Tuesday, February 09, 2016

The myth that is 'KYC'

Some of you may recall a Swedish pop group of the Seventies called ABBA. The lyric of one of their popular songs went like this:

Knowing me, knowing you (ah-haa)
There is nothing we can do
Knowing me, knowing you (ah-haa)
We just have to face it,….etc.

The group must have been echoing sentiments that were much ahead of their times. To know why, read on.
In 2002 the Reserve Bank of India introduced KYC guidelines for all banks. In 2004, RBI directed the banks to be fully compliant with the KYC provisions before December 31, 2005.
“KYC (know your customer) is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc), you need not undergo the same process again when you approach another intermediary.” So says CDSL Ventures Limited website[1]. Apart from CDS Ventures, a few others are also authorised to handle certain KYC related issues.

As is usual with all such proclamations, the devil lies buried deep in the details. The reality is that KYC is not a one time exercise. This is what the website of a reputed bank says,

“In accordance with RBI (Reserve Bank of India) guidelines on KYC norms, banks are mandated to periodically update its (sic) customer's identification data including the customer's photograph, a proof of identity, a NRI status proof and a proof of address.”

That little word ‘periodically’ is the fountainhead of all my misery of late. My friendly neighbourhood bank, where I maintain my puny savings, through which I route my transactions, while asking me to fill up the KYC forms once again states in its recent message to me thus:

“If no response is received within 6 months from this SMS, you’re a/c will be blocked for withdrawals”
Oooh…la….la. How sweet and charming, really! Friendly, helpful souls, are they?

The mutual funds too have been sending similar love letters. To add to my joy, some of these guys want you to locate their office in a metro city, travel all the way there, produce the original along with a photo copy (no self certification, or despatch by post, will do), and so make yourself ‘KYC compliant’. Else, all your operations (except closure, may be) will be blocked.

As if these were not enough, we have a new acronym to add to the fun. It’s called FATCA (no relation to the Indian language word that means ‘gambling’). FATCA calls for yet another (extended) round of KYC. The details asked for are many more. For example, all asset management companies have been advised to adhere to the following requirements from November 1, 2015:
  1. “All new investors to provide additional KYC details - income slab, occupation, net worth, politically exposed status, etc.,
  2. All new non-individual investors to provide the ultimate beneficial ownership (UBO) details
  3. All investors to submit FATCA/CRS declaration while opening account from 1st November 2015 and also for all the new accounts opened after 1st July 2014 to 31st October 2015.”
From 1 January 2016 it has become mandatory for the existing mutual fund investors to:
  1. “Provide additional KYC details as detailed above in order to make additional purchases (including switch) in their MF accounts
  2. Provide missing details and complete IPV (in-person verification) for all CVL-MF cases (whazzzzzat!)
  3. Update the ultimate beneficial ownership (UBO) details in their existing accounts.”
My experience shows that most of the equity schemes in India give poor returns anyway. These are most unreliable, if not far too risky especially if you have a run a family. (Oh, I know I’ll be challenged immediately. But I’d look forward to an opportunity to show with data how wrong they are.) Hence, I might as well close down the few MF investments I still maintain and then rest at peace. It’s simply not worth the trouble.

But if you think this is bad enough, tarry a little. The post offices, aspiring to become banks since the RBI relaxed regulations recently, have also upped in their KYC game. Their reach, the volume and number of small investments at these post offices are quite significant, for the post offices provide an important avenue for investment by the savers in India, especially the small investors and the senior citizens. Visit any large post office and note the demographic pattern to see what I mean.

At first they asked for compliance with the KYC norms because the rules demanded it. Next, they wanted the KYC forms to be filled once again when they insisted that you open savings accounts to link them to the account holders’ MIS (monthly interest scheme) or fixed deposit accounts with them. This was followed by a fresh request and re-submission of another set of the same documents and photographs when the concerned post offices computerised operations and switched over to CBS (core banking system). And now they want to “periodically update” their KYC records. So, the post offices are calling for more of the same – KYC compliance exercises, I mean.

To add to the list of woes, while the voter identity card (issued by the Election Commission of India) is accepted as identity proof by everybody (repeat, everybody) in India, the post offices refuse to! Since they do not have help desks, (except agents and touts who may help you if they can only earn a commission) you will get to know this fact only after you have stood in the queue for an hour or two to submit your completed KYC forms – assuming that you have filled the form correctly, signed at the right places, and attached all the required documents once again. (I have made three trips already; scared to make another attempt, knowing fully well that I have to some day.) The forms themselves are ambiguous, and hence not so easy to fill correctly. But who cares? For one reason or another, at almost all the post offices the queues are very long, move ever so slowly. Long ago the one who said that life was full of uncertainties hadn’t seen anything yet. I shudder to think what’s going to happen when these post offices convert themselves to commercial banks.

