Introduction of Bank

The term bank means Accepting for the purpose of lending or investment of
deposits of money from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft or order.
Banking is an institution for lending, borrowing, exchanging issuing or
safeguarding money.
The term bank is derived from the French word, Banco which means the
changers bench or desk on which European moneylenders used to exhibit the coins of
different countries for the purpose of lending or exchanging.
The developed of banking is evolutionary in nature. A Bank performs a
multitude of functions and services which cannot be put into a single definition. A
bank may mean different things to different people. For some it is a storehouse of
money, for others an institution of funding for finances and yet for many others an
institution of funding for finance and yet for many others bank is a depository for
their savings.
The banking system in India is based upon the British Banking System which
is largely branch banking. Commercial Banks in Indian were during the latter half of
the 19th century. Three Presidency Bank dominated the banking sector that is Bank of
Bengal, Bank of Bombay and Bank of Madras. These banks were setup by a special
charter of the British Government.
The above three banks were later amalgamated to from one bank called, the
Imperial Bank of India under the Imperial Bank of India Act, 1920. The Imperial
Bank carried on the business of commercial banking as well as managed the public
debt office of the Central and the State Government. The government continues to
handle the issuance of currency notes and coins until the Reserve Bank of India was
set up in 1935.

The second half of the 19th century saw the establishment of a number or
private-sector banks such as Bank of Baroda, Allahabad Bank, and Punjab National
Bank. At that time there was an indiscriminate growth of smaller banks in the private
sector. These banks were set up by merchants and traders who combined trading with
banking. These led to a series of failures of banks.
The bulk of money transaction today involves the transfer of bank deposits.
Depository institutions, which we normally call bank, are at the very centre of our
monetary systems. Thus a basic knowledge of the banking system is essential to an
understanding of how money works.
The monetary base is created by the fed when it buys securities for its own
portfolio. Bank deposits themselves are not base money, rather they are claim on base
money. A Bank must hold reserves of base money in order to meet its depositors cash
withdrawals and to cover the checks written against their accounts. Reserves comprise
a banks vault cash and what it holds on deposit at the Fed, knows as fed funds. The
Fed requires banks to maintain reserves of at least 10% of their demand deposits,
averaged over successive 14 day periods.
When a depositor writers a check against his account, his bank must surrender
that amount in reserves to the payees bank for the check to clear. Reserves are
constantly moving from one bank to another as checks are written and cleared. At the
end of the day, some banks will be short of reserves and others long. Banks
redistribute reserves among themselves by trading in the Fed funds market. Those
long on reserves will normally lend to those short. The annualized interest rate on
interbank loans is known as the fed funds rate, and varies with supply and demand.
The reserve requirement applies only to the banks demand deposits not its
term or saving deposits. Thus when a bank depositor converts funds in a demand
deposits into a term or saving deposit, he frees up the reserve that were held against
the demand deposits. The bank can then use those reserves in several ways. For
example it can hold them to back further lending, buy interest earning Treasury
Securities or lend them to other banks in the Fed funds market.
The Supply of reserve changes whenever base money enters or leaves the
banking system. This occurs when the Fed buys or sells securities or when the Public
2

deposits or withdraws cash from banks. The demand for reserves change, with occurs
when banks increase or decrease aggregate lending. The Fed controls the Fed controls
the Fed funds rate by adjusting the supply of reserve to meet the demand at its target
interest rate. It does so by adding or draining reserve through its open market
operations.
The Fed funds rate effectively sets the upper limit on the cost of reserves to
banks, and thus determines the interest rate that banks must charge the public for
loans. Bank interest rate influences the demand for loans, and thereby the net amount
of the bank lending. That in turn determines the liquidity of the private sector. Which
is important in terms of aggregate demand and inflation any pressure. The selection
and of the Fed funds rate is the key monetary policy instrument of the Fed.
The Indian banking sector is broadly classified into 2 parts in that 1.scheduled
banks and 2.non-scheduled banks. The scheduled banks are those included under the
2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are
further classified into: nationalized banks. State Bank of India and its associates
Regional Rural Banks (RRBs) foreign banks; and other Indian private sector banks.
The term commercial banks refers to both scheduled and non-scheduled commercial
banks regulated under the Banking Regulation Act, 1949.
Generally banking in India is fairly mature in terms of supply, product range
and reach-even though reach in rural India and to the poor still remains a challenge.
The government has developed initiatives to address this through the State Bank of
India expanding its branch network and through the National Bank for Agriculture
and Rural Development with facilities like microfinance
A bank is a financial institution that accepts deposits from the public and
creates credit. Lending activities can be performed either directly or indirectly through
capital markets. Due to their importance in the financial system and influence on
national economies, banks are highly regulated in most countries. Most nations have
institutionalized a system known as fractional reserve banking under which banks
hold liquid assets equal to only a portion of their current liabilities. In addition to
other regulations intended to ensure liquidity, banks are generally subject to minimum
capital requirements based on an international set of capital standards, known as the
Basel Accords.
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Features of a Bank

Has gained popularity due to Simplicity of procedure approachability.

Can be opened with a minimal amount.

Cheque book issued by the bank after the account has been opened for making
withdrawals.

Profit computed on flexible or variable rates on a monthly basis.

No restrictions on withdrawals.

Notice/intimation prior to sizeable withdraws insisted by some banks.

Part accounted for in the banks financial statements as Current and Part as
Term liabilities.

