Simplifying the KYC process and business identifier

Anita Baid, Vice President | finserv@vinodkothari.com

Backdrop

The regulations for conducting customer identification and due diligence by financial sector entities have been laid down by RBI and SEBI, in accordance with the provisions of Prevention of Money Laundering Act and Rules. Under the current regime, the KYC process extends from physical KYC to digital and video-based KYC as well. The physical process of collecting KYC documents and verifying the same involves a lot of paperwork. On the other hand, the Digital KYC Process is a facility that allows lenders to undertake the KYC of custom​​ers via an authenticated application, specifically developed for this purpose, hence making it a paperless process. The Digital KYC process, however, also requires physical interaction. Video-based KYC is both paperless and without any physical intervention.

The hurdles in the KYC process are more difficult for fintech and digital lenders who intend to digitize the entire customer onboarding process and do away with any paperwork.

For the purpose of initial and periodic KYC as well, bundles of paper are again collected from customers and executed. The entire process turns out to be a nightmare for lenders, with hordes of papers being signed and collected. Further, even the lending operations are being stigmatized by the compliance requirements and at times, even credit decisions are being overshadowed by KYC concerns.

The need for conducting KYC spans across various financial transactions – it is not just restricted to lending but also includes purchases, sales, and any transaction for making or receiving payment, in whole or in part, for any contractual or other legal obligation.

In the past, the most interesting amendment in the KYC process was the introduction of “equivalent e-document”. This facilitated the acceptance of an electronic equivalent of a document, issued by the issuing authority of such document with its valid digital signature including documents issued to the digital locker account of the customer, as a KYC document. The said recognition aimed at facilitating a hassle-free and convenient option for customers to submit their KYC documents since they were able to submit KYC documents in electronic form stored in the digital locker account. Further, pursuant to this amendment, at several places where Permanent Account Number (PAN) was required to be submitted mandatorily has now been replaced with the option to either submit PAN or an equivalent e-document.

Budget Proposals

The Union Budget has proposed to further simply the KYC process by adopting a ‘risk-based’ instead of a ‘one size fits all’ approach. It seems that the RBI, being the financial sector regulator will be encouraged to have a KYC system fully amenable to meet the needs of Digital India. The collection of KYC documents is an integral part of the entire process and the same could be automated or simplified for the customer as well as the financial entities.

Further, the use of digilocker may be widened to make it a one-stop solution for reconciliation and updating of the identity and address of individuals maintained by various government agencies, regulators, and regulated entities. It is also proposed to make Aadhaar a foundational identity, thereby giving it wide acceptance and recognition.​ ​​The various modes of submission of Aadhar would also need to be streamlined​ to enable this.​

Furthermore, for business establishments​ and legal entities, it is proposed that PAN will be used as the common identifier for all digital systems of specified government agencies. This will bring ease of doing business and address various operational hassles. Also, the use of digilocker and Aadhaar, which is backed by government, would help to increase customer trust and security, as well as improve the accuracy and reliability of identity information.

It appears that the process simplification will come by way of rules under the Prevention of Money Laundering law or the KYC provisions issued by financial sector regulators. It is also expected that we will to a regime of a long-term and single window KYC process. It is ironical that while the country’s passport is accepted as an identity proof world over, for KYC, one needs to go through the cumbersome documentation process, and that too, after every one or two years.