Let’s Stop This Indiscriminate Freezing of Bank Accounts
In January, I wrote about how banks have been inflicting untold hardship on ordinary, law-abiding citizens by freezing bank accounts for not updating their KYC (know your customer) documents. This inflicts ‘financial death’ on people by depriving them of access to their own savings. KYC documents are basic identification documents such as your PAN number/Aadhaar or some address proof to prove that your account is bona fide
We support the need for strict identification to prevent misuse of banking channels. But something is drastically wrong with the system when ordinary people are treated like criminals and tax-evaders and have their money frozen, while fraudsters, such as a closely regulated Dewan Housing Finance Ltd (DHFL) could create lakhs of fake accounts in a fictitious branch (Bandra Books) to siphon thousands of crores of rupees. Their cousins at Housing Development and Infrastructure Ltd (HDIL) opened 21,000 fake accounts that bypassed the core banking system and eventually led to the collapse of Punjab & Maharashtra Cooperative Bank (PMC Bank) without ever attracting RBI’s (Reserve Bank of India’s) attention.
In contrast, pensioners and senior citizens living on their savings are driven to panic by having their accounts frozen. How is this fair and reasonable? 
Moneylife Foundation, our not-for-profit associate, decided to study the issue by collating examples of harassment and submit a memorandum to RBI. Governor Shaktikanta Das has been supportive. He asked us to submit the memorandum and has agreed to have it examined. 
I would encourage you to read the detailed memorandum because the callous implementation of KYC rules can hit anyone, even those of us who are meticulous about ensuring compliance with the rules. Here are just some key points from our 20-page memorandum. 
1. Indiscriminate Freezing of Accounts: Denying access to their own money is an extreme punishment which is imposed with impunity by bank officers, often without adequate notice, merely for a delay in compliance with KYC re-submission.
Often, customers get no warning and learn of the draconian action when their cheques bounce or debit card is dishonoured, despite money in the bank. Sometimes, they suffer because banks have made horrible mistakes or failed to seek or update information in the core banking system. Banks neither apologise nor face any consequences when this happens.
We have provided several examples of such indiscriminate freezing of accounts which have serious consequences, including default on loans and non-payment of salaries.
We believe banks should be allowed to freeze accounts only in case of financial crime and that, too, on requests from revenue authorities, Central investigation agencies or the economic offences wing (EOW) of the police, ideally ratified by courts.
2. No Clarity on Risk Categorisation: RBI rules say low-risk customers are not required to update KYC more than once in 8-10 years, especially for running accounts for routine transactions. But we find that there is no clear definition or guideline for categorisation of customers into high-risk, medium-risk and low-risk categories; each bank has to evolve its own criteria for doing so and claim a certain number in each category.
Since too many low-risk customers seem to be harassed, we suspect that banks are misclassifying customers to ensure perfunctory compliance with RBI requirements.
3. Technology and Centralised KYC: Banks must use latest available technologies, like digital ID or video-based customer identification process (V-CIP), to establish KYC.
A centralised KYC already has all the facilities in place for smooth and easy online updation. But, instead of using it, banks have been forcing customers to visit the home branch with physical documents, even in the middle of the COVID pandemic. 
Although we are hopeful that governor Das will act on our memorandum, we need to prepare for a longer battle to assert our rights. I find that banks often seem to treat court orders with disdain. For instance, in 2012, the Gujarat High Court (HC) has already ruled that banks cannot freeze accounts or stop issuing cheque books/ATM facilities for want of KYC documents.
Interestingly, this petition was filed by an under-trial, Ashwin Parmar (convicted in a gang rape case), who sought bail on the grounds that his personal presence was needed to submit KYC documents to State Bank of India (SBI), which had threatened to freeze his account for non-submission.
Well, Mr Parmar was denied bail, because the Court ruled that “personal presence of the accountholder is not a must. If such documents are submitted by duly authorised representative of the accountholder, the bank is required to accept the same.”
Isn’t it astonishing that RBI has not bothered to update its rules, despite a nine-year old HC ruling? And isn’t it ironical that a convict’s account is now protected but law-abiding citizens are made to suffer?
RBI is also aware that a government registry, called Central KYC (CKYC) was created under Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), precisely to eliminate the harassment over KYC. I wrote about it in my article earlier, so did Harsh Roongta, in his column in Business Standard.
On 10 March 2021, the Securities and Exchange Board of India (SEBI) issued a circular telling all intermediaries not to seek fresh KYC documents from clients if they provide a CKYC identifier and consent to download these documents. This is not a new development.
As far back as in 2017, online brokerage firms such as Zerodha, with over 5 million clients today, started using CKYC for opening accounts.
In fact, brokers have been mandated to carry out CKYC since 2016, says Venu Madhav of Zerodha. KYC data is certified by an internal auditor every six months.
Only last week, Zerodha asked me to update my CKYC – a process that took a few minutes and was smooth and hassle-free, followed by a confirmatory mail from the registry the next day.
According to Mr Madhav, “We push files via SFTP and upload new KYCS to the CKYC system. 65-70% of the uploads happen successfully on first attempt,” generating a valid CKYC number.
If a person is already registered under CKYC and a new intermediary uploads the same information, the CKYC number is immediately shared. When there is data inconsistency (for instance, different identity documents being shared the second time) it throws out a ‘probable match’ and a simple verification process to confirm that it is the same person. 
If this has been working for five years and is already used by millions of investors in the securities market, it is unclear why banks follow outdated systems where customers are asked to come in person and that, too, to the home branch, to re-submit documents.
We have seen cases where KYC documents recently provided for some other service (loan or credit card) are not considered valid for KYC updation, despite a core banking systems and  unique investor number (UIN) mandated across services. 
Clearly, RBI has been unwilling to change and adapt to new technology. But this is no surprise. It had to be pushed by SEBI to introduce NEFT (national electronic funds transfer) and RTGS (real-time gross settlement) transactions to permit quick transfer of funds, so that India could move to T+3 rolling settlements that put our capital market ahead of even some developed markets. At other times, changes came from lobbying by powerful banks, intermediaries or even the information technology (IT) industry. 
We, the depositors, have no lobbying power. In order to change draconian account-freezing rules that cause immense mental agony and hardship, we need collective action to make our voices heard. Our memorandum is a first step in this long battle.
If you believe that banks simply cannot be empowered with such extreme powers, please sign and share this online petition.
We also urge you to write to foundation@moneylife.in with details if you have suffered due to unfair freezing of your account. We will add the information to the case studies we have collated.