Functions of Commercial Bank

Commercial Banks have to perform a variety of functions which are common

to both developed and developing countries. These are known as General Banking
functions of the commercial banks. The modern banks perform a variety of functions.
Commercial banks are those institutions which conduct the business purely on
profit motive. Commercial banks receive surplus money from the people who are not
using it and lend to those who need it for productive purpose.
A commercial bank is a dealer in short and medium-term credit. It borrows money
from a group of people at a lower rate of interest and lends to the other group of
people at some higher rate of interest. The difference between the two rates of interest
is the profit of the bank. These can be broadly divided into two categories such as.

1. PRIMARY FUNCTIONS
2. SECONDARY FUNCTIONS

1] Primary Functions

A] Accepting of Deposits.
B] Advancing of Loans.

2] Secondary Functions

A] Agency Functions
B] General Utility Services
A] Accepting of Deposits:

Accepting deposits is the most important function of all commercial banks.

Deposit is the basis of commercial banks' activities. In order to attract the general
public to deposit their surplus money in the bank, the bank offers to deposit money in
any of the following accounts.

a] Time Deposits:

1. Fixed Deposits
2. Recurring Deposits
3. Cash Certificates
b] Demand Deposits:

1. Saving Account
2. Current Account

a] Time Deposits:-

These are deposits repayable after a certain fixed period. These deposits are
not withdrawal by cheque draft or by other means. It includes the following.

1. Fixed Deposits Account

There are deposits repayable after a certain fixed period. These deposits are
not withdrawal by cheque draft or by other means. These deposits can be withdrawn
only after expiry of certain period say 3 years, 5 years or 10 years. The banker allows
a higher rate of interest depending upon the amount and period of time previously the
rates of interest payable on fixed deposits were determined by Reserve Bank.
Presently banks permitted to offer interest as determine by each bank. However, banks
are not permitted to offer different interest rate to different customers for deposits of
same maturity period, except in the case of deposit of Rs. 15 lakes and above.
These days the banks accept deposits even for 15 days or one month etc. In
times of urgent need for money, the bank allows premature closure of fixed deposits
by paying interest at reduced rate. Depository can also avail of loans against Fixed
Deposits. The Fixed Deposits Receipt cannot be transferred to other persons.

2. Recurring Deposits Account

This account is meant for creating saving account among the people at regular
in travel a fixed amount is to be deposits the account holder gets high rate of interest
and low with drawl is allowed.
In recurring deposits, the customer opens an account and deposit a certain sum
of money every month. After a certain period, say 1 year or 3 years or 5 years, the
accumulated amount along with interest is paid to the customer. It is very helpful to
the middle and poor sections of the people. The interest paid on such deposits is
generally on cumulative basis. This deposits system is a useful mechanism for regular
savers of money.

b] Demand Deposits:-

These are the deposits which may be withdraws by the depositor at any time
without previous notice. It is withdrawal by cheque or draft. It includes the following.

1. Saving Account

The savings deposits account promotes thrift among people. The savings
deposits can only be held by individuals and non-profit institutions. The rate of
interest paid on saving deposits is lower than that of time deposits. The saving
account holder gets the advantage of liquidity and small income in the form of
interest.
But there are some restrictions on withdrawals. Corporate bodies and business
firms are not allowed to open Saving Bank Accounts. Presently interest on SB
Accounts is determined by RBI. It is 4.5 per cent annum. Co-operative bank are
allowed to pay an extra 0.5 per cent on its savings bank deposit.

2. Current Account

These accounts are maintained by the people who need to have a liquid
balance. Current account offers high liquidity. No interest is paid on current deposits
and there are no restrictions on withdrawals from the current account.
These accounts are opened by business firms, institutions and co-operative
bodies. Nowadays, banks are designing and offering various investment schemes for
deposit of money. These schemes vary from bank to bank.

It may be stated that the banks are currently working out with different
innovative schemes for deposits. Such deposits accounts offer better interest rate and
at the same time withdrawal able facility also. These schemes are mostly offered by
foreign banks. In USA, Current Account is known as Checking Accounts as a
cheque is equivalent to check in America.

B] Advancing of Loans:-

Advancing Loans the second important function of commercial bank is

advancing loans to the individuals, businessmen and government bodies. The loans
are granted out of deposited money. Generally, a commercial bank grants short-term
loans.

Overdraft

Overdraft is a short-term loan granted by commercial banks to their account

holders. Under this type of loan, the customers are allowed to draw more than what
they have in their current account up to a certain limit. The excess amount overdrawn
is called overdraft.
This facility is given to current account holders only. This is an arrangement
with the banker thereby the customer is allowed to draw money over and above the
balance in his/her account. This facility of overdrawing his balance is generally prearranged with the bank up to a certain limit. It is a short-term temporary fund facility
from bank and the bank will charge interest over among the overdrawn. This facility
generally available to business firm and companies.

Loans and Advances

It includes both demand and term loans, direct loans advances given to all
types of customers mainly to businessman and investors against personal security of

goods of movable or immovable in nature. The interest is charged for the full amount
whether he withdraws the money from his account or not.
Loans Commercial banks grant loans for short and medium-term to
individuals and traders against the security of movable and immovable property. The
amount of loan is credited to the borrower's account. Interest is charged on the entire
loan sanctioned.

2] Secondary Functions

The Secondary Functions of the banks consist of agency functions a general

utility functions.

A] Agency Functions

The banks render important services as agent on behalf of their customers in

return for a small commission. When banks act as agent, law of agency applies. The
agency functions or services of bank are as follows.

Collection of Cheque
As an agent, the bank collects cheques, drafts, promissory notes, interest,
dividends etc., on behalf of its customers and credits the amounts to their accounts.
Commercial banks collect the cheque, bills of exchange, etc. on behalf of their
customers. Banks collect local and outstation cheque and bills of exchange through
clearing house facilities provided by the central bank

B] General Utility Services

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Commercial bank performs different utility functions for their customers.

