70% of frauds occur due to inadequate re-KYC measures by banks and lending companies

⁠Re-KYC (Know Your Customer) is a regulatory requirement aimed at ensuring that customer information remains accurate and up-to-date. The Reserve Bank of India (RBI) guidelines state that re-KYC should be conducted regularly.

“Despite this directive, the re-KYC process is often taken leniently by both, banks and NBFCs, leading to massive frauds. If data is to be considered, it suggests that about 70% frauds take place past the KYC stage due to loopholes in the process and a lack of continuous customer monitoring,” said Shobhit Goyal, Founder & CEO, BeFiSc.

Hence, banks are advised to conduct re-KYC based on a risk approach. They are required to categorise customers as per various risk factors like identity, credit hunger, social and financial status, and business activity, among others.

Besides, banks and NBFCs are also mandated to conduct Risk Profiling.

Based on the intensity of risks, they are guided to conduct High-Risk re-KYC every 2 years, moderate-risk every 8 years, and low-risk every 10 years. The RBI also mandates a Customer Identification and Risk Categorization process. If banks and NBFCs fail to comply with this directive, they are penalized and pushed to take corrective measures.

Moreover, the issue lies not only with the re-KYC but the entire re-KYC process. From the customer's perspective, if there are no changes in the KYC information, they can complete re-KYC through self-declaration. The RBI has directed banks to offer facilities for such self-declaration applications through various non-face-to-face channels (such as registered email, registered mobile number, ATMs, digital channels (such as online banking/internet banking, mobile application), letters, etc. In this case, the applicant isn’t required to visit the bank’s branch.

However, the challenge remains that the bank is trusting the customer with the information they are providing, without conducting proper due-diligence at their end. For instance, if a customer provides the updated ID proof for address change, RE’s do not necessarily verify with the authorities if the requested changes have been updated.

What’s the solution?

Re-KYC and continuous customer monitoring are the only ways to map out the probability of fraud and prevent it. As a safety measure, the RBI can mandate the re-KYC every 2 years for all the customers accessing any financial products. Continuous monitoring is a must and should be opted by banks and NBFCs to understand the customer better in terms of their profession, changes in the documents, or any other details that can lead to suspicious action.

“Currently, about 75% of the market is captured by top banks like HDFC, ICICI and SBI, who are also following the re-KYC guidelines, but not enough to track the frauds. At BEFISC, we cover more than 1M transactions a day and have identified that up to 5% documents/contact details are rejected due to incorrect information,” said Goyal. 

“Most financial institutions and Fintechs are getting wrong. They think that KYC checks are sufficient while onboarding customers. But more than 70% fraud occurs past the KYC stage. There are frauds happening with 100% successfully KYC’ed accounts as well. RBI should make re-KYC norms stricter, and companies should conduct continuous customer monitoring to reduce the fraud cases,” added Goyal.