Mumbai: After the Paytm Payments Bank fiasco, the Reserve Bank of India (RBI) is insisting on KYC (Know Your Customer) compliance for accounts purchased by asset reconstruction companies from banks and non-banking finance companies.
Earlier, asset reconstruction companies (ARCs) would ask creditors selling bad loans for central KYC records, but now the RBI is insisting on full KYC. “When purchasing portfolios from banks/NBFCs, RBI requires ARCs to maintain KYC documents for all accounts. This seems to be a fallout of the Paytm incident,” said an ARC executive.
This additional “mandatory” requirement has increased the burden on ARCs that are not the “originators” of such loans and have acquired “bad loans” from the original lenders – primarily responsible for such KYCs. The onus should continue to be on the loan originator, the executive added.
Gaps in KYC, despite reminders and follow-ups, were one of the major reasons for the central bank to direct Paytm Payments Bank to stop offering banking services earlier this year. Its chief executive, Surinder Chawla, resigned Tuesday, citing personal reasons.
However, unlike other regulated entities, ARCs do not lend or accept deposits and hence compliance level at ARC should be proportional, not the same as applicable to others, the ARC industry says.
Some ARCs are suggesting that the RBI clarify that accounts lacking KYC compliances for the purpose of accountability be mandatorily excluded from the list of those available for sale to ARCs.
After an account turns bad, borrowers often become non-cooperative, making it extremely challenging to meet the required criteria, especially regarding KYC compliance. While KYC was already a part of the process before, along with CERSAI registration, it didn’t receive as much attention as it does now.
Finance companies update their customers’ records on the CKYC registry which is managed by the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).
CKYC keeps track of customers’ identity and other details for banks and non-bank lenders as need to follow anti-money laundering rules.
Customer Bonafide
Using CKYC, banks and NBFCs can check and confirm their customers’ identity, address, and other information. This helps prevent fraud and financial crimes and ARCs were using this as the KYC document.
The RBI had recently introduced a new section in the Foreign Contribution Regulation Act and emphasised a risk-based approach, requiring comprehensive due diligence, and limited outsourcing of KYC decision-making. ARCs face challenges with CKYC requirements when acquiring financial assets, as no account-based relationship is initiated. The industry wants CKYC requirements to be exempted for such defaulting borrowers whose loans are taken over.