When bank performs utility functions, it does not act as an agent of the customers.
The general utility functions are as follows.

Payment Mechanism or Money Transfer

Transfer of funds is one of the important functions performed by commercial

banks. Cheque and credit cards are two important payment mechanisms through
banks.
Electronic Transfer of funds is also known as Cheque less Banking where
funds are transferred through computers and sophisticated electronic system by using
code words. They offer Mail Transfer, Telegraphic Transfer [TT] facility also.

Credit Cards

Banks have introduced credit card system. Credit cards enable a customer to
purchase goods and services from certain specified retail and services establishments
up to limit without making immediate payment. In other words, purchases can be
made on credit basis on the strength of the credit card.

Role of bank

Banking system plays a very significant role in the economy of a country. It is

central to a nations economy as it caters to the needs of credit for all the sections of
the society. Money-lending in one form or the other has evolved along with the
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history of mankind. Even in the ancient times, there are references to the moneylenders, in the form of sahukars and zamindars who lend money by mortgaging the
land property of the borrowers.
Towards the beginning of the 20 century, with the onset of modern industry in
our country, the need for government-regulated banking system was felt. The British
government began to pay attention towards the need for an organized banking sector
in the country and the Reserve Bank of India was set up to regulate the formal
banking sector in the country. Ever since they were nationalized in 1969, banks have
been playing a major role in the socio-economic life of the country. They have to act
not only as purveyors of credit, but also as harbingers of social and economic
development through a variety of enterprises, many of which may tiny and yet
capable of generating productive energies.
The Industrial Development Bank of India (IDBI) is the premier institution in
India purveying financial assistance to the industrial sector projects. It provides direct
financial assistance to the industrial concerns in the form of granting loans and
advances, and purchasing or underwriting the issues of stocks, bonds or debentures.
The creation of the Development Assistance Fund is the special of the IDBI. The
Fund is used to provide assistance to those industries which are not able to obtain
funds mainly because of heavy investment involved or low expected rate of returns.
Assistance from the Fund requires the prior approval by the government. Apart from
this, the IDBI even gives guidance to start a business.

KYC (KNOW YOUR CUSTOMER)

KYC Stands for Know Your Customer. Know your customer (KYC) policy
is an important step developed globally to prevent identity theft, financial fraud,
money laundering and terrorist financing. The objective of KYC is to enable banks to
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know and understand their customers better and help them manage their risks
prudently.
KYC is a regulatory and legal requirement and KYC policies are framed by
respective banks incorporating the key elements following the Reserve Bank of
Indias directive in 2004 such as Customer Acceptance Policy, Customer
Identification Procedures, Monitoring of Transactions and Risk management
The process of KYC entails identifying the customer and verifying the identity
by using reliable and independent documents or information. While opening different
accounts, the Bank collects documents to identify and verify the customer as required
under the existing laws to demonstrate that it has performed the existing KYC
procedures.
KYC (Know Your Customer) is a framework for banks which enables them to
know / understand the customers and their financial dealings to be able to serve them
better.
Banking operations are susceptible to the risks of money laundering and
terrorist financing.

Therefore banks are advised to follow certain customer

identification procedure for opening of accounts and monitoring transactions of a

suspicious nature for the purpose of reporting it to appropriate authority.
Reserve bank of India has advised banks to make the Know Your Customer
(KYC) procedures mandatory while opening and operating the accounts and has
issued the KYC guidelines under section 35 (A) of the banking regulation Act, 1949.
Any contravention of the same will attract penalties under the relevant
provisions of the Act. Thus the bank has to be fully compliant with the provisions of
the KYC procedures.
The objective of KYC/AML/CFT guidelines is to prevent banks from being
used, intentionally or unintentionally, by criminal elements for money laundering or
terrorist financing activities. KYC procedures also enable banks to know/understand
their customers and their financial dealings better which in turn help them manage
their risks prudently.
KYC is an acronym for Know your Customer a term used for Customer
13

identification process. It involves making reasonable efforts to determine, the true

identity and beneficial ownership of accounts, source of funds, the nature of customers
business, reasonableness of operations in the account in relation to the customers business, etc
which in turn helps the banks to manage their risks prudently. The objective of the KYC
guidelines is to prevent banks being used, intentionally or unintentionally by criminal
elements for money.
To prevent the possible misuse of banking activities for anti-national or illegal
activities, the RBI has given various directives to banks: Before giving any finance at
branch level, making sure that the person has no links with notified terrorist entities
and reporting any such 'suspect;' accounts to the government. Regular 'Internal Audit'
by internal and concurrent auditors to check if the KYC guidelines are being properly
adhered to or not by banks. Most important, banks must keep an eye out for all
banking transactions and identify suspicious ones. Such transactions will be
immediately reported to the bank's head office and authorities and norms shall also be
laid down for freezing of such accounts.

History of KYC

The man purpose of KYC norms was to restrict money laundering and terrorist
financing when it was introduced in late the 1990s in the United States. The US
government turned very strict after 9/11 and all regulations were finalized before 2002
14

for KYC.
The US has made changes in its major legislations -- Bank Secrecy Act, USA
Patriot Act --to make KYC norms really effective for the banking sector.
Taking a leaf out of the US book, the Reserve Bank of India too directed all
banks to implement KYC guidelines for all new accounts in the 2nd half of 2002.
For existing accounts, imposing KYC norms was a little difficult, so the RBI
issued guidelines for the same at the end of 2004.
The Reserve Bank of India (RBI) had issued a directive that banks should
draw up a time bound action plan for obtaining customer identification documents
under new KYC norms in respect of all the old accounts and complete the entire
exercise by 31.12.2004. Accordingly, the Zones/Branches had been advised to comply
with the RBI directive as per the action plan. All the Zones had confirmed compliance
of the KYC norms for all the accounts based on branch confirmations and the final
certificate was furnished by the Bank to the RBI in April, 2005.

