KYC Norms: Know Your Customer (KYC) is one of the most important regulations in the Indian banking sector. It is the process by which banks and financial institutions verify the identity, address, and background of their customers before providing financial services. KYC is not just a formality but a legal requirement that protects the financial system from fraud, money laundering, terrorism financing, and other illegal activities.
The Reserve Bank of India (RBI) made KYC mandatory in 2002 and later strengthened it under the Prevention of Money Laundering Act (PMLA), 2002. Today, KYC is a critical part of banking awareness, and bank exam aspirants must understand it thoroughly since questions related to KYC appear regularly in exams like IBPS, SBI, RBI, and insurance exams.
What is KYC?
KYC means “Know Your Customer.” It involves collecting proof of identity, proof of address, and sometimes financial details of customers.
The main purpose of KYC is to ensure that banks know who their customers are and what kind of financial transactions they are likely to conduct. This helps banks identify suspicious activities early and report them to the authorities.
For example:
- If a person opens a savings account, they must provide Aadhaar and PAN card.
- If a company opens a current account, it must provide incorporation certificates, tax details, and authorized signatory documents.
KYC Norms
KYC norms are the rules and guidelines that banks and financial institutions must follow to verify the identity of their customers. These norms were introduced to ensure that the banking system is not misused for illegal activities like money laundering, terrorism financing, or identity fraud.
The Reserve Bank of India (RBI) has made KYC compliance mandatory for all banks, Non-Banking Financial Companies (NBFCs), and other regulated entities. KYC is carried out at the time of opening an account, availing a loan, investing in mutual funds, or carrying out high-value transactions.
The KYC process usually involves two components:
- Identity verification – through documents such as Aadhaar, PAN, passport, voter ID, or driving license.
- Address verification – through documents like utility bills, rental agreements, or government-issued IDs.
Why Is KYC Necessary in Banking?
The banking sector deals with large sums of money, making it vulnerable to fraud and misuse. KYC helps banks reduce these risks.
Key reasons why KYC is necessary:
- To prevent money laundering and terrorism financing.
- To ensure customer accounts are used only for genuine purposes.
- To protect customers from identity theft and fraud.
- To maintain compliance with national laws (PMLA) and international standards (FATF).
- To build trust and transparency in the financial system.
Objectives of KYC Norms
The KYC framework was designed with specific goals that benefit both customers and banks.
- Proper Customer Identification – Verifying identity using reliable, independent documents.
- Risk Assessment – Identifying high-risk customers such as politically exposed persons (PEPs).
- Monitoring of Transactions – Tracking unusual patterns in deposits, withdrawals, or remittances.
- Prevention of Financial Crimes – Blocking illegal activities such as hawala transactions, black money circulation, or funding of terrorism.
- Compliance with Global Standards – Ensuring Indian banks follow international AML/CFT frameworks.
Components of KYC
Every KYC process has two essential components.
| Component | Purpose | Examples of Documents |
| Proof of Identity | To confirm who the customer is | Aadhaar card, PAN card, Passport, Voter ID, Driving License |
| Proof of Address | To confirm where the customer resides | Aadhaar card, Utility bills, Passport, Rent agreement, Bank statement |
In certain cases, banks may also collect:
- Proof of Income (Salary slips, Form 16, ITR for loans).
- Business Documents (for companies/partnership firms).
Types of KYC in India
RBI has introduced flexible modes of KYC to make it easier for customers and to promote financial inclusion.
Regular KYC
Traditional method of submitting documents physically at the branch. Customers must carry originals for verification.
e-KYC (Electronic KYC)
Verification using Aadhaar authentication. Completely paperless and done through UIDAI database. OTP-based or biometric-based.
Video KYC
Introduced by RBI in 2020. Customers complete KYC via a live video call with a bank official. The official verifies documents and captures live photo/video.
