It is mandatory for banks to strictly follow the RBI guidelines and maintain proper records

KYC – an ellipsis for ‘Know Your Customer’ -- is a commonly heard term these days, especially in the telecom and the banking service sectors, where service providers demand for certain personal information from their prospective/existing customers. The objective of doing so is to enable them to have positive identification of their customers and thus protect the interests of consumers by preventing fraudsters from misusing vital information.

KYC basically has two components – identity and address. While identity of a person remains the same, the address could vary and therefore, service providers, who are required to periodically update their records, ask for details time and again.

With regard to banks, KYC is a legal and regulatory prerequisite. The Reserve Bank of India, under Section 35A of the Banking Regulation Act and Rule 7 of Prevention of Money - Laundering Rules, 2005 issued guidelines on Know Your Customer Standards, according to which, all banks are required to put in place a comprehensive policy framework covering KYC standards. Non-compliance attracts penalties under the Banking Regulation Act.

The guidelines also state that if the bank is unable to apply appropriate KYC measures due to non-furnishing of information and/or non-co-operation by the customer, the bank can consider closing the account or terminating the banking relationship after issuing due notice to the customer explaining the reasons for taking such a decision.

Having discussed the need for KYC, let me now speak a propos a complaint that will elucidate on how banks harass consumers despite them submitting the necessary KYC documents. Chandrashekar has been having his account with a multi-national bank (MNB) for many years and as demanded by the bank, had submitted the relevant papers for KYC purposes, recently. He also had deposits with the bank and always retained a substantial balance in his account.

Chandrashekar had taken a housing loan from another bank and was promptly repaying the same. A few months ago, he presented his MNB with a cheque towards a particular instalment and was surprised when he learnt that the cheque bounced as his account was frozen! He approached the bank for an explanation and was told that since he did not produce the necessary papers to update his KYC record, his account was blocked.

He immediately wrote to the bank stating that he had submitted all the relevant papers only recently and the bank had dishonoured his cheque without verifying records thus causing great embarrassment to him. Therefore, the bank should compensate him for the unwarranted humiliation that he had to face. He also highlighted the fact that the bank failed to adhere to the RBI guidelines by freezing his account without prior notice. The MNB responded by apologising profusely for its supposed oversight, confirming that Chandrashekar’s KYC details were indeed updated with them and assuring best services in the future.

Chandrashekar believed the incident to be a one-off thing that could have happened due to human/technical error and therefore, decided to leave the matter to rest. However, he was in for a rude shock when, a few days later, another cheque bounced and an interest warrant from the deposit he had with a NBFC, which, in normal course, is automatically credited to his account with the MNB, was returned by the bank.

When he wrote to the MNB demanding to know the reasons, he was bemused by their response that he had not presented the papers as per KYC norms. We were all the more amazed when Chandrashekar sought our assistance and we represented the matter to the MNB. Without evaluating the gravity of the issue, they replied stating that they would not share crucial consumer information with third parties due to security reasons and therefore, the complainant should represent his case himself. Even when we pointed out that details were already given by the customer and we only wanted an explanation, they failed to see reason.

On our advice, Chandrashekar has now filed the complaint in the District Forum for deficiency in service, seeking compensation.

Thus, it is mandatory for banks to strictly follow the guidelines issued by the RBI and also ensure that they maintain proper records of the same so that they do not gratuitously harass consumers in the process.

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