RBI Follow-up:

1. We have, thereafter, been time and again reiterating the importance of

extremely careful compliance of KYC guidelines.
2. In spite of these instructions and compliance certificates, instances of noncompliance of KYC norms have been pointed out by the RBI Auditors and
Internal/Concurrent Auditors.
3. At every quarterly meeting, the RBI has been expressing serious concern over
the continue instances of non-compliance of KYC guidelines.
4. They had categorically advised that the Bank should adopt zero tolerance
policy in respect of deviation from adherence to KYC norms in all accounts
including existing accounts and confirm compliance to them.

KYC Test Checks:

15

In the above scenario, as per the directions of the Top Management, Inspection
& Audit Department has carried out test checks at select Branches in each Zone to
check the extent of implementation of KYC norms.
The Auditors were advised to select all types of accounts over a period and
submit their findings.
It means that the Branches are not complying with the KYC guidelines
extremely careful and the requirement of KYC compliance is not being taken
seriously by some branches.

KYC Compliance Measures:

The primary objective of KYC guidelines is to prevent banks from being used
by criminal elements for money laundering and terrorist activities and avert
occurrence of frauds.
KYC procedures also enable banks to understand their customers and their
financial dealings better and thereby facilitating prudential management of risks.
Following are measure for achieving full KYC compliance in all the existing
accounts as per the RBI directives:

Public Notice in News Papers:

RBI then published a general notice in newspapers in English and Hindi at the
national level inviting the customers attention to the need to urgently comply with
the KYC requirements. In order to ensure that all the territories are covered, RBI also
arranged to publish the notice in local newspapers of different States. Branches should
16

display this Notice prominently in the Branch premises and confirm to their respective
Zonel Offices of having done so.

Identification of KYC Non-compliant Accounts:

The task of identifying accounts requiring KYC compliance at each Branch

shall be carried out by the Zones on priority. In order to ensure that the exercise is
done diligently, the scrutiny of accounts to identify the KYC non-compliant accounts
at a Branch shall be done by Officer/deputed from a different Branch.
Subsequent verification of KYC compliance of the accounts is completed
within one month from the date of this Circular. (Now days it takes 8 to 9 days). The
deputed Officers should verify all types of accounts at the Branches.
The documents are required to be obtained for all customers in case of every
individual, every Proprietor, each Joint account holder/ Partner/ Director/ Trustee/
HUF Member, each other Authorized signatory if any. Upon completion of the task,
the Officers should hand over a copy of the Report to the Branch Head with a copy to
the respective Zonel Office.

Branch Notice to KYC Non-compliant Customers:

Once the accounts are identified for KYC non-compliance and the nature of
deficiency is established, Branches shall address a suitable communication to each
such identified account holder requesting for submission of the necessary documents
for compliance of the KYC requirements.
17

The Branch should ensure that any change of address communicated by the
customer is properly recorded and the notice is sent to the correct address.
The customers may be given seven days time for complying with the Banks
requirements. In case the KYC norms are not complied within the period stipulated
therein, the account/s shall be frozen.
The Notice should be sent by Registered Post A.D. and if it undelivered then
the Branches should make efforts to contact the customers and send fresh Notices to
them at the correct address so as to provide a fair opportunity to each customer for
compliance with KYC norms, before freezing the accounts.

CUSTOMER

For the purpose of KYC policy, a Customer is defined as:

A person or entity that maintains an account and/or has a business relation

with the bank.
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One on whose behalf the account is maintained (i.e. the beneficial owner);
Beneficiaries of transactions conducted by professional intermediaries, such as
Stock Brokers, Chartered Accountants, Solicitors etc. as permitted under the

law, and
Any person or entity connected with a financial transaction which can pose
significant reputational or other risks to the bank, say, a wire transfer or issue
of a high value demand draft as a single transaction.

Banks should keep in mind that the information collected from the customer
for the purpose of opening of account is to be treated as confidential and
details thereof are not to make known for cross selling or any other like
purposes.

Banks should, therefore, ensure that information sought from the customer is
relevant to the perceived risk, is not intrusive, and is in conformity with the
guidelines issued in this regard.

Any other information from the customer should be sought separately with
his/her consent and after opening the account.

Banks should ensure that the provisions of Foreign Contribution Regulation)

Act, 1976 as amended from time to time, wherever applicable are strictly
adhered to.

Situations When KYC is required

KYC has to be followed by every financial institute while dealing with customers.
KYC procedure needs to be adhered to by a customer during following instances:

While opening an account in a bank

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While applying for a credit card or loan

While opening a subsequent account

Opening a locker facility

When there are not enough documents with the bank in existing account

When there are changes in signatories, beneficial owners, etc

When the bank feels it necessary to obtain additional information from

existing customers based on conduct of the account

While investing in a mutual fund

Financial institutes may ask for a mandatory KYC process in other instances
too

KYC Policy

Banks should frame their KYC policies incorporating the following four key
elements:

Customer Acceptance Policy;

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Customer Identification Procedures;

Monitoring of Transactions; and

Risk Management.

1. CUSTOMER ACCEPTANCE POLICY

a) Every bank should develop a clear Customer Acceptance Policy laying down
explicit

criteria for acceptance of customers. The Customer Acceptance Policy must

ensure that explicit guidelines are in place on the following aspects of customer
relationship in the bank.
i.
ii.

No account is opened in anonymous or fictitious/benami name(s);

Parameters of risk perception are clearly defined in terms of the nature of
business activity, location of customer and his clients, mode of payments,

iii.

volume of turnover, social and financial status etc.

