As we all know KYC (know your customer) is basically the submission of a few documents, just as a proof of identity and existence of the customer. In a similar manner housing finance companies also have a KYC policy for all the existing and new depositors. In this blog, we will discuss the KYC policy for the housing finance company. For this, we will first try to understand the basic definition of housing finance company and then look into their KYC policy and why it is required? What is the Housing Finance Company? As the name itself suggests, the primary objective of housing finance company is to finance the acquisition or construction of houses, including the development of plots of lands for building the new houses. Now, let's discuss the KYC guidelines one by one in detail. What is the KYC Policy for Housing Financing Companies in India? For any housing financing company in India, their KYC policy basically involves the four crucial points to have a better customer understanding and the management of the risk- Customer acceptance policy Customer Identification Procedure Monitoring of Transactions Risk management Further, we will discuss these points one by one in detail. Customer Acceptance Policy Housing Financing Companies (HFCs) must mention the clear cut policies, which should be transparent and could easily be understood by anyone. For building the better customer relationship- You cannot open an account in HCFs with any anonymous, imaginary, or fake name There are parameters in relation to the risk perception which are clearly defined in terms of- Location of customer Details of clients and their mode of payment Volume of turnover Social and financial status Above four arrow points helps in the categorization of the customer into three categories; low, medium, and high risk. HFCs may choose any of the nomenclature (level l, level ll, level all etc), suiting the level of risk. For example, there may be high-level monitoring over the politically exposed person due to the high level of risk. On the basis of the perceived level of risk, documentation and other formalities will be done. During this, Prevention of money laundering Act, 2002 will be taken into consideration. If the HFCs are not able to apply the proper customer due to diligence measures, they cannot open or close an account. However, at the same time, they need to have a built-in safeguard to avoid the harassment of the good customer. For example at the time of closing any customer's account, HFCs need to send a notice explaining the reason behind the closing of the account. There are chances when the customer needs to act on someone else's behalf. In these cases, it must clearly be spelled out in accordance with the law and practices. In order to not to entertain or involve people with criminal background or banned identities such as terrorists or terrorist organization etc, there have to be necessary checks. HFCs may categorize the profiles of new customers on the basis of risk categorization and for this, they will ask customer's personal information. However, HFCs cannot be too intrusive. They can only inquire about the relevant information and take the customer's consent before asking any further information. These customer profiles are confidential documents which must not be disclosed for cross-selling or any other purpose. Risk categorization of customers- Low-risk customer- It includes the individuals and entities whose identities and source of wealth can be easily identified. This category comprises salaried employees who have a well-defined salary structure, government departments etc. In these cases, sometimes basic verification is enough. Medium or high-risk customer- It includes individuals and entities which may pose higher than average risk to HFCs. It requires intensive due diligence. This comprises non-resident customers, high net worth individuals, trusts, charities, NGOs and organizations receiving donations, companies having close family shareholding or beneficial ownership, firms with sleeping partners, politically exposed persons of foreign origin, non-face to face customers, and anybody with dubious reputation as per public information available etc. Note- if there is an already existing customer, who becomes a politically exposed person (PEP), then approval from senior management is required to continue the business. There may be enhanced monitoring for such PEPs as well. In order to follow these customer acceptance policies and to implement them, the general public must not suffer. Especially those are financially or socially disadvantaged. Customer Identification Procedure There is a Rule 9 of the Prevention of Money-Laundering (Maintenance of Records of the Nature and Value of Transactions, The Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 (hereinafter referred to as PML Rules), requires every HFC: In case of the commencement of an account-based relationship, the following needs to be inquired- Identify its clients Verify their identity Knowing the purpose of opening an account Nature of business relationship In other cases- Verify the identity during the following instances: When there is a transaction of an amount equal to or exceeding rupees fifty thousand Any international money transfer operation Rule 9 also states that, in case of the beneficial owner, HFC would take all the reasonable steps to verify their identity. HFC would also conduct due diligence to verify the relationship between clients and their transactions. HFCs obtain all the necessary information to their satisfaction in case of both regular and occasional customers. In accordance with the Rule 9 of the PML, this information/documentation is obtained for the identification of various types of customers i.e. individuals, companies, partnership firms, trusts, unincorporated association or a body of individuals and juridical persons. Let's take a look at the list of documents required by customers for Housing finance companies- KYC document in case of individuals For name mentioned to HCF Passport, PAN card, Voter's identity card, drivers' license, identity card (subject to HCFs validation), the letter issued by the recognized public authority or public servant verifying the identity and residence of the customer (subject to HFC's validation) Permanent Address of the customer Telephone bill, bank account statement, the letter issued by any recognized public authority, electricity bill, ration card, the letter issued by the employer (subject to HFC validation) KYC documents in case of Company For the purpose of- Name of the company principal place of business the mailing address of the company Telephone/Fax number · Certification of incorporation. · Memorandum & Article of association. · Resolution from the board of directors and power of attorney granted to its managers, officers or employees to transact business on its behalf. · An officially valid document in respect of managers, officers, or employees holding an attorney to transact on its behalf. · Telephone bill. KYC document in case of a partnership firms For the purpose of- Legal name Address Names of all partners and their addresses Telephone numbers of the firm and partners Registration certificate if the firm is registered Partnership deed Power of Attorney granted to a partner or an employee of the firm to transact business on its behalf Any officially valid document identifying the partners and the persons holding the Power of Attorney and their addresses. Telephone Bill in the name of firm/partners. KYC documents for trusts and foundations For the purpose of- Name of trustees, settlers, beneficiaries, and signatories Names and addresses of the founder, the managers/directors and the beneficiaries Telephone/fax numbers Certificate of registration, the trust or foundation is registered Trust deed Power of attorney granted to transact business on its behalf Any officially valid document to identify the trustees, settlers, beneficiaries, and those holding power of attorney, founders/managers/ directors, and their address Resolution of the managing body of the foundation/association Telephone bill In case of the Unincorporated association or a body of individuals If there is an unincorporated association or a body of the individual resolution of the managing body of such association or body of individuals. power of attorney granted to him to transact on its behalf. an officially valid document in respect of the person holding an attorney to transact on its behalf. and such other information as may be required by HFC to collectively establish the legal existence of such as association or body of individuals. Monitoring of transaction It is one of the most essential elements of Effective KYC procedures. Monitoring of transactions helps in reducing the risk, and let HFCs have the understanding of the reasonable activity of the customers. Which ultimately helps in identifying the transactions falling out of the pattern. Attention to all the unusual large transactions or patterns which have no apparent economic or visible lawful purpose HFCs can also state the threshold limit of the transactions. Special attention would be given If the customer exceeds the threshold limit. Transactions involving a large amount of cash, which is inconsistent with the usual activity of the customer. A Customer account with very high turnover, are having the inconsistent amount of balance indicates the funds are being washed away and needs inspection. Key indicators to be checked for every customer's account- Checking the background of customer Country of origin sources of funds Type of transaction involved Other risk factors if any Every HFC must have a periodical review of risk categorization of accounts and keep a formulate due diligence whenever required. Risk Management There has to be an effective KYC programme for HFCs and make sure to implement it. And cover the following points- Proper management oversight Systems and controls Segregation of duties training and other related matters The responsibility for the implementation of KYC procedures and policies must be explicitly allocated within the HFC. HFCs with their board may also devise procedures for detecting risk profiles of existing or new customers Conclusion If you are looking to form your own housing finance company or be a customer of any housing financing company in India. Then you must take care of the above rigorous KYC policy for housing finance companies mentioned above. For more information please contact Enterslice.