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The Reserve Bank of India, also referred to as RBI, is the country’s central bank and a regulatory agency in charge of establishing policies and overseeing the country’s banking industry. Along with banks, other NBFCs in the finance industry must follow the RBI’s rules as needed. In 2004, the Reserve Bank of India made comprehensive KYC implementation for customer identification and verification mandatory for all financial institutions. Since then, a number of modifications have been made, the most recent of which concerns the approval of the video KYC solution in 2021. Here We discuss Adoption of KYC norms by NBFC.
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In order to identify and validate a customer while creating a bank account or during customer onboarding, a process known as KYC, or know-your-customer, is used. Additionally, in order to continue operating normally, all financial companies, including banks and NBFCs, must adhere to the RBI KYC norms. eKYC is a digital process that only requires the customer’s 12-digit Aadhaar number to verify their identity. Once a citizen enrols in the UIDAI’s Aadhaar initiative, the organisation collects and stores their data for authentication purposes in a secure database.
These facts include the following:
The increase in financial fraud, particularly money laundering and financing of terrorism, was the driving force behind the introduction of KYC norms. Using KYC, financial institutions can identify consumers who might pose a risk to the company and deny their applications accordingly. The RBI’s KYC norms not only stop money laundering and terrorism financing, but they also safeguard financial companies from fraud.
There are two varieties of eKYC: online and offline.
NBFCs are allowed to use online KYC procedures. However, they must pay a transaction fee of 20 rupees for each eKYC verification that is carried out.
Furthermore, Section 11A permits the Ministry of Finance to publish notifications allowing non-banking financial institutions to employ eKYC as long as they adhere to the instructions for applying.
The Ministry of Finance published a notification to exercise its authority under the aforementioned rules, outlining the procedure for authorising companies other than banks to use the UIDAI’s authentication services.
As the financial sector’s regulator, the Reserve Bank of India has issued the notification allowing all NBFCs to carry out client Aadhaar number authentication utilising the KYC capability. The application form requests various information regarding the applicant, including confirmation that the entity is adhering to the Data Security Regulations 2016 of UIDAI and other relevant guidance/circulars issued by UIDAI from time to time with regard to privacy and security norms.
Financial institutions, including banks and NBFCs, employ video KYC as a special way of customer identification. In an audio-visual contact between the consumer and a trained official, the customer is asked to provide their live photo and other identification documents for ID verification.
Video KYC was certified by the RBI as a recognised means of ID verification for banks and other NBFCs in May 2021. The RBI’s video KYC update includes the following:
eKYC offers NBFCs and their clients a number of benefits. Here are several advantages NBFCs may get by transitioning from traditional paper-based KYC verification to electronic KYC.
Immediate Verification –Customers are almost immediately validated. By digitising KYC verification, eKYC cuts the verification process from taking 10 to 20 days to only a few minutes. It has led to a sharp increase in efficiency and time savings for enterprises and a precipitous drop in operational costs estimated at 90%.
High Security – Customer data is safe, and fraud is prevented because of biometric technologies used for KYC verification and data security procedures for the Central Identities Data Repository (which holds Aadhaar information).
Paperless records –No identification documents are needed for eKYC because the Aadhaar database immediately has all the data needed to validate a consumer. It has been demonstrated that doing so increases productivity and audit efficiency while reducing reliance on paper-based documentation.
Customers are more likely to complete the authentication process and not abandon it midway because of the simplicity of the eKYC channel, which contributes to a 60% decrease in KYC drop-offs.
Market expansion and financial accessibility –In India, the UIDAI database has all of the personal data. Business owners no longer need to invest significant sums of money in extending their markets because eKYC is immediately integrated with this database.
Customers having Aadhaar can be promptly verified, which requires little setup on the part of the verifier. Because it makes it simple for clients to create accounts and get credit, firms can utilise KYC norms to grow cost-effectively into new areas and attract more people to the official financial sector.
According to the aforementioned notification, Non-Banking Financial Companies, Payment System Providers, or Payment System Participants may submit an application to the RBI as long as they abide by the privacy and security standards established by UIDAI. In order to comply with FATF rules and stop money laundering, terrorism financing, and financial fraud through identity verification services, RBI is getting stricter and stricter over time.
Read our Article: What are the Regulatory Requirements of Non-Banking Financial Company in India?
I am a driven and meticulous professional who completed B.Com BL (Hons) from Tamil Nadu Dr. Ambedkar Law University and completed Master of Laws in specialization (Criminal Law with Cyber Crimes). I have extensive experience in Criminal Litigation and want to utilise my legal knowledge in writing also I have proficiency in writing legitimate content with comprehensive research. My core areas of interest are Business Law, Intellectual Property Rights, and Cyber crimes.
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