Why KYC is required in Bank.

BanksKYC (Know Your Customer) is a mandatory process through which banks verify the identity, address, and nature of their customers before allowing them to open or operate an account. The main objective of KYC is to prevent money laundering, financial fraud, and the misuse of banking systems. It helps banks confirm the true identity of individuals and businesses, ensuring that accounts are not used for illegal or terrorist activities. Moreover, it ensures compliance with the Prevention of Money Laundering Act (PMLA), 2002 and the RBI Master Direction on KYC, which make KYC compulsory for all financial institutions in India.

There are different types of KYC, such as Simplified KYC, which involves basic verification using Aadhaar OTP and is used for small or digital accounts with transaction limits; Full KYC, which includes complete verification of identity and address using officially valid documents (OVDs) and is used for regular savings or current accounts; and e-KYC or Video KYC, which allows digital verification through Aadhaar authentication or live video interaction for paperless account opening.

KYC requirements vary depending on the type of bank account and the customer category. For example, individuals opening savings accounts must provide personal KYC documents, while businesses, partnerships, LLPs, and companies must submit entity documents like GST registration, incorporation certificates, and authorization letters, along with KYC of the authorized signatories. Similarly, NRI/NRO account holders are required to submit their passport, visa, and overseas address proof.

Banks also classify customers into threerisk categories—low, medium, and high—based on their profile and transaction nature. Low-risk customers, such as salaried employees or pensioners, need re-KYC every 10 years; medium-risk customers, such as small business owners, every 8 years; and high-risk customers, such as large businesses or politically exposed persons (PEPs), every 2 years.

For verification, the Officially Valid Documents (OVDs) accepted by banks include Aadhaar Card, Passport, Driving Licence, Voter ID, NREGA Job Card (duly signed by a state officer), or a Letter from the National Population Register. Even after account opening, customers are required to undergo periodic re-KYC to keep their records updated and ensure continued compliance with RBI guidelines.In summary, KYC is a crucial part of the banking process that enhances transparency, safeguards the financial system, and helps banks build trust with genuine customers while reducing the risks of illegal financial activities.