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Ahead of the Union Budget 2024, the government is deliberating upon a single Know Your Customer (KYC) for all financial services across the board. The aim is to reduce duplication of paperwork and the burden of costs on financial institutions and other businesses and boost ease of doing business as a result.
Business activity is often subject to regulatory frameworks which are meant to safeguard economies, and investors on an individual level. If regulations are essential to overall safety, the streamlining of procedures and records aligned with the technological advancement of the day is crucial for the purpose of achieving a robust investment and credit-friendly environment. This is where CKYC comes in.
A centralised, fool-proof KYC could propel India’s investment climate to higher levels, building trust, enabling lenders and unleashing the impact of the growing class of investors in India.
All Set for Revamped CKYC?
The finance ministry led by minister Nirmala Sitharaman has called for a crucial high-level meeting on January 24 including top officials from the ministry, regulatory bodies and heads of private and public sector banks.
The meeting will be attended by officials from various regulatory bodies, including the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA). Additionally, representatives from the Enforcement Directorate (ED) will also be present at the high-stakes meeting.
The discussions will reportedly revolve around Central KYC of CKYC, particularly the efficient utilisation of the Central Know Your Customer Registry (CKYCR) which has been termed as crucial to facilitate ease-of-doing business and ensure complete compliance with customer due diligence requirements.
What is CKYC?
CKYC enables customers and investors to complete KYC only once before interacting with different entities in the financial services sector. It aims to achieve greater ease of doing business by allowing investors greater agility across a host of financial institutions, and streamlining of databases and to avoid duplication of KYC done through multiple organisations.
This will significantly reduce the burden of compliance and the added cost of repeating KYC procedures on financial institutions. Further, it will create a streamlined database which will provide a clearer picture for regulatory bodies and law and order agencies.
Under CKYC, individuals can submit their KYC documents, such as identity and address proof, just once and get a unique 14-digit KYC number allocated by Central Registry of Securitisation Asset Reconstruction & Security Interest of India (CERSAI), a statutory body that operates under the aegis of the RBI.
While the traditional KYC process includes the requirement of physical presence and physical documents and the subsequent eKYC implementation, seeking an easier electronic alternative of KYC, entails an online process seeking only digital documents— the CKYC is conceptually a one-time KYC seeking digital documents and biometric verification.
‘High-Risk’ Hiccup
By March 31, 2023, the CKYC Record Registry hosted more than 70 crore KYC records, and the growing number of KYC records downloaded by reporting entities from CKYCRR signifies the benefit and ease this repository has provided to the reporting entities and their customers.
Central KYC was enacted in 2016, but in 2023, the RBI deemed these registrations as “High Risk,” sending shockwaves across the industry and slowing down the pace at which customers were onboarded through this process.
The high-risk tag stemmed from doubts about the quality of the data and its vulnerability to fraud. While CKYC was a noble idea aimed at reducing the hassle and costs for financial institutions and other businesses that must verify the KYC status of their customers, the high risk tag indicates that it was short of being fool-proof and may require a greater component of face match and biometric verification.
However, the government has not given up on its agenda to streamline KYC norms to boost business prospects for India’s fast-growing financial market. The government anticipates that upon complete implementation, CKYC will offer investors advantages such as cost optimisation, inter-usability of KYC records across the financial sector, and the convenience of uploading documents in a centralised location.
If CKYC is implemented with a foolproof mechanism, the government will unleash its full potential, granting enviable conditions for both businesses and customers and enhancing the country’s ease of doing business rankings, specifically in the parameters of ‘getting credit,’ ‘protecting investors’ and ‘trading across borders’.
Since, there are other KYC norms in use whose registries may become redundant in the case of CKYC implementation, the government may seek to reconcile these issues ahead of the Budget 2024.
Here’s how KYC works
Introduced by the Reserve Bank of India (RBI) in 2002, KYC has managed to curb money laundering and fraud by ensuring that banks have enough information about their customers to understand their financial activities and assess potential risks. Back then however, the process entailed in-person verification which is time and resource-consuming and not accessible to all.
Subsequently, the introduction of Aadhaar helped build better conditions for KYC. According to the Finance Minister Sitharaman, the cost of customer acquisition through KYC has fallen from Rs 500 to 700 to only Rs 3 per person owing to the leveraging of the Aadhaar database.
KYC allows organisations to gather vital customer information, including identity, address, occupation, and income source, helping financial institutions assess risk profiles and offer suitable services.
All financial institutions in India must adhere to KYC procedures outlined by the RBI, ensuring a standardized approach for industry-wide integrity.
KYC is essential for both new customer accounts and maintaining existing ones, ensuring regular verification and updating of customer details.
Financial institutions are responsible for periodically updating KYC records to keep information current and accurate, aiding in the identification of changes in customer behavior or suspicious activities.
Why KYC is Essential
KYC compliance is vital for building trust, transparency, and collaboration, while minimising risks. KYC helps establish confidence in real-time cross border payments, and large transactions in general.
In the ever-expanding global economy and the emergence of new technologies, financial institutions face increased susceptibility to illicit activities. Hence, in this day and age of increased use of financial services, KYC is essential.
KYC procedures play a crucial role in detecting fraudulent activities within customer accounts, allowing financial institutions to identify unusual patterns or transactions indicating fraud or identity theft. Another key goal of KYC is to prevent money laundering by verifying customer identity and understanding their financial activities, aiding in the detection and deterrence of illegal activities.
The implementation of Know Your Customer (KYC) standards acts as a protective measure, involving steps like confirming customer identity, understanding their activities, validating the legitimacy of funds, and assessing associated money laundering risks.
The cornerstone of a successful compliance and risk management program lies in robust Know Your Customer (KYC) processes. Meeting KYC obligations is becoming increasingly demanding, gaining prominence alongside heightened regulatory requirements for anti-money laundering and KYC compliance. Both banks and corporations are allocating substantial resources and time to enhance their KYC compliance processes to enhance their global competence and trust quotient, coupled with the nation’s effort to build a rock-solid pool of verified and legitimate customers.
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