RBI Allows e-KYC Mechanism for NBFCs and Banks

Neelansh Gupta

01 Jul, 2020

Recently, RBI (Reserve Bank of India) introduces some essential amendments to the Master Direction on KYC along with updating its list of documents required for the identification of the individuals. Earlier, RBI had disqualified the use of electronic KYC for non-benefit taking customers. Hence, it now allows banks, NBFCs and Fintechs to carry out Aadhar authentication/offline verification of an individual who voluntarily uses his or her Aadhar number for identification purposes.

Banks, Fintech’s can now use Aadhaar for KYC with Customer’s permission

• The RBI prescribes Know Your Customer (KYC) norms to be followed by Fintech’s, banks and other entities regulated by it for various customer services which also includes bank accounts opening.
• Banks have been permitted to carry out Aadhaar verification/ offline verification of an individual who voluntarily uses his Aadhaar number for identification purpose,”

KYC Norms and management of risks

The KYC details allow banks and other regulated entities including financial institutions, NBFCs, prepayment instrument issuers, payment system providers and agents of the Money Transfer Service Scheme to understand their customers and their financial dealings better. As a result, it helps them manage their risks.

The RBI move has opened up opportunities for the NBFCs/Fintech sector, with innovative means of leveraging the Aadhaar database.

Opportunities for Fintech Sector

• RBI’s move has opened up opportunities for the fintech sector, with innovative means of leveraging the Aadhaar database.

• For offline Know Your Customer (KYC) verification, companies can capture customer details using a QR code, or through an XML-based process, prescribed by the Unique Identification Authority of India (UIDAI) which manages the biometric database of consumers.
• The recent amendment has made it easier for Fintech’s to easily onboard customers

Key Highlights of the Master Direction on KYC Norms

Significant changes carried out in the Master Direction are listed hereunder:

Customer identification of “Individuals”

• The RBI said that for customer identification of individuals, those who wants to receive any benefit under direct benefit transfer (DBT), the bank should obtain the customer’s Aadhaar and can carry out its e-KYC authentication.
• For non-DBT beneficiary customers, the regulated entities have to obtain a certified copy of any OVD containing details of the customer’s identity and address along with one recent photograph.
• The regulated entities shall ensure that the customers (non-DBT beneficiaries) while submitting Aadhaar for Customer Due Diligence, blackout their Aadhaar number.

Submitting PAN Details

• All non-individual customers, like corporate and partnership firms, have to compulsorily provide Permanent Account Number (PAN) along with other entity-related documents. The PAN/Form No. 60 of the authorized signatories shall also be obtained.
• For existing bank account holders, PAN or Form No 60 is to be submitted within such timelines, failing which account shall be subject to temporary ceasing till PAN or Form No 60 is submitted. However, before blocking a statement, the regulated entities have to give the customer an accessible notice and a reasonable opportunity to be heard.
• While an individual who does not have a PAN card can submit Form 60 for certain financial transactions, such as sale or purchase of immovable property and motor vehicles, or opening a bank account. However, this option is not available to entities.

The whole notification can be read here

Reason for introducing amendments in the Master Directions of KYC

These changes come after the amendments to the Prevention of Money-laundering (Maintenance of Records) Rules, 2005. After the Supreme Court struck down few sections of the Aadhaar Act and Regulations such as Section 57, it thereby nullified the biometric e-KYC model used by telecom companies and banks for customer verification and onboarding. The government proposed to amend the Aadhaar Act, Prevention of Money Laundering Act and the Indian Telegraph Act.