Executive Summary- The government has launched a centralised KYC process to store all investor details in one location. Financial institutions can access investor details there and complete financial transactions. The aim is to do away with processing KYC multiple times to ensure smooth facilitation of financial transactions. There are some negatives to be taken care of for it to be successful.
Know Your Customer (KYC) is a process wherein the financial institution has to verify the identity of its customers/investors. Banks, Mutual Funds, Stock brokers need to ensure that the KYC process for all their customers is completed. Earlier, an individual had to complete the KYC process with banks and MFs separately. In many cases, more than 1 KYC was required for MFs.
But that is set to change. The government has launched a centralised KYC (CKYC) program. The Central Registry of Securitization and Asset Reconstruction and Security interest of India (CERSAI) will manage the Central KYC process. Under this scheme, once you complete your KYC with a single bank, it will be considered sufficient for investments in all financial products, including mutual funds. The CKYC scheme will store all investor data at one central location that can be accessed by all financial institutions to check status of customers' KYC. An investor has to obtain a central KYC number from Central KYC Registry through the financial institutions. Once this is done, he/she can invest in any financial product. There will no requirements of multiple KYC for different financial institutions. If implemented properly, individuals can invest in products in the future by giving information on phone or email. The financial institution can get all information from the central registry and the transaction can be quickly completed. This will save the investor from the hassle of going to each company and completing details.
C-KYC aims to have a central database for investor KYC details so that multiple KYC acknowledgements are done away with. One unique KRA will be used across financial transactions leading to uniformity, inter-usability and cost savings. Watch this space to check how successful it is or end up being one more organization asking for duplicate information thereby making financial transactions difficult.
The MF industry generally seems upbeat with this announcement as it means, investors need not go through KYC process again and again. With bank details, an individual can open a MF account. He need not give details like bank account, PAN etc. repeatedly to different organizations. This step breaks the process barrier and will encourage more people to invest in MFs. For MFs, the turnaround time to make a individual to a customer will be lesser.
The new KYC process is available for new individual investors from August 1, 2016. The process for existing investors and corporates will be announced soon.
There are some concerns regarding the new centralised process. In the existing process, PAN was the sole identifier of investors. Now there is no unique identifier. There are many identifiers. This can lead to duplication and errors. Duplication can lead to scams.
The new norms ask for information such as maiden name, mother's name and proof of permanent address if local/ correspondence address is different. This means existing investors have to follow the KYC process again! This looks like hassling law abiding citizens again and again. Just as in the past, people have done the KYC process many times, they will have to follow it again. It might create problems for them when they are redeeming their investments as redemption os not allowed if KYC is incomplete. Another new process might just put off people from investing.
Many financial institutions - banks, brokers, insurance companies and mutual funds have stopped processing new accounts as due to technical glitches they are not able to upload KYC details to the central database. This is leading to loss of business. Moreover, every financial institution needs to file an e-copy of a client's KYC record with the central registry within three days of opening an account else they can face non-compliance charges. So they have stalled the process of opening new accounts.There should have been more preparation and financial institutions should have been informed in advance to be prepared for the new system.
The future roadmap for it has to be defined properly and followed else it will become a burdensome process for existing investors.