While attempting to do an online transfer of funds, Randeep Arora, a retired army officer, found his account was frozen for non-compliance with know your customer (KYC) norms. Despite having maintained a salary account, and later a pension account, with the bank for 30 years, and when the bank already has his pension payment order, Aadhaar and PAN card on record, he was harassed by putting a freeze on his money without any prior intimation to update KYC details.
One evening when Irfan Khan went to purchase fuel, he discovered his debit card was blocked without any intimation to him. Mr Khan learnt that he was not 'KYC-compliant'. He believes he had updated his KYC just a couple of years ago, so he studied the guidelines of the Reserve Bank of India (RBI) and discovered that he needed to be informed in writing before initiating coercive action. When he went to meet the bank manager the next day with his KYC documents, he received no explanation as to why his account was frozen.
Rahul Singh realised that his account with Canara Bank was frozen when a cheque that he had issued was bounced. He insists that he submitted the KYC documents but the bank did not bother to update them in the core banking software.
Nirajan Modi discovered his joint account was frozen when he was not allowed to transfer money from his Axis Bank account; he learnt it was because his wife's KYC update was pending.
These cases (all names changed) are among the thousands every day who are deprived of access to their own money because banks have been recklessly freezing their accounts. This extreme punishment is imposed with impunity by bank officers, often without adequate notice, or sufficient time for compliance with KYC re-submission. Unilaterally freezing an account has a series of consequences on standing instructions, for loan repayments, credit card payments or utility bill payments which may get cancelled or bounce. Senior citizens living on a pension are reduced to helplessness for no fault.
Now here is a stunning fact: we were led to believe that banks have been empowered by RBI and the ministry of finance (MoF) to freeze customer accounts for failure to update KYC documents. It now appears that neither banks nor RBI have the power to do so.
How do we know this?
From a committee set up by RBI to look into customer service standards of banks and (other RBI-regulated entities). While the committee, headed by a former RBI deputy governor, BP Kanungo, has come up with excellent recommendations that address all the major grievances of bank customers, the report also has this stunning admission about the freezing of accounts.
In the committee’s words: “Instances came to the notice of the Committee that some banks stop operations in the account when required documents are not submitted in time by the account holder, for updating KYC… even though the regulation does not provide for it. Cheques issued by the account holder were dishonoured in many such cases.”
This has left us speechless. All this, while banks have been freezing accounts indiscriminately with the argument that we need repeated updating of identification documents to prevent the misuse of banking channels for money laundering and financial fraud. Banks, in turn, said that RBI inspectors harass them if they do not take the extreme step of freezing accounts if KYC was not updated. But we are now told that freezing accounts is itself illegal!
RBI has released the Kanungo Committee report and sought public comment and feedback on its recommendations by 7th July, after which a decision will be made on adopting them. But why wait for 7th July on an issue where RBI knows that the banks’ action of freezing accounts is illegal and causes extraordinary harassment? Why not issue directions to banks today to stop freezing accounts for KYC updates? Indeed, RBI could have acted much earlier.
In response to a Right to Information (RTI) query about freezing accounts by my colleague in January 2021, RBI replied, “We have not issued any specific instructions in this regard.”
Its master directions only asked banks to follow “certain customer identification procedures“. And yet, RBI has remained impassive about the havoc caused by banks on ordinary, law-abiding people. This is ostensibly in the name of preventing money laundering, while actual money laundering by crooks and criminals continues with impunity.
Fortunately, as mentioned, the Committee report deals with almost all the major customer issues with compassion. It acknowledges the need to fix banks’ broken and one-sided internal ombudsman system and asks for greater accountability from banks, especially when there are repeated complaints on the same issue.
In many cases, RBI has been issuing general directions, leaving banks to implement them as they deem fit. This causes unnecessary distress for customers because interpretation differs widely. Such general directions have to be replaced with standard operating procedures for all banks, especially in dealing with nomination and succession issues.
The committee also notes that technology should be a two-way street and if new accounts and services can be availed online, then closure should also happen online. A well-known industrialist told me that account closures are so cumbersome that he simply leaves a small amount in the account and does not bother about it. Hopefully, the committee's report will be implemented in a manner that would eliminate this and numerous other forms of aggravation of bank customers.
(This article first appeared in Business Standard newspaper)