Reserve Bank of India Deputy Governor Swaminathan J flagged KYC (know-your-customer) as an area that has emerged as a major source of operational concern, with the way it is being implemented, resulting in a number of accounts getting frozen.
“While the Reserve Bank has comprehensively updated the Master Directions on KYC in full alignment with FATF (Financial Action Task Force) and PMLA (Prevention of Money Laundering Act) requirements, the way in which the guidelines are being implemented seems to be resulting in a number of accounts getting frozen, denying the customers access to their funds,” he said in his address at the Conference of Directors of Private Sector Banks.
RBI’s root cause analysis indicates a set of issues, including high pendency at bank level in periodicupdate of KYC details of the customers, lack of a proactive approach in assisting, and obtaining the required customer documents.
Shortcomings highlighted
Swaminathan also noted inadequate staff deployment in such critical functions, resulting in overcrowding or denial of service at branches; directing the customers to approach their ‘home branch’ for availing such services rather than being empathetic to customer needs by attending to them at a branch of their convenience; and failure to update the details in the system even after the customers have provided the required documents.
It has also come to RBI’s notice that in certain cases the accounts that are meant to receive direct benefit transfers (DBT) from the government have also been frozen, contrary to regulatory guidelines in the matter.
Swaminathan emphasised that in such matters, it is essential for boards to establish policies and require management to adopt standard operating procedures that are not only compliant with regulatory guidelines but also practical for effective implementation.
He urged board members, particularly the chair of the customer service committee, to ensure that KYC guidelines are followed with both precision and empathy.
Warns of action
The deputy governor warned that RBI will not hesitate to take regulatory or supervisory actions against entities that fail to address these concerns in a timely and considerate manner.
He also touched upon the issue of bank boards operating with outdated or incomplete data.
“In today’s complex world, risks are no longer limited to just credit or market risks. As board members, your ability to make informed decisions depends heavily on having access to accurate, timely, and comprehensive data.
“One of the common issues we see is that of boards operating with outdated or incomplete data. Imagine trying to assess a critical situation with only part of the picture—it’s risky and can lead to poor decision-making. So, what is the solution? “ he said.
Swaminathan emphasised that boards should champion data integrity initiatives, ensuring that robust data systems are in place that provide a holistic view of risks across the bank.
“Real-time data can allow you to detect potential issues early, track trends in non-performing assets, or identify early warning signs in market or liquidity conditions. When it comes to risk, timely data isn’t just a nice-to-have—it’s an essential part of keeping your bank resilient,” he said.
Additionally, banks should think of stress testing as a tool that goes beyond regulatory requirements.
Swaminathan observed that these tests should be tailored to address a broad spectrum of risks, including operational, cyber, and liquidity risks. Regular, well-designed stress tests allow banks to not only respond to but also anticipate potential crises.
Customer grievance
The deputy governor said it is concerning that in many cases, customer grievance mechanisms, including the internal ombudsman structure, are treated more as a formality than as a robust, effective resource.
He underscored that the internal ombudsman mechanism should be more than words on paper; it should operate with the spirit and diligence necessary to resolve issues impartially and promptly.
Customer-centric governance is an area where RBI is significantly focussing to enhance the customers’ trust in the system and will not hesitate to act in case a supervisory intervention is considered necessary, he added.