Speaking about banks, the other day I visited my bank branch I’d mentioned earlier, wanting to place some fixed deposits (FD) with them. Along with the application form, I was asked to submit a photo identity proof of address. I decided that I had enough of this KYC business, so pretend to blow my top. I asked the bank executive what the @#%*& had happened to the KYC forms and documents that I had submitted months back. IF I was already KYC compliant, why ask me for identity proof or proof of residence all over again?
Further, my cheque for the FD was on their own branch where I had my account. The FD application form was signed by me. “Did they know how to compare signatures?” I asked. It must be a lost art nowadays. They also knew me by my face. I demanded that they make up their mind whether the bank knew me (officially and personally), or they did not. Had they ever heard of something called ‘in good faith’? “Yes, sir; no, sir; you see sir, formalities sir, our system requirements sir…” the replies went. Finally, after some internal discussions, my application was accepted.

I sometimes wonder if some of these banks are being run by ‘bankers’ with experience in banking or by their IT guys; or if they did things simply buy rote. Except for the fact that they want the right boxes ticked, I wondered if these bankers knew banking business or their customers at all?

My banking days must have been “a long time ago in a galaxy far, far away....". It was not more than three decades ago, when banks did not have computers or ATMs. Their customers did not have net banking facilities. There was no ‘core banking’ either. The branch office was the single point provider of service to its customers. The branch manager was the captain of his ship, responsible for its performance – its achievements and its failures. Of course, the customer had to personally visit the branches to get his business done. But this gave the personnel at the branches – from the branch manager to the messenger or the watchman – an opportunity to know their customers. The customers did not have to take a ticket from a machine, and then wait like the patients do at the outdoor clinics of hospitals for their numbers to be called. There was always someone to welcome them and offer help.

That era ended years ago, as all good things must end some day. The banks first pushed their customers away from their own offices, to the ATMs. Then they were pushed further away - from the ATMs to internet banking. What next, is to be seen. But it is obvious that the banks do not want to have any personal contact with their customers, to know their customers any more. KYC is the name of the shield they want to hide behind. KYC is a mere formality, a routine, a form of periodical compliance by ticking the right boxes and furnishing the right documents, nothing more.

I had the opportunity to dwell on this aspect of KYC recently when, on a pleasant winter morning last December I was invited to deliver a speech to the students of the commerce stream at a top tier college in Calcutta.

There were about 50-55 students and a few members of faculty in the audience. I wanted to illustrate to them the importance of, and the need for, the lending banks to know their customers, especially their potential borrowers. To underscore the state of affairs today, I asked a series of questions to the students. My first question was, “Do you have at least one credit or debit card in your wallets?” Everyone replied in the affirmative. My next question, “Do each and every one of you have a bank account?” In one voice all the girls and boys (young ladies and young men, actually) replied, “Yes, sir!”

My next question, “Do you visit your banks once in a while? Did you visit your bank branches in the recent past?” Once again they confirmed that all of them indeed had. Which lead me to my final question, “Whenever you visit your bank, do any bank’s staff recognise you, nod at you (in recognition), say ‘hello’ to you? I mean, does anyone there know you at all? If your answer is ‘yes’, please raise your hand.”

Not a single hand was raised. There was total silence in the room. Was I surprised at the response? Of course not.
After posting this item I visited my bank branch to submit an application - a simple form for net banking. The officer concerned asked me to attach with the application a photo-ID proof of myself. I said that I had already submitted a copy of the same for KYC purposes! "Yes, sir...that was for KYC. This is for net banking." "But isn't it the same bank, the same data base, the same customer?" I asked. "Yes, sir, but that's the way the system is designed."

I threw up my hands. You can't beat the "system", can you?

1 comment:

  1. Anonymous1:29 pm

    Sir why do you have to distance yourself from us with the shield of your Blogs ?? WHY do you have to presume that every person on earth today enjoys spending his reading time with eyes fixed on a digital screen ?? WHY can't it be believed that there are people like me who detest too much of black and white on these screens ?? WHY can't we have the privilege of reading such excellent debatable pieces in the traditional printed format, reclined on a sofa or perhaps lying down after a hard day's toil ?? May be SYSTEMS demand the digital format and so our weekly Rotary "SAMACHARS" are deprived of the opportunity to carry such pieces in print !!