What is KYC? Full Form, Meaning & Types

What is KYC (Know Your Customer)?

KYC meaning, a set of processes and procedures implemented by businesses and financial institutions to verify the identity of their customers. The primary objective of KYC is to reduce the risks of fraud, money laundering, terrorist financing, and other illicit activities. By verifying the identity of customers and assessing their risk profile, businesses can establish trust, comply with regulatory requirements, and safeguard themselves against financial crimes.

Importance of KYC

The Indian government introduced KYC regulations under the Prevention of Money Laundering Act (PMLA), 2002. This law mandates financial institutions to verify the identity of their customers, ensuring that their funds are not being used for illegal purposes.

KYC benefits both banks and customers. For banks, it reduces the risk of fraudulent accounts, unauthorized transactions, and non-performing assets by ensuring that only legitimate individuals access financial services. It also helps in risk assessment and enables institutions to offer tailored financial products based on customer profiles. For customers, KYC enhances trust and security, preventing misuse of personal information and unauthorized access to their accounts. Additionally, it helps maintain financial transparency, ensuring that institutions can track and report suspicious transactions to regulatory authorities.

How Does the KYC Process Work?

The KYC process can be completed through both online and offline methods, depending on the service provider’s requirements.

1. Online KYC

• Begin by visiting the bank or financial service provider’s official website or mobile application.
• Fill out the KYC form by entering personal details such as name, address, and date of birth.
• Submit scanned copies of Aadhaar, PAN, and other necessary documents.
• The financial institution then uses Optical Character Recognition (OCR) technology to read and extract details from your documents automatically. Some institutions may also require manual data entry for verification.
• The submitted information is cross-checked against the uploaded documents to ensure accuracy and authenticity.

Once verified, you will receive a confirmation, and your KYC will be approved. You can then access the financial services.

1. Offline KYC

• Head to the bank, financial institution, or an authorized KYC center.
• Fill out the KYC application form and provide necessary personal details.
• Submit the form along with self-attested photocopies of Aadhaar, PAN, and address proof at the bank branch or KYC center.
• An official will be assigned to you for an In-Person Verification (IPV). They will verify your documents and may also require biometric authentication.

After verification, the institution approves your KYC, enabling access to financial services.

Benefits of KYC

After learning KYC full form, what is KYC, and other basic details, let us now understand what makes this process essential.

• KYC helps financial institutions verify customer identities, reducing the risk of identity theft, money laundering, and financial fraud.
• Once KYC is completed, customers can enjoy hassle-free access to financial services, including faster loan approvals and smoother transactions.
• It allows banks to comply with government regulations, strengthening the financial system’s integrity.
• It ensures that banks and financial institutions comply with government regulations, preventing illegal financial activities.
• Lenders use KYC to assess an individual’s creditworthiness by gaining insights into their financial history and standing.
• By enhancing the security of banking and investment transactions, KYC builds investor confidence. This, in turn, encourages investments in the country, contributing to overall economic growth.

What are the Types of KYC?

KYC norms serve as a critical framework in this regard, helping financial institutions verify the identity of their customers and assess associated risks. In India, KYC requirements are diverse, catering to the unique needs and circumstances of different sectors and segments of the population. Let us look at the various types of KYC prevalent in India and their significance.

1. Aadhaar-based KYC

Aadhaar-based KYC leverages the Aadhaar card, a unique identification number issued by the Unique Identification Authority of India (UIDAI), to verify individuals’ identities. Owing to the widespread adoption of Aadhaar as a primary identification document, this form of KYC is widely used across various sectors, including banking, telecommunications, and financial services.

2. E-KYC

E-KYC, or electronic KYC, involves using electronic methods to verify the identity of customers. It eliminates the need for physical documents and allows for a seamless and paperless verification process. E-KYC is facilitated through digital platforms and APIs, streamlining the onboarding process for customers and reducing administrative burdens for businesses.

3. Video KYC

Video KYC allows for remote verification of customers’ identities through live video interactions. This form of KYC is particularly relevant in today’s digital age, enabling financial institutions to onboard customers remotely while ensuring compliance with regulatory requirements. Video KYC offers convenience and flexibility, allowing customers to complete the KYC process from the comfort of their homes.

4. Full KYC vs. Partial KYC

Full KYC requires comprehensive verification of customers’ identities, including documentation and in-person verification, whereas partial KYC may involve less stringent requirements, such as basic identity verification. Full KYC is typically required for high-value transactions and certain financial products, while partial KYC may suffice for low-value transactions or limited-access accounts.

