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Understanding KYC: Definition, Types, and Significance

January 24, 2024 • 1011 views

When dealing with any kind of financial transaction, whether online or offline, you must have come across the term ‘KYC’. But what is KYC and why is it important when opening a savings account or applying for credit? Keep reading to find out!

What is KYC?

To understand what is KYC, let’s begin with the KYC full form, which is ‘Know Your Customer’ or ‘Know Your Client’. It is a process to verify the identity of a customer before providing any financial services. In India, KYC is mandatory for all financial institutions, including banks, Non-Banking Financial Companies (NBFCs), insurance companies, and mutual funds.

The Significance of KYC

KYC is an essential process in the financial sector as it helps in the prevention of fraudulent activities, money laundering, and terrorist financing. It helps financial institutions to understand their customers' financial behaviour and assess their risk profile. KYC verification also helps in the identification and tracking of suspicious transactions.

Types of KYC

The KYC process can be conducted through various platforms. The different types of KYC in India are listed below:

  • Aadhaar or E-KYC: This is a paperless and electronic method of KYC, which is done using an Aadhaar card or other government-issued documents.
  • Video KYC: Video KYCs are conducted through an online video call with an auditor or agent to validate your identity and credentials.
  • In-person Verification or Offline KYC: In-person or offline KYC is a common and traditional form of verification system. Your physical presence is required along with attested copies of certain documents that you must submit to an official when visiting a financial institution.
  • Central KYC: This is a centralised database that maintains all your KYC details. These can be fetched for financial services by different institutions like NBFCs, insurance companies, etc.

Documents Required for KYC

The list of required documents for KYC verification may vary depending on the type of customer and the financial institution. Generally, the following documents are required for KYC in India:

  • Identity Proof: Aadhaar card, PAN card, driving licence, passport, or voter ID card
  • Address Proof: Aadhaar card, passport, bank statement, or utility bills
  • Photographs: Passport-size photographs

Also Read - How to Check Active Loans Using Your PAN Card: A Step-By-Step Guide

Importance of KYC for Loan Application

KYC is an essential requirement for loan applications and accessing other types of financial services in India. Financial institutions are required to conduct KYC before approving any loan application. This is a crucial step as KYC helps in assessing the risk profile of the borrower and ensures that the loan is given to a genuine customer. It also helps in the prevention of fraudulent activities.

Furthermore, KYC involves verifying the identity, address, and other relevant details of the borrower. This is done by submitting government-issued identity proofs and other necessary documents.

The information obtained through KYC is kept confidential and is used only for loan approval. It helps in maintaining transparency and accountability in the financial system and protects both lenders and borrowers from any potential risks. Therefore, loan applicants need to ensure that they fulfil the KYC requirements before applying for a loan.

Also Read - What is CIF Number? and Why is It Important?

To Conclude

KYC is a critical process in the financial sector, and it helps in the prevention of fraudulent activities, money laundering, and other unethical financing practices. The process may vary depending on the type of customer and the financial institution. Overall, it is mandatory for all financial institutions in India, and an essential requirement for loan applications and accessing other financial services.

Frequently Asked Questions 

1. What is the full form of KYC?

The full form of KYC is Know Your Customer and refers to the process of verifying the details of a customer before they can access services from financial institutions.

2. Why is KYC important?

KYC is important as it helps in the prevention of fraudulent activities, money laundering, and terrorist financing. It is also a crucial step that you must undergo to access different financial services.

3. What are the documents required for KYC in India?

The documents required for KYC in India include identity proof, address proof, and photographs.

4. What are the types of KYC in India?

The different types of KYC in India include:

  • Aadhaar/e-KYC
  • Video KYC
  • In-person/Offline KYC
  • Central KYC

5. Is KYC mandatory for loan applications in India?

Yes, completing the KYC process is mandatory for loan applications in India. They are required to provide all the necessary details during the application process to avail of loans or other forms of credit.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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