1 year ago
RBI does supervision audit, as also there is mandatory audit. In all audit instances, not just these two, they do Not audit all accounts and only audit those which the bank staff show them as well paid under the table and RBI SSM's or for PMC the ASM's jolly well knew but did not report, as it normal for banks to create fake loan accounts, disburse money into them, to be withdrawn and paid into NPA accounts holders dummy (fake) accounts of NPA account holder for audits, to show health bank, while illegally charging interest on NPA accounts.

Banks associated with DHFL and HDIL crashed due to it coming to light due to other issues or entities and had been going on from years. RBI deputy governors, department directors, GM's all know as hope they manage somehow.

Why else are account holders who go into negative harassed or made to bounce in various banker tricks to make it look, so they can start charging heavy charges in hundreds when banks pay just around 5 paise to National payments system and Re 1 for cheques, while Payments & Settlements law of RBI says banks must charge only reasonably to cover- costs, which cannot be more than 0.25 pais for a cheque on upper side and 0.5 paise for ECS.

RBI officials are colluding to receive deals behind closed doors and do know all, just make out to be innocent. Look at their unilateral illegal circular to reduce ATM withdrawals to five, without consulting consumers and this can be struck down as only for banks to benefit to receive part as kickbacks.
3 years ago
What bank account holders needs
1- Acknowledgement for receipt of KYC documents.
2 Acknowledgement in writing ✍ to confirm KYC completed and in writing next date for RKYC. or stamp on pass book for next date of KYC.

3 years ago
The issue of banks requesting KYC documents for each category of account that an account holder has with a bank can have far-reaching consequences. Let me explain a situation we had to deal with recently; the PPF account of my wife with SBI matured and we approached the closest branch for credit of the maturity proceeds to her SB a/c; first, we were told that a PPF account can only be encashed in the branch in which the account was opened (which is very surprising in this day and age of digital banking); since my wife was unable to go I went to the home branch with all supporting documents but was told that there was a 'KYC' flag in her account and she needed to come in person.....I find this ludicrous that the account holder needs to come in person with originals when all other accounts are in the same institution and the funds are not leaving the institution. There is absolutely nothing that an account holder can do in these situations since beauracracy trumps common sense and objectivity. This harassment of account holders needs to stop especially in a day and time when banks are charging account maintenance fees on a recurring basis.
3 years ago
I support your initiative. My son is having NRE/NRO account with axis bank and ICICI bank. Almost every year I get email or message on mobile regarding KYC. It seems they do not have proper system internally. Many a time I have drawn attention of bank concern officer about R. B.I. Guide line categorization but seems they them self are not aware or they ignored guide line. This is mental torcher to account holder.
further our one of account link NRE/NRO.(with common et banking for NRE/NRO) at AXIS BANK GHATKOPAR. Same documents applicable for both. Bank insist separate set of documents for both even both account link to gather. I have sent several emails but non reply by axis bank Ghatkopar.
Further Now AXIS bank going charge monthly fees /penalty for dormant account. My son NRO account not operated for last one year due to COVID-19 as when ever visited bank was closed due to infected staff or some other reasons. bank also sent several messages preferably to avoid visit of branch. Now they have labeled as dormant account and stop transections. Axis banks had never issue any written communication before making DORMENT.
3 years ago
Another issue is the regularity with which accounts are marked "dormant". Here again, a physical visit is insisted on to update the KYC.
3 years ago
Freezing of account is OK, but when a account is CLOSED and amount transferred , the finance minister, regulator, chairman of bank Look the other way, turn a blind eye/ear
Sandeep Kumar
Replied to sureshtb4246 comment 3 years ago
Sorry freezing is not ok, if a pensioner account is frozen imagi his/her plight. Thanks a lot Moneylife team for taking this up.
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