Know Your Customer (KYC) is a process by which banks and financial institutions obtain and maintain information about their customers. This is done to prevent banks from being used by criminal elements for criminal activities. The main objective of this policy is to ensure that only legitimate and authentic customers are accepted.

Banks and financial institutions obtain different documents about the customer based on the type of account they have. If the customer has opened a single account, the following along with KYC are required: clear name and surname, name of the father or spouse, detailed address, contact details, valid identification documents, photo and any other document specified by the bank. In case of a joint account, the bank also asks for a consent letter from the different joint account holders. Customers must provide the documents demanded by the bank, and it has the right to immediately decline to conduct any transaction or establish a business relationship with a customer who fails to provide or is not able to provide the documents for any reason.

Banking is a risky business as they face numerous risks on a daily basis. So in order to curb and mitigate such risks, the bank implements and maintains the KYC policy. Some of the risks that can be lessened with the help of KYC are reputational risk, operational risk, legal risk, financial risk and concentration risk. Reputational risk is the risk of loss caused by a negative impact on the market positioning of the bank. The ability to attract good employees, customers, funding and business depends on the bank’s reputation. If any violent activity is done, the bank’s reputation can be irreparably damaged.

A strong KYC policy helps to prevent a business from being used as a vehicle for illegal activities. Managing operation risk is also one of the important features of sound risk management practices. In today’s competitive business environment, operational excellence is crucial for competitive advantage. If the KYC policy is faulty or poorly implemented, operational resources are wasted and it may provide a chance to criminal elements to conduct illegal activities. The most important type of operation risk involves a breakdown in internal controls and corporate governance.

The objectives

Such breakdowns can lead to financial loss through error, fraud or failure to perform in a timely manner or cause the interest of the bank and financial institution to be compromised. Legal risk, financial risk and concentration risk are also mitigated due to a strong KYC policy. The KYC policy helps to monitor customer accounts and transactions on a daily basis. If there are unusual activities or any suspicious behaviour is detected, the transactions will reviewed from time to time. The transaction can be classified into three categories, they are high risk, medium risk and low risk. The classification of the risk based on risk categories is reviewed from time to time, and if any suspicious activities are found by the concerned staff of the bank, they should be directly reported to the proper authorities within the stipulated time frame.

Another objective of the KYC policy is to look past the appearance of the customer and obtain visibility into sources of the customer’s money. Nepal Rastra Bank, the central bank of Nepal, has advised all banks to follow certain KYC guidelines. Banks and financial institutions must get clear information about their customers and establish friendly and harmonious relations with them. But customers are still hesitant, and find it tedious to fill out the KYC form because they find it too lengthy and complex. So banks must explain the importance of the KYC form to their customers and make them understand that it is beneficial for them.

KYC is also important to trace frauds due to whom the economy and the rule of law of the country can be jeopardised. It is important and everyone understands that KYC is not a burden for them. It is good for the welfare of the country, and bank customers should not be hesitant to give clear information to their bank. This way they can check that the customer is authentic and genuine. KYC also helps them to track and monitor every customer easily.  

Pant completed his bachelors in business management from Bangalore University