We are living in times when identity theft is a common scenario. We hear of instances of someone getting duped due to signature forgery or someone becoming a victim of phishing. Danger lurks everywhere, especially when it comes to financial dealings. Although Loan Singh is a secured digital lending platform, we have to maintain RBI norms pertaining to KYC which will ensure every borrower’s authenticity and also gives the borrower a sense of trust while applying for a personal loan at Loan Singh. Through this piece we look at what is KYC, what are its benefits, the versions of KYC and why we need it.
What is KYC?
KYC aka Know Your Customer, was part of Reserve Bank of India’s guidelines to set up a process by which financial institutions like banks or digital lending platforms could verify a borrower’s identity and residential information. This simply helps financial institutions to confirm if the borrower is genuine or not. The Reserve Bank of India introduced KYC in 2002. By 2004, RBI directed all banks to ensure that they are fully compliant with the Know Your Customer provisions. KYC is the common and regulatory process of document submission where the identity of the investor is verified based on written details submitted. The documents for KYC are submitted by the customer and maintained by the collecting bank or digital lending platform. Banks are also instructed to periodically update their KYC details as and when possible.
KYC guidelines help financial institutions to counter money laundering activities. KYC also enables financial institutions to understand their customers and their financial dealings better. It is an indispensable banking requirement for opening of a bank account or applying for a personal loan. KYC helps financial institutions to manage risks prudently.
Financial institutions, when implementing RBI approved KYC policies, consider the following aspects
- Acceptance by the borrower – The KYC policy should be acceptable by the borrower
- Borrower identification – KYC should identify the borrower and verify his/her identity, information and document source
- Monitor transactions – To monitor the financial activity of the borrower with regards to disbursements and loan EMIS.
- Manage risk – To ensure steps are taken to avoid risk or take action in case there are repeated defaults.
When is KYC required?
KYC documents are to be submitted for
- New account opening
- Applying for a new credit card
- Applying for a personal loan
- If existing documents are not enough
- To avail locker facility
- To change a nominee or signatory
- For insurance
- Used for mutual funds, stock broking or commodity trading
Which are the KYC documents?
There are 2 types of documents required to comply with KYC guidelines, Proof of Identity and Proof of Address. Under Proof of Identity, any one of the following can be used as officially valid KYC documents
- Driving License
- Voter’s Identity card
- PAN Card
- Aadhaar card (Issued by UIDAI)
- NREGA Job Card
If any of the above KYC documents also mention your residential address, then it can be also treated as a valid Proof of Address. Otherwise, the following are also accepted as valid KYC documents.
- Utility bill (electricity, water bill, phone bill, postpaid mobile recharge bill)
- Municipal Tax Receipt
- Bank Account statement
- Pension Payment Order number
Benefits of KYC
KYC acts as a proper mechanism (thanks to its stringent rules) to track the entities involved in illegal money laundering activities. Knowing the financial dealings of customers/borrowers is a deliberate effort of financial institutions. The idea is to trace suspicious transactions to any illegal agenda. Financial institutions can create risk profiles by assigning customers or borrowers to a risk category. They can then monitor possible frauds and loan defaults. Financial institutions look at the purpose of loan, financial background and nature of transactions involved. KYC documents allow financial institutions to verify accounts of borrowers or customers. Unless the details are verified, a new account cannot be opened nor can a loan be applied for.
Financial institutions get the answer to questions such as is the customer/borrower genuine or does the customer/borrower know willingly that their information is being shared with the institution or the information provided matches with records elsewhere.
What is Re-KYC?
As per Reserve Bank of India norms, banks have to update the customer’s KYC documents periodically. The bank can then ask the customer/borrower to re-submit their KYC documents. Banks create customer profiles based on financial status, purpose of opening the account, purpose of personal loan, origin of funds, employment status etc. For cases where transactions are not consistent with the profile, the bank can ask their customer/borrowers to re-submit their KYC documents.
In any case, it is for your own good to redo your KYC as it a good way to safeguard your financial transactions. If you are requested to do a Re-KYC by the bank, you will need to submit self-attested copies of your Aadhaar Card, PAN Card, passport size photographs and a KYC update form (Re-KYC form).
In case the customer does not periodically update his/her KYC with the bank, the bank can partially freeze the customer’s account. The bank will send a reminder notice to the customer which will be valid for 3 months prior to partial freezing. If the customer does not update his/her KYC even after 6 months from the partial freezing stage, the account would be deemed inoperative by the bank.
Although yet to be implemented by financial institutions for savings account or loan applications, investors in Mutual Funds will have to do a C-KYC (Central Know Your Customer).
CKYC replaced the existing KYC for new mutual funds’ investments from February 1, 2017.
- It is an initiative which requires investors to complete their KYC just once for multiple agencies across multiple financial products.
- CKYC is managed by CERSAI which is RBI authorized.
- It reduces the burden of producing KYC documents every time an investor deals with a new financial entity
- It is a centralized repository for KYC records in the financial sector.
- New investors need to fill the new CKYC form and submit self-attested copies of Aadhaar, PAN, Address proof and ID proof
- Older investors who have produced their KYC before need not switch to CKYC
- 14 Digit number provided to the investor to be used in all financial dealings
It is only possible if the customer has an Aadhaar number. It is simply a mandate via which the customer authorizes UIDAI (Unique Identification Authority of India) to release identity or address information through biometric authentication to the bank.
KYC for Loan Singh
Being a financial services facilitator for providing online personal loans to salaried professionals, Loan Singh is also entitled to collect the borrower’s identity proof and address proof. As mentioned above, this is to prove the authenticity of the borrower. It is advisable that you keep your KYC documents handy.
The documents that Loan Singh asks for are PAN and latest 6 months bank statement in PDF format.