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Too close for comfort

Too close for comfort

Know Your Customer guidelines have been used to harass customers by way of cross selling. And also to design customised products to delight them.

Nabanita Talukdar is a reformed shopaholic. The 28-year-old marketing executive now prefers to occasionally splurge on big-ticket items like a laptop or a Louis Vuitton bag than empty out her wallet every month. Having diligently saved up, she recently decided it was time for a shopping spree.

The object of desire this time was a home theatre system, but when she reached the bank to withdraw Rs 60,000 she was shocked to be questioned about what she planned to do with the money. Talukdar’s reasoning that it was her money and, hence, solely her business fell on deaf ears.


Under the Know Your Customer (KYC) norms, banks are required to know details of their customers.
Not just about customers identity and residence but also their transactions.
This is to prevent identity theft, frauds or money laundering.
The customer information is often used to market products not asked for, like insurance or mutual funds.
That’s because banks are emerging as a one-stop shop for all financial needs in today’s competitive culture.
But profiling customers also enables banks to offer them customised and innovative services.
Banks have been directed not to misuse the information on customers for cross selling.

The bank officials insisted on an answer. Affronted at this intrusion into her affairs she threatened to close her account. The officials were adamant that should she refuse to part with the information, they would have no option but to do just that.

Don’t bother thinking up ways to sue the bank. This is just one of the measures introduced by the Reserve Bank of India (RBI) under the Know Your Customer (KYC) guidelines.

The KYC is a set of guidelines that enable banks to understand their customers and their financial dealings better, which in turn help them manage their risks. First issued in the second half of 2002, the norms were applicable only to first-time account holders. Since 2004 even existing customers have been brought into the net.

To prevent identity theft, banking frauds, money laundering and financing of terrorism, last year the RBI directed all banks to put in place a policy framework to know their customers before opening an account. “The assumption is that unless you truly know your customer, it is difficult to anticipate their financial dealings,” says Joginder Singh, compliance and control director, global consumer group, Citigroup India.

This involves verifying customers’ identity and address. Most banks now have a two-level check before opening an account. In the first step, a bank employee personally drops by at your residence to pick up the required documents. The second step involves matching the documents furnished with your profile to weed out any inconsistencies. Says an employee of SBI: “All banks have earmarked negative and positive areas in every city of operation. Negative areas are typically problem areas or economically poor areas. So if we have a customer from such an area wanting to open an unexpectedly large account, more field research is conducted.”

In addition, banks are expected to keep an eye out for suspicious banking transactions. Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of their customers so that they can identify irregular transactions.


By seeking proof of identity: Passport, PAN card, voter's ID card, driving licence, letter from a public authority - any one of these.
By seeking proof of address: Telephone bill, bank account statement, electricity bill, ration card, letter from employer or a public authority - any one of these.

These rules apply to individuals opening an account. There are separate KYC guidelines for demat accounts and credit cards.

Says Murali M. Natrajan, regional head, consumer banking, India & Nepal, Standard Chartered Bank, “A customer’s actual transactions in the account should be consistent with the nature of business activity and volume as described at the time of account opening.”

If the bank finds transactions inconsistent with customer’s business activity, officials will contact him for more details to understand the source of funds. Depending on the explanation provided, the account details will be further reviewed. In a few instances, banks have even closed accounts because of unsatisfactory responses from customers.

This is often a point of friction between the banks and the customers. People find it bewildering and annoying to produce the required documents and answer questions about expenditure. Which is why it is important to create awareness about KYC. “A majority still views KYC as a bank policy and not a personal safeguard. Worse, they see it as an affront to their dignity. An awareness campaign will facilitate the process,” says Anup Bagchi, general manager, ICICI Bank.

Emphasising that KYCs actually benefit rather than harm the customer, he looks forward to the days when customers will opt to open an account with a bank because of its risk policy and strict adherance of KYC norms.

So where does one draw the line between legal safeguards and outright harassment? How can a bank ensure that customers are not being harassed under the garb of KYC norms? There are instances of information collected from the customer for account opening being divulged to other departments for cross selling. But several banks are now taking steps to curb this. The RBI has directed that any informationsought from the customer apart from the mandatory requirement should be taken with his consent.


Cash Back Scheme: The segment using credit card more for a certain kind of purchase, say fuel, may earn a percentage of spending as cash back.
Camp: Banking lessons are combined with yoga or a leadership development course. Some banks also organise weekend lunch for key customers.
Higher credit limit: Banks reward an impeccable repayment record with a bigger credit limit or a top-up loan.

KYC norms can be used to help or hound you. What you are subjected to depends on how well you understand them.

But senior bank officials make a counterclaim that without the sales pitch customers will never know about the options available to them before making an informed choice. Says Bagchi: “Sometimes customers have to be cajoled to buy products that are beneficial to them, like an insurance policy. Besides, people now are too savvy to get pressurised by agents.”

Adds Natrajan: “If the customer is there in the bank branch, why not make use of the opportunity to make him aware of our new products?” But most banks now have a monitoring system in place to ensure customer satisfaction, and employees violating the policies are pulled up and penalised.

An unexpected benefit of the KYC guidelines is that it is helping banks build a stronger relationship with their customers. Sending flowers on birthdays is now passe. In the cutthroat environment, banks are constantly innovating to hang on to their customers. Standard Chartered has a 20-strong business intelligence unit for creating new marketing models. It profiles customers on the basis of demographics and transactions. Last year, the bank’s database revealed that a segment was using their credit cards more often for tanking up their vehicles. If the normal usage on fuel was 10%, this segment spent 12 14%. As an incentive to this group, the bank offered 5% cash back on cards used at petrol stations.

ICICI Bank profiles its customers in the back end to offer differentiated products and services. “For example, if one of our customers has sold his ESOPs, we approach him for home loans because the first thing most people want to do when they have sizeable cash is to buy property,” says an official. For salary, the bank runs a Glad-To-Meet-You camp. “Since banking is boring, we try to create footfalls by retailing. Who wants to hear about debit cards? So we combine it with yoga or a leadership development course,” says Bagchi.

The aim is to reward loyalty, be it through better pricing or better service. As Natrajan puts it, “Getting a new customer is a costly affair. It is far more advantageous to keep existing ones happy.”

The road ahead lies in fine-tuning the existing KYC norms. Standard Chartered is in the process of implementing a more efficient automation system that will help branch managers keep track of daily transactions and enable electronic transfer of customer information. However, Bagchi feels that the KYC norms must be linked to risk. “A tiered KYC is required to fit a tiered risk structure where high risk individuals have more stringent KYC rules applied to them,” he says. This will ensure that everybody isnot put through the same scanner.

So the next time your bank asks questions you find offending, cooperate. It may be for your financial safety. To prevent the bank from using that information to hound you with promotions, make sure you know what KYCs really are through better KYB—know your bank.