5. Centralized KYC (CKYC)

Centralized KYC (CKYC) is a centralized repository of KYC records maintained by the Central Registry of Securitization and Asset Reconstruction and Security Interest of India (CERSAI). CKYC streamlines the KYC process by allowing financial institutions to access and share KYC information electronically, reducing duplication and enhancing efficiency.

6. Sector-specific KYC

Certain sectors, such as banking, insurance, mutual funds, and securities, may have specific KYC requirements tailored to their unique characteristics and regulatory frameworks. Sector-specific KYC norms ensure compliance with sectoral regulations and address sector-specific risks and concerns.

Who Needs KYC?

KYC is required by anyone offering financial services as well as their customers.

• Individuals and Corporates– Anyone opening a bank account, applying for a loan, investing in mutual funds, or using digital wallets must complete KYC. NRIs must also complete KYC to invest in Indian markets or open NRI bank accounts.
• Government Schemes Beneficiaries – Individuals applying for government subsidies, pensions, or welfare schemes must complete KYC for eligibility verification.
• Financial Institutions – Banks, NBFCs, and other financial service providers require KYC to onboard customers and comply with regulations.
• Investment Firms – Stockbrokers, mutual fund companies, and portfolio management services need KYC to verify investor identities.
• Insurers – Life, health, and general insurance providers require KYC before issuing policies to customers.

When is KYC Required?

Across various sectors, from banking to investments and insurance, KYC requirements play a pivotal role in verifying the identity of customers and assessing associated risks. Here are some scenarios when KYC is required:

KYC for Banks

Banks are at the forefront of financial services, serving as custodians of individuals’ and businesses’ finances. KYC is mandatory for banks to open new accounts, avail themselves of loans and credit facilities, and conduct various financial transactions. Here’s when KYC is required in the banking sector:

Account Opening

Individuals or businesses must undergo KYC verification when they open new bank accounts.

Loan Application

When applying for loans, mortgages, or credit cards, banks conduct KYC checks to assess the creditworthiness and identity of borrowers.

Transactions Above Threshold

Banks may require customers to undergo additional KYC verification for certain high-value transactions.

Updating KYC Records

Banks periodically update their KYC records to ensure customer information remains accurate and up-to-date.

KYC for Investments/Life Insurance

Investment plans and life insurance are critical components of financial planning, helping individuals build wealth and secure their future. KYC requirements in these sectors aim to safeguard investors’ interests and ensure compliance with regulatory standards. Here is when KYC is required for investments and life insurance:

Mutual Funds/Stock Market Investments

Investors looking to invest in mutual funds or participate in the stock market must undergo KYC verification.

Insurance Policies

When individuals purchase life insurance policies or other insurance products, insurance companies conduct KYC checks to verify the identity of policyholders and assess associated risks.

Financial Planning Services

Financial planners and advisors may also require clients to undergo KYC verification before providing investment advice or financial planning services.

List of KYC Documents

KYC documents serve as essential tools in this process, providing proof of identity, address, and other relevant information. Here is a comprehensive list of commonly accepted KYC documents:

Aadhaar Card

The Unique Identification Authority of India (UIDAI) issued a unique identification number.

Passport

A travel document issued by the government that certifies the identity and nationality of the holder.

Voter ID Card

An identity card issued by the Election Commission of India that allows individuals to vote in elections.

Driving License

A government-issued document that authorizes individuals to drive vehicles on public roads.

PAN Card

A Permanent Account Number (PAN) card issued by the Income Tax Department for tax-related purposes.

Utility Bills

Recent utility bills such as electricity, water, or gas bills that show the customer’s name and address.

Bank Statement/Passbook

A bank statement or passbook with entries not older than three months that shows the customer’s address.

Ration Card

A government-issued document that certifies the identity and address of the holder.

Rent Agreement

A registered rent agreement between the landlord and tenant that confirms the tenant’s address.

Below are some other documents that are required for KYC:

Passport Size Photographs

Recent passport-size photographs of the customer.

Income Proof

Documents such as salary slips, income tax returns, or Form 16 may be required for certain financial transactions.

KYC Declaration Form

A form provided by the financial institution or service provider that requires customers to declare their identity and address details.

KYC Compliance

KYC compliance refers to the mandatory adherence to the PMLA guidelines regarding customer identity verification. Banks, insurers, and investment firms must collect customer details, verify them against official documents, and monitor transactions for suspicious activity. This is required not only when onboarding new customers but must also be regularly updated for existing ones. The key objectives of KYC compliance include:

• Confirming the identity of individuals and businesses
• Conducting periodic risk assessments of customers
• Taking appropriate action if any unusual financial activity is detected

Failure to comply with KYC regulations can lead to penalties, legal action, or loss of business licenses.

