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This article was first published on ET BFSI, dated July 4th, 2021.
Recent RBI steps play a key role towards digitizing business KYC, and easing KYC updation for businesses and individuals alike. This is very welcome relief particularly with the pandemic increasing the need for credit access, combined with the need for zero contact KYC processes. KYC, after all, forms an essential first step for accessing several financial services- loans, banking, payments, etc. For small businesses, MSMEs, one person companies, etc., the lack of digitized KYC processes is a major challenge with account opening and lending processes. These in particular can expect to benefit. Here, key changes and improvement to existing processes are discussed.
New uses of Video-KYC
Video-KYC when introduced in January 2020, but only for individuals. Thus earlier, despite permitting using ‘equivalent e-documents’ for businesses, in-person visits were still needed to complete KYC processes (like signature requirements). The latest steps now ease this:
- Video-KYC permitted for business KYC: The use of video KYC has been permitted for the individual KYC component of business KYC. This refers to checks for key individuals of the business, like actual owners. Specifically, this has been allowed for sole proprietors for a proprietorship, and for authorized signatories and beneficial owners for a legal entity (company, partnership, trust, etc.).
- V-KYC for updating KYC and converting Aadhaar OTP accounts: Additionally, use of V-KYC has also been permitted for KYC updation of eligible customers (individuals and businesses), and for converting non-face-to-face Aadhaar OTP based accounts to full KYC accounts (earlier this needed physical visits).
Remaining checks for business KYC, like for business documents and activity proof (incorporation documents, registration checks, GST certificates, etc.) business PAN checks, line of business checks, etc. all continue as per old processes. This means these must either be physical checks or checks of equivalent e-documents, i.e., official e-copies digitally signed by the relevant authority, or documents via Digi Locker or C-KYC (permitted recently for businesses also). Together with V-KYC, this thus can now allow business customers to be digitally on-boarded.
Changes to V-KYC process and tech
The basic V-KYC process remains the same, but there are welcome changes, like removing exclusive dependency on Aadhaar here.
- Allowing identity documents apart from Aadhaar: Previously identity here could be verified via Aadhaar alone (Aadhaar OTP based eKYC for banks or Aadhaar offline verification). Now this can use KYC records via the CKYC Register, or other OVD e-documents (passport/driver’s license/voter ID, etc.) including via DigiLocker. This thus increases acceptable identity documents here.
- Capture of current address: Where current address varies from that on the OVD, those details can also be captured- likely the capture of equivalent e-documents of utility bills, property/municipal tax receipts, pension payment orders, etc.
- Infrastructure related- data localization and no using cloud: New baseline security requirements are also outlined to ensure security. Most requirements like end-to-end encryption, geo-tagging, liveness detection, etc. were also present earlier. New ones include disallowing the use of the cloud (to be housed in the entity’s own premises, i.e., on its own servers), increased testing and audit requirements, etc. Further, V-KYC data can be stored only in systems in India.
Relaxations to KYC updation
Even earlier, KYC updation did not require in-person verification, allowing sending updation documents and KYC self-declarations via post, net banking, etc. These processes are now relaxed further. In fact, the RBI has also asked financial entities not to act against failures to update KYC until the year-end.
- Individual and Business KYC updation via e-mail, app, ATMs, etc.: The RBI has now expressly allowed updation via a range of digital methods- registered e-mail/mobile number, online/net banking, mobile app, ATMs, etc. For businesses, this can also be via a board resolution, letter from authorized officials, etc. In case of no change, a self-declaration via these modes will suffice. For businesses earlier, fresh certified copies of documents were required regardless. Now, only if there is a change, then a fresh KYC process will be conducted.
- Change in address proof via self-declaration: In case of only an address change, individuals can self-declare the new address via any of these methods . The financial entity will thereafter verify the declared address via address verification letters, contact point verification, deliverables, etc. The entity can also ask for an OVD (passport/driving license/Aadhaar/Voter’s ID, etc.) as address proof at its option.
Variations in KYC procedures for higher risk customers
Customers may see some variation in KYC requirements from entity to entity, since financial entities have been allowed some discretion with the requirements set based on their risk perception. For example, higher risk customers may see additional requirements like in-person verification, fresh photographs, etc. for KYC updates. Nevertheless, these are very welcome steps from the RBI towards digitising KYC.
- Article by Asheeta Regidi: What are the KYC procedures for merchant onboarding?, Cashfree Blog.
- Ministry of Finance Notification, Prevention of Money-laundering (Maintenance of Records) Third Amendment Rules, 2019, G.S.R.582(E), dated 19 Aug, 2019.
- RBI Notification: Amendment to Master Direction (MD) on KYC, RBI/2019-20/138, 9 Jan, 2019.
- RBI Notification: Amendment to Master Direction (MD) on KYC – Centralized KYC Registry – Roll out of Legal Entity Template & other changes, RBI/2020-21/80, 18 Dec, 2020.
- RBI Notification: Periodic Updation of KYC – Restrictions on Account Operations for Non-compliance, RBI/2021-22/29, 5 May, 2021.
- RBI Notification: Amendment to the Master Direction (MD) on KYC, RBI/2021-22/35, dated 10 May, 2021.
- RBI Report: Expert Committee on Micro, Small and Medium Enterprises, dated 25 June, 2019.
- Website of Digilocker.
- Website of Unique Identification Authority of India, on Aadhaar Paperless offline e-KYC.