KYC challenge for financial institutions

On March 11th, the Reserve Bank of India barred Paytm Payments Bank from onboarding new customers with immediate effect. Without elaborating, the RBI said it observed ‘material supervisory concerns’ in the bank.

The regulator also ordered a comprehensive audit of Paytm Payment Bank's IT systems. Vijay Shekhar Sharma holds a 51% stake in the bank and One97 Communications 49%. 

The restrictions mean users cannot sign up for new Paytm wallets or Paytm Payments Bank savings and current accounts. 

Meanwhile, sources told Business Standard that RBI’s action was primarily owing to violations of KYC and anti-money laundering norms. 

The bank faced a similar action in 2018 after RBI found that it had violated KYC norms while onboarding users.

Banking industry experts said the RBI had been strict in this regard in view of the Financial Action Task Force country review, which is coming up this year or early next year.
 

Paytm has denied a news report from Bloomberg that said RBI found Paytm Payments Bank's servers were sharing information with China-based entities that indirectly own a stake in the firm.

In the past, RBI has levied monetary penalties on banks for non-compliance with KYC rules. Earlier this month, three cooperatives faced penalties while in September 2021, Axis Bank was fined 25 lakh rupees.

Recently, fraudsters used the PAN number of several people to avail instant loans from the Dhani app. This has highlighted the need for stronger KYC checks. 

The objective of  KYC and AML guidelines is to prevent banks from being used by criminal elements for money laundering. KYC procedures also enable banks to understand their customers and their financial dealings better which in turn help them manage their risks prudently.  

Banks must ensure that no account is opened in anonymous or fictitious names. Account should not be opened when a bank is unable to apply appropriate customer due diligence measures, either due to non-cooperation of the customer or non-reliability of the documents and information furnished by the customer.
 

Customers shall be categorised as low, medium and high risk category, based on the assessment and risk perception of the RE.

So, what are the challenges that financial institutions face when trying to implement RBI's KYC/AML guidelines since lenders are being frequently fined for lapses?

In an increasingly digital world, it is clear that banks must find innovative ways to assess customer risks and monitor transactions. Financial institutions, i.e both banks and fintech companies,  should understand the complexities that arise from both the volume of transactions as well as KYC data as we undergo a digital transformation.