Know Your Customer (KYC): What You Should Know

Imagine having your bank account frozen or your investment application rejected without a clear explanation. You may have the funds, the intention, and the plan, but something as simple as a missing or outdated document can stop everything. This is not rare. Many people in India face difficulties while accessing financial services, not because of any fault in their finances, but due to incomplete or misunderstood KYC compliance.

What is KYC?

KYC stands for Know Your Customer. It is a process used by banks, financial/lending institutions, and service providers to verify the identity and address of their customers. The primary purpose is to verify that the person using the service is genuine and not involved in any illegal activities. This process is not just limited to banks. Mutual funds, insurance companies, digital wallets, and even mobile service providers may ask you to complete your KYC.

Many institutions now rely on KYC solutions to automate and streamline this process, ensuring quick and accurate identity verification.

Documents Required for KYC Completion

To complete your KYC process, you must submit the following two categories of documents:

• Proof of Identity (POI): Documents accepted include:
• Aadhaar Card
• PAN Card
• Voter ID
• Passport
• Driving Licence
• NREGA Job Card (signed by a State Government officer)
• Proof of Address (POA): Documents include:
  • Aadhaar Card
  • Passport
  • Utility bills (electricity, water, or telephone – not older than 3 months)
  • Bank account or post office statement
  • Rent agreement (registered)
  • Driving Licence

• A recent passport-sized photo is required.
• For minors, guardians’ documents are mandatory.

Different Types of KYC Process

The four types of KYC processes you may undergo are:

Paper-Based KYC

In paper-based KYC, you must physically fill out the KYC form and submit self-attested copies of your identity and address proof, such as your PAN, Aadhaar card, or passport. Along with these, you also need to paste your recent passport-size photograph and sign across it. This method is required when opening a bank account. You also need to undergo an in-person verification, where a bank official confirms your identity. 

Video-Based KYC

Video-based KYC allows you to verify your identity remotely through a video call with an official from the financial institution. You must show your original PAN card and display your face clearly in front of the camera. The official asks you to respond to a few live questions to confirm liveness and verify the authenticity of the documents. You must also allow location access during the call.

Central KYC (CKYC)

Central KYC or CKYC is a unified KYC process managed by the Central Registry of Securitisation and Asset Reconstruction and Security Interest (CERSAI). Once you complete CKYC through any financial institution, your details are stored in a centralised database and assigned a unique CKYC number. When you approach another financial service provider, you just need to share this number, and they can access your KYC record. This eliminates the need to repeat the process for each investment or account. You must submit proof of identity, address, and a photograph, and fill out a CKYC form for this one-time and centralised verification process.

Aadhaar-Based Biometric KYC

In Aadhaar-based biometric KYC, you must provide your Aadhaar number along with fingerprint or iris scan verification. This process confirms your identity in real time using the UIDAI database. It is commonly done at banks, telecom offices, or through authorised agents with biometric devices. There is also an Aadhaar-based OTP KYC process. It is also a paperless method that uses your UID number and a one-time password sent to your registered mobile number. You enter the OTP to verify your identity through the UIDAI platform.

Importance of KYC Process

Here are five importance of the KYC process:

Prevents Identity Fraud

KYC helps institutions verify that you are who you claim to be. It requires documents like Aadhaar, PAN, or Voter ID to confirm your identity and address. This process makes it harder for fraudsters to open fake accounts or misuse someone else’s details. For instance, if a criminal tries to open a bank account using your name, KYC procedures can detect mismatched documents or biometric issues.

Controls Money Laundering

KYC plays a crucial role in tracing the origin of funds. It ensures that the money being deposited or transferred is clean and not linked to illicit acts such as terrorism financing, drug trafficking, or black money. When you submit your identity and address proof, the institution can monitor suspicious activity by flagging irregular transactions or unusually large deposits. This forms an essential part of customer due diligence carried out by financial entities.

Access to Financial Services

Without KYC, banks and financial institutions will not allow you to open savings accounts, apply for loans, or invest in mutual funds. It is the foundation of your financial profile. By verifying your identity and address, institutions can confidently offer you various services, such as fixed deposits, credit cards, insurance, and pension schemes.

Promotes Regulatory Compliance

KYC ensures that all financial transactions comply with the rules set by regulatory bodies, including the RBI, SEBI, IRDAI, and PFRDA. These regulators require financial institutions to confirm the identity and address of their customers so that the system remains transparent and accountable. If an organisation fails to collect KYC details, it could face penalties or legal action. Proper KYC also helps during audits and investigations.

Government Benefit Distribution

Many government schemes in India, such as PM-KISAN, LPG subsidy, and pension schemes, rely on Aadhaar-linked bank accounts for direct benefit transfer (DBT). KYC ensures that funds reach the intended beneficiary directly, without the involvement of intermediaries. When your bank account is KYC-compliant, the government can directly credit funds without delays or duplication.

Conclusion

KYC is not just a formality but a necessary step to access financial services, prevent fraud, and ensure legal compliance. Whether opening a bank account, investing in mutual funds, or receiving government benefits, proper KYC safeguards your identity and smoothens transactions. Understanding the types of KYC and the required documents helps you stay prepared and avoid service interruptions.

**’The opinions expressed in the article are solely the author’s and don’t reflect the opinions or beliefs of the portal’**