Documentation requirements and other information to be collected in respect
of different categories of customers depending on perceived risk and keeping
in mind the requirements of PML Act, 2002 and instructions/guidelines issued

iv.

by Reserve Bank from time to time;

Not to open an account or close an existing account where the bank is unable
to apply appropriate customer due diligence measures i.e. bank is unable to
verify the identity and /or obtain documents required as per the risk
categorisation due to non cooperation of the customer or

v.

Circumstances, in which a customer is permitted to act on behalf of another

person/entity, should be clearly spelt out in conformity with the established
law and practice of banking as there could be occasions when an account is
operated by a mandate holder or where an account is opened by an
intermediary in fiduciary capacity.

b) Banks should prepare a profile for each new customer based on risk categorisation.
The customer profile may contain information relating to customers identity,
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social/financial status, nature of business activity, information about his clients

business and their location etc.
c) It is important to bear in mind that the adoption of customer acceptance policy and
its implementation should not become too restrictive and must not result in denial of
banking services to general public, especially to those, who are
financially or socially disadvantaged.

2. CUSTOMER IDENTIFICATION PROCEDURE (CIP)

a) Customer identification means identifying the customer and verifying his/her

identity by using reliable, independent source documents, data or information.
Banks need to obtain sufficient information necessary to establish, to their
satisfaction, the identity of each new customer, whether regular or occasional,
and the purpose of the intended nature of banking relationship. For customers
that are natural persons, the banks should obtain sufficient identification
data to verify the identity of the customer, his address/location and also his
recent photograph.
For customers that are legal persons or entitles, the bank should
i.

Verify the legal status of the legal person/entity through proper and

ii.

relevant documents.
Verify that any person supporting to act on behalf of the legal
person/entity is so authorized and identify and verify the identity of

iii.

that person.
Understand the ownership and control structure of the customer. Banks
may, however, frame their own internal guidelines based on their
experience of dealing with such persons/entities.

Banks can use any supplementary evidence such as a letter received through
post for further verification of the address. While issuing operational instructions to
the branches on the subject, banks should keep in mind the spirit of instructions issued
by the Reserve Bank and avoid undue hardships to individuals who are, otherwise,
22

classified as low risk customers.

b) Banks should introduce a system of periodical updation of customer

identification data (including photograph/s) after the account is opened.
c) An indicative list of the nature and type of documents/information that may be
may be relied upon for customer identification is given in Annex.

3. MONITORING OF TRANSACTIONS

Ongoing monitoring is an essential element of effective KYC procedures.

Banks can effectively control and reduce their risk only if they have an understanding
of the normal and reasonable activity of the customer so that they have the means of
identifying transactions that fall outside the regular pattern of activity. However, the
extent of monitoring will depend on the risk sensitivity of the account. Banks should
pay special attention to all complex, unusually large transactions and all unusual
patterns which have no apparent economic or visible lawful purpose. Banks may
prescribe threshold limits for a particular category of accounts and pay particular
attention to the transactions which exceed these limits. Every bank should set key
indicators for such accounts, taking note of the back ground of the customer, such as
the country of origin, sources of funds, the type of transactions involved and other risk
factors. Banks should put in place a system of periodical review of risk categorization
of accounts and the need for applying enhanced due diligence measures.
Such review of risk categorisation of customers should be carried out at
aperiodicity of not less than once in six months.

4. RISK MANAGEMENT

a) The Board of Directors of the bank should ensure that an effective KYC
programe is put in place by establishing appropriate procedures and ensuring
23

their effective implementation. It should cover proper management oversight,

systems and controls, segregation of duties, training and other related matters.
Responsibility should be explicitly allocated within the bank for ensuring that
the banks policies and procedures are implemented effectively. Banks should,
in consultation with their boards, devise procedures for creating risk profiles
of their existing and new customers and apply various anti money laundering
measures keeping in view the risks involved in a transaction, account or
banking/business relationship.
b) Banks internal audit and compliance functions have an important role in
evaluating and ensuring adherence to the KYC policies and procedures. As a
general rule, the compliance function should provide an independent
evaluation of the banks own policies and procedures, including legal and
regulatory requirements. Banks should ensure that their audit machinery is
staffed adequately with individuals who are well-versed in such policies and
procedures. Concurrent/ Internal Auditors should specifically check and verify
the application of KYC procedures at the branches and comment on the lapses
observed in this regard. The compliance in this regard should be put up before
the Audit Committee of the Board on quarterly intervals.
By implementing an effective KYC policy, a business can identify the entire
scope of the asset and liability risk faced in relation to each customer and group
of customers.

When KYC control

Collection and analysis of basic identity information (Customer Identification

Program or CIP)

Name matching against lists of known parties.

Determination of the customers risk in terms of propensity to commit money

laundering, terrorist finance, or identity theft.

Creation of an expectation of a customers transactional behaviour.

24

Monitoring of a customers transactions against their expected behaviour and

recorded profile as well as that of the customers peers.

For Accounts of individuals, the bank will require the following information and
documents under KYC.
1. Legal name and any other change in names used.
2. Correct permanent address
The individual/s will have to provide the original document for verification and
submit a copy for the Banks record.

Documents Required For KYC

Identity Proof (any one of the following)

i. Passport
ii. PAN card
iii. Voters Identity Card
iv. Driving license
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v. Ration Card
vi. Identity card (subject to the banks satisfaction)

Address Proof (any one of the following)

i.
ii.

