KYC: Banks Don’t Have the Right To Freeze Accounts. It’s Illegal
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)
 
Comments
ppatelweb
8 months ago
Franky in my opinion, RBI is anti customer. If you check minutely all the bank rules and provisions, list of them are customer unfriendly, anti -customer and some blatantly illegal or violative of f RBI's own guidelines and instructions.

None of the bank have an easy customer service or redressal system.

KYC, Nomination, closing of accounts and withdrawal of funds in case of death of account holders are key areas where customers suffer the most.

Of course, things like delay in crediting funds, cash withdrawals or deposits at bank counters, wrong debits, etc are the standard issues faced by customers (this applies to private banks also).

It is high time RBI wakes up and come sout woh identical SOP's which all banks mandatorily have to follow, these need to have strict time limits and compensation payable to the customers if the banks fail to adhere to the SOP's
karukhatri32
11 months ago
My question here is, what we should do now?

As an informed citizen what action should I take if the bank is asking for re-kyc and stating that if no kyc done then they will freeze the account?

or

should we just submit the re-kyc form?
anilsangeeta
11 months ago
bank has freeze my ac for kyc. bank has not send any notice or letter to me . when i went to update pass book i was told you cannot update . is it not unfair .it is just saving ac. bank allow bogus ac to run . no body stop shell co.
sachinpathak1101
11 months ago
What is the Kanungo Committee recommendation w.r.t. to KYC ? Customer convenience cannot be the primary consideration yet it shouldn't lead to customer harrasment.

The frequency of re-kyc has been prescribed by RBI basis the risk classification of a customer. This is one stage where there is a problem. How do banks decide who is high risk? Why isn't the risk classification made known to customer upfront for him to then decide whether he wishes to open an account? Why isn't RBI not centralising the entire kyc process through the Pan and a well designed kyc evaluation form? There is c-kyc. Why isn't it being actively scaled up? If Aadhaar could be a sucess, why not central kyc ?
vasanthmadhavoffice
12 months ago
what if this bank accounts are being operated by terrorists, urban naxals, anti-nationals - the effected person should go to bank and update - therefore your article looks both stupid and absurd
sachinpathak1101
Replied to vasanthmadhavoffice comment 11 months ago
And you think going multiple times for re-kyc has prevented such PPL from operating bank accounts???

Grow up Mister
vasanthmadhavoffice
Replied to sachinpathak1101 comment 11 months ago
growing up is the biggest issue - none wants to grow up - see the people standing in big queues for Aadhr correction - until we stop blaming the system due to some stray incidents - this blame game continues unabated - will try to grow
adityag
12 months ago
Consumers want more regulation (aka protection), yet they complain when they are on short end of the stick. Can't have it both ways. More regulation = more complications = more stupidity = pain for consumers.

RBI (and SEBI for that matter) seem to think it can pass order and order, regulation after regulation, without thinking through the prerequisites. The so called "2nd and 3rd order effects of regulation" without any iota of systems thinking.

Having said this, I agree with you on this KYC nonsense. I've had KYC notices sent to my current account several times, despite complying with it. Each time, I went to the bank personally. They checked their systems only to find I've complied. I asked them why I'm was getting all the silly emails and SMS reminders. They couldn't answer.

My guess is that the IT system and information flow is broken. It's all automated without the knowledge of the staff or, indeed, the IT department (which probably never audited it in the first place). Every time a staff tries to override the system, it leads to more complications upstream (or downstream). Sometimes, some dolt upstream will inadvertently press some button that will undo everything downstream. Of course, I'm not sure if this is the case, but it's my best guess.
msivanand
12 months ago
If so, I wish RBI or the finance ministry would notify all banks. This morning, I transferred by NEFT a small amount to an IOB, account we have in Trivandrum so that it remains active. But that money came back. I don't live there but I have to use that account at least once in six months or it's deactivated. When I miss that, I'm made to do the KYC process over again, as I will have to do now. Every effort is made to trouble customers, waste paper and time.
govindwattal
Replied to msivanand comment 12 months ago
one needs to withdraw money from an account to keep it active.
msivanand
Replied to govindwattal comment 12 months ago
Or deposit a small amount, they say. But if you go by this article, it's illegal to freeze the account, right?
VN KULKARNI
12 months ago
IT IS ALL SYSTEM DRIVEN. DO NOT BLAME STAFF,THAT IS WHAT HUMAN BANKERS SAY. NOW BANKERS USE AI TO AVOID ALL THIS.
r_ashok41
12 months ago
Good to hear the same since bank managers especially public sector banks first of all do not give any service to customers since they are not used to it and always try to harass customers unless he happens to be a vip person whom they give loan and which does not get repaid and becomes NPA.If only the managers are made accountable and the amount be deducted from their salary will they realise the importance of customer service.
govindwattal
12 months ago
Banks are threatening to freeze PPF accounts. One was told that even courts could not attach a PPF ac.
ppindia18
Replied to govindwattal comment 12 months ago
Can you provide more details
Govind Wattal
Replied to ppindia18 comment 12 months ago
Dear Customer, STOP has been placed on your Acc XXXXX884317 for the reason KYC Updation Overdue.-SBI
Kamal Garg
Replied to Govind Wattal comment 12 months ago
Horror. To my knowledge, PPF accounts are opened for minimum 15 years, how can they freeze PPF account. Each and every details and papers are with them, they just don't enter it into their CBS system resulting into such "system driven" freeze, if any.
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