Simplified or Small Account KYC
Designed for financially weaker sections who may not have full KYC documents. These accounts come with restrictions:
- Maximum deposit: Rs. 1 lakh per year
- Maximum withdrawal: Rs. 10,000 per month
- Validity: 12 months (extendable to 24 months)
Customer Due Diligence (CDD)
Customer Due Diligence is a key part of KYC norms. It ensures that customers are properly verified and classified based on risk levels.
Levels of CDD
- Simplified Due Diligence (SDD): For low-value accounts with minimal requirements.
- Normal Due Diligence: Standard verification for most customers.
- Enhanced Due Diligence (EDD): For high-risk customers like PEPs, NRIs, or those with large transactions.
EDD includes stricter checks such as source of funds, occupation details, and close monitoring of transactions.
Periodic Updating of KYC
KYC is not a one-time process. Banks must update records regularly to keep information accurate.
| Risk Category | Frequency of KYC Update |
| Low-risk customers | Every 10 years |
| Medium-risk customers | Every 8 years |
| High-risk customers | Every 2 years |
Example: A senior citizen with a pension account may be classified as low-risk, while a businessman dealing in foreign trade may be high-risk.
RBI Guidelines on KYC
The RBI has issued a Master Direction on KYC that all banks and financial institutions must follow. Some key provisions are:
- KYC must be completed before opening any account.
- Aadhaar can be used as both proof of identity and proof of address.
- PAN card is mandatory for high-value transactions.
- Banks must report Suspicious Transaction Reports (STRs) to FIU-IND.
- Video KYC is permitted to make onboarding easier.
- Accounts without updated KYC may be frozen until compliance.
KYC and Anti-Money Laundering (AML)
KYC is the first step in preventing money laundering. Together with AML laws, it ensures:
- Proper monitoring of financial activities.
- Prevention of illegal fund transfers.
- International cooperation in combating financial crimes.
For exam aspirants, it is important to remember that KYC + AML = Compliance Framework in banking.
Importance of KYC in Banking Exams
KYC is highly relevant for exams because:
- It is part of Banking Awareness.
- It is directly linked to PMLA and AML laws.
- RBI frequently updates KYC rules, making it current affairs material.
- Practical questions about KYC documents, periodic updates, and small accounts are common.
FAQs
A1: KYC stands for Know Your Customer. It is the process of verifying customer identity in banking and finance.
A2: KYC helps prevent money laundering, fraud, and identity theft, ensuring safe financial transactions.
A3: The Reserve Bank of India (RBI) regulates KYC norms under the Prevention of Money Laundering Act, 2002 (PMLA).
A4: The two types are Regular KYC (document-based) and e-KYC (Aadhaar-based electronic verification).
A5: Aadhaar card, PAN card, voter ID, passport, driving license, and utility bills for address proof are commonly accepted.
A6: CKYC stands for Central KYC, a central database of KYC records accessible to multiple financial institutions.
A7: Yes, KYC is mandatory for all types of bank accounts like savings, current, FD, and loan accounts.
A8: e-KYC is an Aadhaar-based electronic verification done using OTP or biometrics for faster account opening.
A9: Banks update KYC every 2 years (high-risk customers), 8 years (medium-risk), and 10 years (low-risk).
A10: The bank may freeze the account, restrict transactions, or deny financial services until KYC is updated.
- Banking KYC Norms in India: Documents, Rules & Objectives
- Anti-Money Laundering (AML) Laws in India & Global Framework
- Direct Benefit Transfer (DBT) in India: Objectives, Schemes & Role
- NBFC’s Structure, Functions, and Regulations
- Homonyms & Homophones, Types of Questions Asked on This Topic
- Synonyms and Antonyms, Types of Questions Asked on This Topic
Hi, I’m Tripti, a senior content writer at Oliveboard, where I manage blog content along with community engagement across platforms like Telegram and WhatsApp. With 3+ years of experience in content and SEO optimization related to banking exams, I have led content for popular exams like SSC, banking, railways, and state exams.