Illegal freezing of bank accounts

While attempting to do an online transfer of funds, Randeep Arora, a retired army officer, found his account was frozen for “non-compliance” with Know Your Customer (KYC) norms. Despite having maintained a salary account, and later a pension account, with the bank for 30 years, and when the bank already has his Pension Payment Order, Aadhaar card, PAN card, etc on record, he was harassed by putting a freeze on his money without any prior intimation to update KYC details.

One evening when Irfan Khan went to purchase fuel, he discovered his debit card was blocked without any intimation to him. Mr Khan learnt he was not “KYC-compliant”. He believes he had updated his KYC just a couple of years earlier, so he studied the Reserve Bank of India (RBI) guidelines and discovered he needed to be informed in writing before the initiation of coercive action. When he went to meet the bank manager the next day with his KYC documents, he received no explanation as to why his account was frozen.

Rahul Singh realised his account with Canara Bank was frozen when a cheque he had issued was bounced. He insists he submitted the KYC documents but the bank did not bother to update them in the core banking software.

Niranjan Modi discovered his joint account was frozen when he was not allowed to transfer money from his Axis Bank account; he learnt it was because his wife’s KYC update was pending.

These cases (all names changed) are among the thousands who are deprived every day of access to their own money because banks have been recklessly freezing their accounts. This extreme punishment is imposed with impunity by bank officers, often without adequate notice or sufficient time for compliance with KYC re-submission. Unilaterally freezing an account has a series of consequences on standing instructions, for loan repayments, credit-card payments, or utility bill payments, which may get cancelled or bounce. Senior citizens living on a pension are reduced to helplessness for no fault of theirs.

Now here is a stunning fact: We are given to believe banks have been empowered by the RBI and the Ministry of Finance to freeze customer accounts for failing to update KYC documents. It now appears that neither banks nor the RBI has the powers to do so. How do we know this? From a committee set up by the RBI to look into customer-service standards of banks and (other RBI-regulated entities). While the committee, headed by a former RBI deputy governor, B P Kanungo, has come up with excellent recommendations that address all the major grievances of bank customers, the report has this stunning admission about freezing accounts. In the committee’s words: “Instances (have come) to the notice of the Committee that some banks stop operations in the account when (the) required documents are not submitted in time by the account holder, for updating Know Your Customer (KYC) … even though the regulation does not provide for it. Cheques issued by the account holder were dishonoured in many such cases.”

This has left us speechless. All this, while banks have been freezing accounts indiscriminately with the argument that we need repeated updating of identification documents to prevent the misuse of banking channels for money laundering and financial fraud. Banks in turn say RBI inspectors harass them if they do not take the extreme step of freezing accounts when KYC is not updated. But we are now told that freezing accounts is itself illegal!

The RBI has released the Kanungo Committee report and sought public comments and feedback on its recommendations by July 7, after which a decision will be made on adopting them. But why wait for July 7 on an issue where the RBI knows that the banks’ action of freezing accounts is illegal and causes extraordinary harassment? Why not issue directions to banks today to stop freezing accounts for KYC updates? Indeed, the RBI could have acted much earlier. In response to a Right to Information query about freezing accounts by my colleague in January 2021, the RBI replied: “We have not issued any specific instructions in this regard.” Its master directions asked banks only to follow “certain customer identification procedures”. And yet, the RBI has remained impassive about the havoc caused by banks on law-abiding people. This is ostensibly in the name of preventing money laundering, which by crooks and criminals continues with impunity.

Fortunately, as mentioned, the committee report deals with almost all the major customer issues with compassion. It acknowledges the need to fix banks’ broken and one-sided internal ombudsman system and asks for greater accountability from banks, especially when there are repeated complaints on the same issue.

In many cases, the RBI has been issuing general directions, leaving banks to implement them as they deem fit. This causes distress for customers because interpretations differ widely. Such general directions have to be replaced with standard operating procedures, especially in dealing with nomination and succession issues. The committee also notes that technology should be a two-way street and if new accounts and services can be availed of online, then closure should also happen online. A well-known industrialist tells me that account closures are so cumbersome that he simply leaves a small amount in the account and does not bother about it. Hopefully, the committee report will be implemented in a manner that will eliminate this and numerous other forms of aggravation of bank customers.

The writer is editor of www.moneylife.in and a trustee of the Moneylife Foundation; Twitter: @Moneylifers