KYC in Banking: Know Guidelines, Objectives, and Major Compliance Rules by RBI
In today’s banking era, Know Your Customer (KYC) serves as a prime factor that ensures transparency, security, and trust. Reserve Bank of India (RBI) directs all banks to adhere to strict KYC rules to avoid abuse of the banking system for money laundering, terrorism financing, and other illicit purposes.
KYC creates the customer’s identity and residence address via prescribed documents. KYC ensures that funds entering the financial system are authentic and traceable.
KYC Objectives in Banking
The primary aims of using KYC procedures are:
- To confirm the real identity and address of the customer.
- To avoid abuse of the banking channels for illicit activities such as money laundering.
- To ensure compliance with the Prevention of Money Laundering Act (PMLA), 2002.
- To monitor suspicious cash transactions based on RBI-prescribed norms.
- To promote a transparent and secure financial environment.
RBI’s Role and Compliance Requirements
The Reserve Bank of India (RBI) requires all banks — public, private, regional rural, co-operative, and foreign — to strictly adhere to KYC guidelines.
Every bank must:
- Implement customer identification procedures for all account-based relationships.
- Perform constant due diligence on transactions to verify that they align with the customer’s profile.
- Report suspicious or high-value transactions to the authorities.
- Appoint a Principal Officer who is responsible for compliance and reporting according to law.
Key KYC Terms
Let us get an idea about some of the fundamental terms related to KYC:
1. Officially Valid Documents (OVD)
The following documents are accepted as valid proof of identity and address:
- Passport
- Driving License
- Aadhaar Card (Proof of Possession of Aadhaar)
- Voter ID Card
- NREGA Job Card (signed by government official)
- National Population Register Letter
- In case the OVD lacks the revised address, customers may temporarily provide:
- Utility bill (not two months old)
- Property tax receipt
- Pension Payment Order (PPO)
- Employer’s accommodation letter
2. Digital KYC
Digital KYC entails taking the live image of the customer along with his/her valid document, including geolocation (latitude and longitude), where offline verification cannot be done. This is done by a bank or regulated officer authorized by law.
3. Customer Due Diligence (CDD)
CDD entails identifying and verifying the customers and beneficial owners from credible, independent sources. It entails:
- Identification and verification of the customers.
- Understanding the purpose and nature of the relationship.
- Identification of beneficial owners in the event of third-party involvement.
4. Continuous Due Diligence
Banks have to continuously watch customer transactions and verify that these are consistent with the customer’s known business and risk profile. This alerts them to unusual or suspicious activity at an early stage.
Who Are Regulated Entities (REs)?
Regulated Entities as per RBI, which are required to adopt KYC norms, are:
- Scheduled Commercial Banks (SCBs)
- Regional Rural Banks (RRBs)
- Co-operative Banks
- Non-Banking Financial Companies (NBFCs)
- Asset Reconstruction Companies (ARCs)
- Payment System Providers (PSPs) and Prepaid Payment Instrument Issuers (PPIs)
KYC and the Law
Prevention of Money Laundering Act (PMLA), 2002 and PML Rules, 2005 mandate the compliance of KYC by all regulated institutions.
Non-compliance may result in penalties and enforcement action by RBI or other financial regulators.
Conclusion
KYC is not only a regulatory requirement — it’s the building block of secure, ethical banking. By making the customer transparent and keeping illegal financial dealings at bay, KYC reinforces India’s battle against financial crimes. All banks and financial institutions need to place strong emphasis on good KYC and due diligence practices in the interest of a safer economy.
