New forms peeve banks, clients

Anjali, a housewife, recently walked into her Connaught Place bank branch, where she has held a savings account for over a decade, to renew her fixed deposits. Imagine her shock when a staffer told her that her account was no longer active and so she couldn't renew the fixed deposits either.

Asked for an explanation, the staffer handed her a four-page "customer relationship form-l" to fill up. The form concerned is part of the Reserve Bank's "Know Your Customer" (KYC) norms issued in November 2004 that treat renewal of term deposits as new accounts.

Know Your Customer is an attempt to clamp down on money laundering operations. The norms mandate banks to establish all personal details from new account holders starting 2004 and from existing customers whose transactions were over Rs 10 lakh in the year ending March 2003 and for those accounts in which unusual transactions have been noticed.

The deadline for compliance expired in December, 2005. Though new accounts are KYC-compliant, getting the old ones up to date is expected to take two or three years.

This is becoming a problem for both banks and their customers. Apart from routine information, the new forms require disclosures on financial interests abroad, credit and debit cards, dealings with other banks and branches and the account numbers (both savings and current), credit facilities, names of the lenders, amount, asset class and so on.

What do bankers do with this information? They have to sign off by assigning customers a risk classification, indicate a threshold limit and also peg an approximate value to the customer's moveable and immoveable assets.

"The forms and the intrusive nature of the information is putting people off and also denting the image of public sector banks, which already suffer negative perceptions about being too bureaucratic and overtly officious in their approach," said the executive director of a leading public sector bank.

"We have customers who have been with us for 20 to 30 years and their credentials are already established. It is not nice to quarrel with them, but we have no option. Most of them leave in a huff, telling us that the private bank next door does not insist on all this information," he added.

The compliance exercise is also impacting banks in other ways. "New account opening time "" which used to be seven minutes by one yardstick "" has gone up to over 30 minutes," a senior bank executive said.

This is especially troublesome for public sector banks. There are about 500 million bank accounts in India, of which 140 million are in rural areas. Public sector banks account for 75 per cent of all banking accounts and 96 per cent of rural accounts.

Rural banks are a particular problem because many are still not computerised. In urban areas, public sector banks say they are losing business from walk-in customers attracted to the higher deposit rates on offer.

The predicament of one public sector bank in the capital, which has around 7,00,000 accounts spread over a 100 branches, highlights the problems. Not only are staffers scrounging around for storage space for the forms, they really have no way to confirm the veracity of the information the customer has given.

As a bank official said, "The bank has no way to go around verifying whether a customer has other bank accounts or has taken multiple credit cards. It is a declaration by the individual. This is especially important as the data is also used to assign a risk rating. If a customer replies in the negative to crucial queries, the chances are high that he would be assigned a very high-risk category."

The KYC norms for pre-2004 accounts have also left scope for ambiguity and encourage banks to err on the side of caution. "Banks on their own want to cover all ends and leave nothing to doubt," the executive added.