Utility bill
Bank account statement received by mail / courier along with signature
verification by the Banker or a cheque drawn on that account for a minimum

iii.
iv.

amount as specified by the Bank, deposited into the account

Ration card
Letter from employer (subject to satisfaction of the bank)
For Accounts of Companies/Partnership Firms/Trusts & Foundation, a

different set of documentation and information is required.

Account Holders may be requested to furnish their recent passport size
coloured photograph along with the signed KYC submission format on the Banks
request. It is also important to note that there is a requirement for the periodic
updating of KYC Information as and when called for by the Bank.

If the bank is unable to apply appropriate KYC measures due to nonfurnishing of information or non-cooperation by the customer, the bank has the right
to consider closing the account or terminating the banking relationship after issuing
due notice to the customer explaining the reasons for taking such a decision.

What kind of information I have to furnish in KYC

KYC form is very simple to fill up and having very information's to furnish. It
includes

26

Identity details,

Address details,

Contact details, and

Other details- In other details you may be asked annual gross income and
existing assets or some other details.

Is it safe to furnish our personal information in KYC?

Yes! It is 100 percent safe to give our personal information's to the banks and
financial institutions, as they are strictly advised and given guidelines by RBI to not
do disclose your personal information at any other source/place. And if any bank or
financial institutions discloses your personal information to any other place for
commercial purpose or any unsafe place, the customer may sue against the bank or
institution for same.

What if I did not fulfilled KYC process?

As the KYC program is mandatory, and each and every customer has to follow
this process and fill the measure of this formality, if a customer fails to follow this
guideline and did not fulfilled KYC process, s/he may lose his banking/business
relationship with the bank/financial institution. And they may face closer or
termination of account/business dealing with the banks/FIs.

27

Benefits of KYC

KYC program has benefits for both authority/banks/FIs as well as for

customers too. What are these benefits, have a look.

For Authority

Its main purpose and benefit is Anti Money Laundering. It enables to stop
money laundering through illegal activity or source
28

It enables banks to understand their customers and their financial activities.

It helps banks/FIs to manage their financial dealings with their customers.

It helps to check necessary requirements at the time of opening account or

getting involved in business dealing, and ensures the identity of a customer,
whether they belongs from a criminal background or banned entities such like
terrorists or illegal organizations.

It helps banks/FIs in Monitoring of Transactions of their customers.

And some other benefits too.

For customer

With the help of KYC compliance a customer can get these benefits.

Good communication between banks: Customers get directly benefited in

terms of a good communication relationship between their banks.

Proper information on time: By this a customer gets proper information's on

time, and never lets any chance go.

Good image in banks: By fulfilling the KYC formality, a customer builds good
image of himself in front of banks.

Apart from all these, there are many more other benefits to the customers and banks
for being a KYC compliance customer and authority.

Benefits of KYC Worldwide

29

KYC worldwide is your outsourced, in-house compliance department There are a

substantial number of benefits and advantages that a client will gain by using the
KYC Worldwide service including:

Guaranteed service levels KYC Worldwide offers guaranteed service

levels for all work undertaken on behalf of a client. These include
guaranteed timescales to complete the work.

Known fixed costs - KYC Worldwide offers a straightforward pricing

model dependent on the type and number of enquiries per year. Therefore
the client can accurately budget its KYC costs for the year ahead.

Meet unexpected demand No need to hire temporary compliance

personnel to complete one off projects or when there has been a sudden
temporary increase in workload.

Reduced risk of mistakes - The KYC Worldwide service process with full
quality assurance means there is a greatly reduced risk of mistakes.

Reduced costs A client will not need to buy subscriptions to multiple

databases or maintain expensive internal systems that are major
compliance costs.

Increased productivity Using the KYC Worldwide service will mean the
clients expensive compliance personnel can be utilised in more productive
areas and increase their productivity.

Simplified ongoing monitoring - of your customers as KYC Worldwide

provides this as a service.

Increased profitability - The KYC Worldwide service will reduce the time
to onboard new customers therefore increasing revenues and

profits.
Reduce time wasted KYC Worldwide can provide a low
cost preliminary report for the relationship manager when
meeting with potential customers. This will provide the
information required to decide if the customer meets the
30

clients own risk appetite and therefore to proceed or

decline the customer.

The KYC Worldwide service offers qualitative evaluate answer rather

than generating yet more data for the compliance team to review or merely
offering a spread sheet to calculate risk without giving answers and
practical solutions

KYC Monitoring Service

Key to the AML/CFT CDD requirements, regular monitoring of the customer

is mandatory. The frequency of the monitoring is based on the risk rating of the
customer. KYC Worldwide provides a comprehensive monitoring service that screens
the customer through KYC Worldwide databases as regularly as the client wishes. All
hits are checked for false positives, verified by the KYC Worldwide compliance team
and then a report is sent to the client detailing the new findings. The client can inform
KYC Worldwide of an internal trigger event at which point KYC Worldwide will run
the customer through the monitoring service.

Terms and Conditions

Minimum balance:-

The bank will prescribe minimum account balance to be maintained in the

31

account.

Interest payment:-

The rate of any interest payable on any account may be displayed by the bank
at its various branches and this rate may be subject to change without notice to
the customer. Interest on account will be paid on quarterly basis, at the end of
Nepali Calendar months Poush, Chaitra, Ashad and ashwin after deducting
applicable tax.

Statement of Accounts:-

Statement of account will be provided as per customer instruction. Statement

will not be provided if transactions are not found in the specified period.
Statement of account will be delivered by e-mail or collected at the Banks
Counter. The statement of account may be collected by the customer or by the
authorized person. The customer should provide mailing address where the
statement of account is to mailed. The change of mailing address should
immediately notified to the bank. Each duplicate statement of account is
subject to the Banks service charge.

