KYC policies.

1. Customer Acceptance Policy;
2. Customer Identification Procedures;
3. Monitoring of Transactions; and
4. Risk management.

The RBI has issued the guidelines under Section 35A of the Banking Regulation Act, 1949 and Rule 7 of Prevention of Money-Laundering Rules, 2005.

The guidelines for KYC have been influenced by the recommendations made by Financial Action Task Force (FATF) on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT).

Overall, KYC norms have drastically changed the way banks in India manege their clients and the relationship with their clients.