What is KYC? Is it necessary?

Know your Customer, more popularly known as KYC is a term used for customer identification process and is governed by rules of the Reserve Bank of India. It involves making all possible efforts to check the true identity and beneficial ownership of accounts, source of funds, the nature of customer's business, reasonableness of operations in the account in relation to the customer's business, etc which in turn helps the banks to manage risks that may arise in the future.

One of the prime objectives of the KYC guidelines is to ensure that banks are not vulnerable, intentionally or unintentionally by nefarious elements for money laundering.

According to the RBI, KYC has two components that need to be complied with: The first is identity and the second being the address. While identity remains the same, the address may change and hence the banks are required to periodically update their records. There are various documents by which the banks could back a clients claim on identity and address proof. These would include PAN card, driving license, passport etc.

Is there any legal backing for verifying identity of clients?

Very much. According to the RBI, it has issued guidelines to banks under under certain provisions of the Banking Regulation Act, 1949 and Rule 7 of Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005.

Is KYC applicable for banking facilities like fixed deposits?

The RBI has made it clear for service like fixed deposits, banks have to enure that clients comply with
the KYC requirements. This is also in the interest of the bank as the chances of fraud and money laundering is eliminated.

Information Courtesy: Reserve Bank of India