In response to the ongoing Paytm Payment Bank crisis and to address non-compliance issues, the government has formed a committee led by Finance Secretary TV Somanathan to propose effective strategies for enforcing a uniform Know Your Customer (KYC) mechanism.
The committee includes members from various ministries and regulatory bodies.
The initiative comes after the Finance Stability and Development Council (FSDC) meeting on February 21, where the need to simplify and digitize the KYC process in the financial sector was emphasized. The Finance Minister, Nirmala Sitharaman, had highlighted the importance of a ‘risk-based’ approach in the budget speech for 2023-24, signalling a move away from the traditional ‘one size fits all’ KYC approach.
Will it help?
Presently, the KYC process involves multiple verifications for various financial products, including opening bank accounts, investing in mutual funds, and purchasing insurance. The committee is expected to bring about a uniform KYC mechanism, making the customer onboarding process more efficient and cost-effective for both investors and financial intermediaries.
A streamlined KYC process is expected to eliminate the repetitive requirement for investors to submit KYC documents multiple times when dealing with various financial intermediaries. The committee, formed under the guidance of the Finance Secretary, can work towards simplifying and digitizing KYC procedures, reducing costs for financial intermediaries, and enhancing customer onboarding efficiency.
The proposed seamless KYC process aligns with the government’s vision to support Digital India. It aims to facilitate a hassle-free KYC experience for customers, promoting a quicker turnaround time for acquiring new customers across different financial sectors.
CKYC registry
As the financial sector gears up for the implementation of a Central KYC Records Registry (CKYCR), challenges related to data privacy and security have emerged as significant roadblocks. The CKYCR, designed to streamline the Know Your Customer (KYC) process across financial intermediaries, is facing scrutiny due to the potential risks associated with storing millions of KYC details on a single database.
One of the primary concerns highlighted by experts is the vulnerability to data breaches, which could lead to the misuse of personal information. Any security breach could have severe consequences, jeopardizing the entire KYC verification process for financial institutions and millions of customers. The central bank has expressed reservations, particularly regarding customers onboarded through e-KYC, flagging them as high-risk entities.
Despite the intent to implement CKYC, financial institutions may still need to resort to additional verification measures, such as video KYC or physical checks, to authenticate high-risk customers periodically. This dual approach raises questions about the practicality and effectiveness of the centralized KYC system.