How to Do KYC in India?

While online KYC is becoming increasingly popular, the option for offline KYC still exists. Here are the steps to follow for an offline KYC:

• Online/ Aadhaar-based KYC
• Offline KYC

How to Do Aadhaar-Based KYC or Online KYC?

Aadhaar-based KYC, also known as e-KYC, has emerged as a popular method for verifying the identity of individuals electronically. Let us understand how to complete Aadhaar-based KYC or online KYC in India:

1. Understand Aadhaar-based KYC

This method eliminates the need for physical documents and allows for a seamless and paperless verification process.

2. Choose the Service Provider

Select the service provider you wish to complete the Aadhaar-based KYC process with. This could be a bank, financial institution, telecom operator, or any other entity offering online services that require KYC compliance.

3. Visit the Service Provider’s Website or App

Access the website or mobile application of the chosen service provider and navigate to the section for completing KYC or opening a new account.

4. Select the Aadhaar-based KYC Option

Look for the option to complete KYC using Aadhaar or e-KYC. Depending on the service provider, this option may be labeled differently but typically involves selecting “Aadhaar-based KYC” or “e-KYC” from the available choices.

5. Enter Aadhaar Number

Enter your 12-digit Aadhaar number in the designated field on the service provider’s website or app. Ensure that the Aadhaar number provided is accurate and matches the details associated with your Aadhaar card.

6. Consent for KYC Authentication

Provide consent for KYC authentication by entering the OTP (One-Time Password) sent to your registered mobile number linked with Aadhaar. This OTP serves as a secure verification method to authenticate your identity.

7. Biometric Authentication (if required)

Sometimes, biometric authentication, such as fingerprint or iris scan, may be required to complete the KYC process. Follow the instructions provided by the service provider to complete biometric verification, if applicable.

8. Confirmation of KYC Completion

Once the Aadhaar-based KYC process is successfully completed, you will receive a confirmation message or notification from the service provider. This confirms that your KYC has been successfully verified electronically.

9. Update KYC Records (if required)

If there are any changes to your personal information or contact details, update your KYC records promptly. Most service providers offer online facilities for updating KYC details, ensuring accuracy and compliance.

How to Do KYC Offline?

While online KYC is becoming increasingly popular, the option for offline KYC still exists. Here are the steps to follow for an offline KYC:

1. Download and Fill the KYC Form

Visit the relevant institution’s website (bank, mutual fund house, etc.) you are applying to. Locate the KYC form download section. They might also offer the form in physical branches. Download and fill out the KYC form with accurate details.

2. Visit a KYC Registration Centre (KRC) or Branch Office

Find the nearest KYC Registration Centre (KRC) associated with the institution or visit a branch office that offers KYC services. Always carry the completed KYC form and the required documents.

3. Submit Documents and Provide Biometrics (if required)

Submit your duly filled KYC form and the required identity and address proof documents. Identity proofs will include a PAN Card, Passport, Aadhaar Card, or Voter ID. Utility bills, bank account statements, Passports, and Aadhaar cards will come under address proof. Sometimes, fingerprint scans or photographs might be taken for biometric verification.

4. Receive Application Number

Upon successful document verification, you will likely receive an application number or reference ID for tracking the KYC process.

Step-by-Step Process for KYC Online Verification?

Traditionally conducted through physical documents and in-person meetings, KYC can now be completed online, offering convenience, efficiency, and enhanced accessibility.

1. Download the KYC application form from the official website or mobile app of your bank, insurance provider, or other financial institution.
2. Complete the form with your personal details, such as name, address, date of birth, and other relevant information.
3. Submit scanned or digital copies of your official documents, including proof of identity (e.g., Aadhaar or PAN), proof of address, and a passport-sized photograph.
4. Some institutions may require you to complete an additional step, such as submitting a selfie or performing biometric verification, to confirm your identity.
5. Once your documents are verified, your KYC will be complete, and you will be able to access the financial services you need.

Conclusion

KYC plays a crucial role in safeguarding the integrity and security of the financial system. By understanding what is KYC, adhering to the related regulations, and implementing robust KYC processes, businesses and financial institutions can prevent financial crimes and build customer trust. Understanding the basics of KYC is essential for ensuring compliance and facilitating smooth and secure transactions in today’s interconnected world.

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