Account Balance Certificate:-

At the written request of customer, the bank will issue Account Balance
Certificate where a certain service will be levied as per the Banks rule.

Cheque Book:32

Cheque book for account will be provided to the accounts maintaining the
certain minimum balance as stipulated by the Bank. Cheque book to third
party will be delivered only after obtaining the identity document of the
receiver and authority from the account holder.

Closure of Accounts:-

The account may be closed if the account reflect nil/negative without any
information to the account holder for consecutive 60 days applicable ledger
fees as per Banks standard tariff fee shall be charged in case the account is
closed on customers request. Customers shall return remaining unused cheque
leaves and ATM/Debit Card along with request for closure of accounts.

Cheque Return:-

The bank shall charge applicable fee in case of cheque return due to
insufficient balance in the customers account.

Good for Payment:-

The bank shall endorse a cheque as Good for Payment as per the request of
its customer where certain charge will be levied as per the Banks rule.

Miscellaneous:33

The customers are advised to contact the bank for detail information
regarding account operation and other service charges like minimum
balance requirement for account opening charges for duplicate
statement of account, account balance certificate, account closing
charge, returned cheque and good for payment charge and other
details. The bank will debit the customers account for the applicable
charges on its services. The Bank acts only as collecting agent and
assumes no responsibility for the realization of deposited with the bank
for collection. Proceeds of cheque or other instruments deposited with
the Bank are not available for withdrawal until collected by the Bank.
The Bank reserves the right to debit any of the accounts that may have
been exceptionally credited with an item subsequently unpaid
collection cheques drawn in favour of a third party or if the payees

name is not identical to banks record.

Customer account details will not be provided through the telephone.

The details will be provided to the customer or any authorized person.

I/we hereby agree if the bank furnishes any information regarding
account to any entity/country as per the prevailing laws and/or order of
Nepal Government and/or directives/circular issued by Nepal Rastra

Bank and/or any foreign country where i/we am/are associated with.
The customers are advised to count their cash withdrawn at the Banks
counter in front of the teller. The bank shall not be held responsible for
any shortfall or losses in cash withdrawn that are not countered at the
Banks counter in front of the tellers.

Bank shall have the right to refuse to open an Account or close/block

existing Account at any time if the Bank feels the transaction of an

account as doubt/suspicious without providing notice to the effect.

Bank reserves the right to amend the charges, fee and any and/or all
terms and conditions mentioned here in as its sole discretion without
giving any prior notice. This documents is an integral part of the terms
and conditions of account opening, maintaining and/or operating at the

NMB Bank Limited.

Customer shall abide by the prevailing rules and regulations and
directives issued by Nepal Rastra Bank from time to time.
34

Post dated and stale cheque will not be paid.

Instructions for filling KYC form

A. Important points
1. Self attested copy of PAN card is mandatory for all clients, including
Promoters/Partners/Karta/Trustees and whole time directors and persons
authorized to deal in security on behalf company/firm/others.
2. Copies of all the documents submitted by the applicant should be self-attested
and accompanied by originals for verification. In case the original of any
document is not produced for verification, then the copies should be properly
attested by entities authorised for attesting the documents, as per the below
35

mentioned list.
3. If any proof of identity or address is in a foreign language, then translation in
to English is required.
4. Name & address of the applicant mentioned on the KYC form, should match
with the documentary proof submitted.
5. If correspondence & permanent address are different, then proofs for both
have to be submitted.
6. Sole proprietor must make the application in his individual name & capacity.
7. For non-residents and foreign nationals, (allowed to trade subject to RBI and
FEMA guidelines), copy of passport/PIO Card/OCI Card and overseas
address proof is mandatory.
8. For foreign entities, CIN is optional; and in the absence of DIN no. for the
directors, their passport copy should be given.
9. In case of Merchant Navy NRIs, Mariners declaration or certified copy of
CDC (Continuous Discharge Certificate) is to be submitted.
10. For opening an account with Depository participant or Mutual Fund, for a
minor, photocopy of the School Leaving Certificate / Mark sheet issued by
Higher Secondary Board/Passport of Minor/Birth Certificate must be
provided.

11. Politically Exposed Persons (PEP) are defined as individuals who are or have
been entrusted with prominent public functions in a foreign country, e.g.,
Heads of States or of Governments,

senior

politicians,

senior

Government/judicial/ military officers, senior executives of state owned

corporations, important political party officials, etc.
B. Proof of Identity (POI): - List of documents admissible as Proof of Identity:
1. Unique Identification Number (UID) (Aadhaar)/ Passport/ Voter ID
card/ Driving license.
2. PAN card with photograph.
3. Identity card/ document with applicants Photo, issued by any of the
following:

Central/State

Government

Statutory/Regulatory Authorities, Public Sector

and

its

Departments,

Undertakings,

Scheduled

Commercial Banks, Public Financial Institutions, Colleges affiliated to

Universities, Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council
etc., to their Members; and Credit cards/Debit cards issued by Banks.
36

C. Proof of Address (POA): - List of documents admissible as Proof of Address:

(*Documents having an expiry date should be valid on the date of submission.)
1. Passport/ Voters Identity Card/ Ration Card/ Registered Lease or Sale
Agreement of Residence / Driving License / Flat Maintenance bill/ Insurance
Copy.
2. Utility bills like Telephone Bill (only land line), Electricity bill or Gas bill Not more than 3 months old.
3. Bank Account Statement/Passbook -- Not more than 3 months old.
4. Self-declaration by High Court and Supreme Court judges, giving the new
address in respect of their own accounts.

