Know Your Customer (KYC)

PMLA, 2002; RBI KYC Master Direction, 2016

The process by which banks verify the identity and background of their customers before providing financial services. Mandated by RBI guidelines under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, KYC involves verifying: identity documents, address proof, source of funds, and business purpose. KYC violations by banks can expose them to regulatory penalties.

In practice, KYC is the documentary spine of every loan file and, later, of every recovery proceeding. Mandated by the RBI KYC Master Direction, 2016 and the rules under the PMLA, 2002, it requires verified identity, address, source of funds and business purpose before a facility is opened. Its recovery significance is twofold. First, robust KYC produces the very documents — verified identity, addresses for service, asset and income trail — that a creditor needs to locate a defaulter, effect valid service of a 13(2) or DRT notice, and resist a borrower's denial of the account. Second, KYC failures expose the bank itself: weak verification invites regulatory penalty and can let a fraudster open accounts that frustrate recovery. There is also a data-protection overlay, since KYC data must be retained for the mandatory period even where erasure is requested. Lenders confirm the KYC pack is complete and current before enforcement.