What is KYC Policy?

As per RBI guidelines issued vide their circular dated 29/11/2004, all banks are required to

formulate a KYC Policy with the approval of their respective boards. The KYC Policy consists of

the following four key elements.

1) Customer Acceptance Policy

2) Customer Identification Procedures

3) Monitoring of Transactions

4) Risk Management.

http://docs.google.com/viewer?
a=v&q=cache:pMiTB2pHCjgJ:https://leads.hdfcbank.com/common/pdf/KYC_norms.pdf+introductio
n+to+kyc+norms&hl=en&gl=in&pid=bl&srcid=ADGEESi5d7up7wlGdoZwWdyfeJrIpV_M1dgtqpZYQP3
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9HMRdckWO_z_jbrz9UPvVnDebeu03fB65qGhZGYg6K7IrGlvKSkMUeI2&sig=AHIEtbTSjAJy_TIHBWHc8
57D5Wxk0QjT1A

This is in the light of the Reserve Bank of India's concern on the origin of FII money in the
domestic markets. The norms relating to Participatory Notes will also be up for review.

This is in the light of the Reserve Bank of India's concern on the origin of FII money in the
domestic markets. The norms relating to Participatory Notes will also be up for review.

Objectives of KYC Norms

1.1

Banking operations are susceptible to the risks of money laundering and terrorist financing. In order
to arrest money

laundering, where banks are mostly used in the process, it is imperative that they know their
customers well.

1.2

On combating financing of terrorism, RBI has specified certain standards based on which our Bank
has formulated a
policy on identification and acceptance of customers to have a business relationship with us. Our
branches are required to

prepare and maintain documentation on their customer relationships and transactions to meet the
provisions of the Prevention

of Money Laundering Act and other laws and regulations.

1.3

RBI has issued the KYC guidelines under Section 35 (A) of the Banking Regulation Act, 1949 and 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.

1.4

The due diligence expected under KYC involves going into the purpose and reasons for opening an
account,

anticipated turnover in the account, sources of wealth (net worth) of the person opening the
account and sources of funds

flowing into the account.

http://docs.google.com/viewer?
a=v&q=cache:Egr30xI04F8J:www.indianbank.in/pdfs/bpc//KYCNorms.pdf+kyc+norms+followed+by+
banks&hl=en&gl=in&pid=bl&srcid=ADGEEShnAeWrdcsdk3Q_-
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KGsr0Ay2zw

Banks are supposed to follow KYC norms to monitor transactions of a suspicious nature and to
prevent money laundering. Therefore, the banks ask customers for documents relating to
residence or identity proofs such as a driving licence, or a permanent account number (PAN).

But it has been noticed that if customers, who have new joint accounts, move the account from
one branch to another, or request a bank statement to be sent at a new address, they have a hard
time with compliance. Banks have been strict and have asked for proof of residence in each
instance.
But it’s not practically feasible for everyone to provide proof of residence. A couple may live in the
same house as their parents, brothers or sisters. If the rental agreement or the home ownership is
in the name of one person only, it becomes very difficult for any other family member to provide
address proof. In addition, the utility bills, such as telephone or electricity bills, which are
acceptable as proof, are in the name of one person and useless for any other family member.

As a result, many customers haven’t been able to avail of banking services and have faced
difficulties in getting account statements, money transfers and other services.

The new RBI directive says that in addition to the identity documents, banks can now ask for a
utility bill, which could be in the name of the husband or father.

In addition, a declaration has to be given by the father or husband that the relative, who wants to
open an account, lives in the same house. RBI has also ruled that for supplementary evidence, a
letter received through mail can also be used for verification.

The objective of KYC guidelines is to prevent banks from being used, intentionally or
unintentionally, by criminal elements for money laundering 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. Banks should
frame their KYC policies incorporating the following four key elements:

i. Customer Acceptance Policy;

ii. Customer Identification Procedures;
iii. Monitoring of Transactions; and
iv. Risk management.

For the purpose of KYC policy, a ‘Customer’ may be defined as :

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

relationship with the bank;
 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.

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2039&Mode=0

Customer Acceptance
2.1

Before commencing a business relationship with a prospective customer, the Bank has to ensure
that such a

relationship does not, in any way, go against its Customer Acceptance principles viz.,

i.

ii.

2.2

A Customer Profile (in the prescribed format) containing information relating to the customer's
social/ financial status,

nature of business activity, information about his clients' business and their location, Sources of
funds, Annual Income, etc.

shall be obtained from/prepared for all the applicants for opening SB/CA/ Term deposits accounts.

The customer profile shall be updated, on a periodical basis, as under:

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

Customers are categorised based on risk perceptions in terms of the nature of business activity,
location of

customer and his clients, mode of payments, volume of turnover, social and financial status, etc.

For low risk customers

For medium risk customers

For high risk customers

Note: However, these periodicities are only indicative and wherever warranted, the updation
exercise may be done even at lesser

frequencies taking into account the activities, conduct of operations, etc.

Customer identification

3.1

Customer identification means identifying the customer and verifying his/her/its identity by using
reliable,

independent source documents, data or information.

3.2

Customer Identification is carried out at different stages i.e., while establishing a banking
relationship, carrying out

a financial transaction or when the branch has a doubt about the authenticity/veracity or the
adequacy of the previously

obtained customer identification data.

3.3

For opening an account, normally, the customer should come to the Bank in person. An account shall
not,

normally, be opened without a meeting between the bank official and the customer.

3.4
Branches need to obtain sufficient information to their satisfaction, to establish the identity of each
new customer,

whether regular or occasional and the purpose of the intended nature of banking relationship.

3.5

The process of enquiry/verification of the documents shall be a thorough one by having a dialogue
with the

prospective depositor, introducer, borrower and guarantor and confirmation through other
channels, if necessary. Wherever it

is necessary, a discreet verification shall also be made about the credentials of the parties, their
business potential etc.

3.6

The process of verifying a customer's identity and his/her credentials is not a faultfinding exercise
but to create a

better customer relationship that may safeguard the mutual interests of the Bank as well as the
customer.