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  • JUNE 20, 2013

Can KYC sanitize Indian banks?

KYC (Know Your Customer) is a term used by the banks for customer identification process. As per the Reserve Bank of India (RBI) guidelines, KYC involves making reasonable efforts to determine 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 their risks prudently. KYC guidelines ensure that the banks act with prudence and refrain from criminal acts of money laundering intentionally or unintentionally. While KYC norms apply to individuals as part of account opening process with any bank, needless to mention it holds true for companies, partnership firms, partnership concerns and trusts and foundations as well.

KYC, thus, helps establishing customer's identification and monitoring transactions of a suspicious nature. So while it stands essential for bank customers as part of initial account opening process, it is particularly vital for the bank.

The information gathered by banks helps them to:

  • Weed out duplicate accounts
  • Check credit history of the borrower
  • Check the trail of money of the depositor
  • Curtail attempts of money laundering
  • Gather collective information on credit demand and usage that can help the regulator keep a watch on financial inclusion and as well as avert systemic risks.
The recent allegations by Cobrapost about the money laundering attempts of few PSU, private and even foreign banks brought the KYC malaise to the surface. While the news gathered much fervor, the RBI laid thrust on rigorous end-to-end investigations of the transactions. On scrutiny, the regulator denied prima facie evidence of money laundering. However, RBI did conclude of some of the violations of the KYC norms. Failure to file cash transaction reports, not obtaining the permanent account number or PAN card details, non-adherence to risk categorization and missing out the periodical review of risk profiling of account holders were few such instances of non-compliance of KYC norms. A penalty, albeit small, was also imposed on HDFC Bank, ICICI Bank and Axis Bank. However, the RBI stopped short of acknowledging that the problem is at a systemic level.

To conclude...

On a macro level, the KYC lapse is a problem of corporate governance. While the RBI has done its job well and would continue to do so, it's also the responsibility of the stakeholders to ensure that corporations are being transparent and honest and that the management does not engage in unethical practices that would prove detrimental to the vested interests. As the legendary investor, Warren Buffet, quite aptly puts forth that good corporate governance is not the sole responsibility of the regulator. Every market participant has a role to play. While the companies are expected to demonstrate high standards of ethics and integrity, stakeholders and investors should be aware and educated in these areas of importance as well.

Investors require being particularly diligent when it comes to identifying quality companies that fit well and adhere to the corporate governance standards stipulated by the regulatory bodies. While KYC cannot and will not sanitize the banking sector or any other sector, investors' stress on good corporate governance can go a long way.

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