5. Proof of address issued by any of the following: Bank Managers of

Scheduled Commercial

Banks

Scheduled

Co-Operative

Bank

Multinational Foreign Banks / Gazetted Officer / Notary public / Elected

representatives to the Legislative Assembly / Parliament / Documents issued
by any Govt. or Statutory Authority.
6. Identity card / document with address, issued by any of the following:
Central / State Government and its Departments, Statutory / Regulatory
Authorities, Public Sector Undertakings, Scheduled Commercial Banks,
Public

Financial

Institutions,

Colleges affiliated to Universities and

Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their
Members.
7. For FII /sub account, Power of Attorney given by FII / sub-account to the
Custodians (which are duly notarized and / or apostiled or consularised) that
gives the registered address should be taken.
8. The proof of address in the name of the spouse may be accepted.

D. Exemptions/clarifications to PAN
(*Sufficient documentary evidence in support of such claims to be collected.)

37

1. In case of transactions undertaken on behalf of Central Government and/or

State Government and by officials appointed by Courts e.g. Official liquidator,
Court receiver etc.
2. Investors residing in the state of Sikkim.
3. UN entities/multilateral agencies exempt from paying taxes/filing tax returns
in India. SIP of Mutual Funds upto Rs 50, 000/- p.a.
4. In case of institutional clients, namely, FIIs, MFs, VCFs, FVCIs,
Scheduled Commercial Banks, Multilateral and Bilateral Development
Financial Institutions, State Industrial Development Corporations, Insurance
Companies registered with IRDA and Public Financial Institution as defined
under section 4A of the Companies Act, 1956, Custodians shall verify the PAN
card details with the original PAN card and provide duly certified copies of
such verified PAN details to the intermediary.

E. List of people authorized to attest the documents:

1. Notary Public, Gazetted Officer, Manager of a Scheduled Commercial/ Cooperative Bank or Multinational Foreign Banks (Name, Designation & Seal
should be affixed on the copy).
2. In case of NRIs, authorized officials of overseas branches of Scheduled
Commercial Banks registered in India, Notary Public, Court Magistrate,
Judge, Indian Embassy /Consulate General in the country where the client
resides are permitted to attest the documents.

F. In case of Non-Individuals, additional documents to be obtained from nonindividuals, over & above the POI & POA, as mentioned below:

1. corporate

Copy of the balance sheets for the last 2 financial years (to be
submitted every year).
38

Copy of latest share holding pattern including list of all those holding control,
either directly or indirectly, in the company in terms of SEBI takeover
Regulations, duly certified by the company secretary/Whole time director/MD

(to be submitted every year).

Photograph, POI, POA, PAN

directors/two directors in charge of day to day operations.

Photograph, POI, POA, PAN of individual promoters holding control - either

directly or indirectly.
Copies of the Memorandum and Articles of Association and certificate of

incorporation.
Copy of the Board Resolution for investment in securities market.
Authorised signatories list with specimen signatures.

and DIN

numbers

of whole time

2. partnership firm

Copy of the balance sheets for the last 2 financial years (to be

submitted every year).

Certificate of registration (for registered partnership firms only).
Copy of partnership deed.
Authorised signatories list with specimen signatures.
Photograph, POI, POA, PAN of Partners.

3. Trust

Copy of the balance sheets for the last 2 financial years (to be

submitted every year).

Certificate of registration (for registered trust only).
Copy of Trust deed.
List of trustees certified by managing trustees/CA.
Photograph, POI, POA, PAN of Trustees

4. HUF

PAN of HUF.
Deed of declaration of HUF/ List of coparceners.
Bank pass-book/bank statement in the name of HUF.
Photograph, POI, POA, PAN of Karta.

5. Unincorporated association or a body of individuals

39

Proof of Existence/Constitution document.

Resolution of the managing body & Power of Attorney granted to

transact business on its behalf.

Authorized signatories list with specimen signatures.

6. Banks/Institutional Investors

Copy of the constitution/registration or annual report/balance sheet for the last

2 financial years.
Authorized signatories list with specimen signatures

7. Foreign Institutional Investors (FII)

Copy of SEBI registration certificate.

Authorized signatories list with specimen signatures

8. Army/ Government Bodies

Self-certification on letterhead.
Authorized signatories list with specimen signatures.

9. Registered Society

Copy of Registration Certificate under Societies Registration Act.

List of Managing Committee members.
Committee resolution for persons authorized to act as authorized signatories

with specimen signatures.

True copy of Society

Rules

and

Bye

Laws

certified

by

the

Chairman/Secretary.

40

Other INSTRUCTIONS/ CHECK LIST

1. Additional documents in case of trading in derivatives segments - illustrative

list
a. Copy of ITR Acknowledgement
i. In case of salary income Salary slip, copy of form 16
ii. Copy of demat account holding system
iii.
Any other relevant documents substantiating ownership of assets
b. Copy of Annual Accounts
i. Net worth certificate
ii. Bank account statement for last 6 months
iii.
Self declaration with relevant supporting document
*In respect of other clients, documents as per risk management policy of the stock
broker need to be provided by the client from time to time.
2. Copy of cancelled cheque leaf/ pass book/bank statement specifying name of
the constituent, MICR Code or/and IFSC Code of the bank should be submitted.
3. Demat master or recent holding statement issued by DP bearing name of the
client.
4. For individuals:
a. Stock broker has an option of doing 'in-person' verification through
web camera at the branch office of the stock broker/sub-broker's office.
b. In case of non-resident clients, employees at the stock broker's local
office, overseas can do in-person' verification. Further, considering the
infeasibility of carrying out 'In- person' verification of the non-resident
clients by the stock broker's staff, attestation of KYC documents by
Notary Public, Court, Magistrate, Judge, Local Banker, Indian
Embassy / Consulate General in the country where the client resides
may be permitted
41

Bibliography

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