The Hindu Business Line : KYC is not ‘Kill Your Customer’

The implementation of KYC norms has led to harassment of innocent citizens. Mutual funds claim to serve individual consumers, but corporate and institutional investors enter and exit funds at will, and the small investor is left holding the can. The RBI and SEBI must set up action-oriented committees to tackle these problems, says S. S. TARAPORE.

In recent years, the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the banks and the mutual funds have been shouting from the rooftops that customer service is their creed. One does not question their intent, but the ground reality is very different. One is reminded of the observation of Wilhelm Ropke, a Swiss economist who, 50 years ago, said that the more people talk about co-operation the less there is of it.

There is no denying that the RBI, SEBI the Indian Banks’ Association (IBA), the banks and mutual funds have made genuine efforts to improve customer service for the common person in the financial sector. Yet, these efforts haveworsened the position of the customer. It is understandable that in view of the worldwide problem of disruptive anti-social activities, all official bodies and other economic agents have to be on high alert. To assess the quality of customer service it is essential to assess service at the grassroots level.

It is unfortunate that in the Indian financial sector, the quality of customer service is directly dependent on who you are and who you know. The common Person has to reconcile to this brutal fact.

CUSTOMERS HARASSED

The new mantra in the financial sector is ‘Know Your Customer’ (KYC). One cannot imagine the reign of terror unleashed by the banks/institutions on their innocent customers. It is true that a bank or a mutual fund may have faced the wrath of the regulators for an occasional lapse. The response of banks/mutual funds is to resort to medieval/colonial punitive retaliation — for one person challenging the authority in a village, burn all crops, kill 20 innocent persons and injure a 100.

No one would dare raise their voice against the authority. In response to the odd KYC lapse, a holy reign of terror is unleashed on innocent customers, some of whom may have been with the bank/mutual fund for 40 years. These customers are worried that despite having provided all the information earlier, they must once again provide all the details or else face a freeze on their account.

The banks/institutions have been singularly insensitive. Illustratively, a customer of a bank of 20 years standing was asked to produce proof of residence based on an account in another bank — one can always blame the other bank for not having properly undertaken KYC. In another Ripley’s ‘Believe it or Not’ episode the mother (guardian) is told that all other KYC norms have been met but the infant’s residence cannot be accepted on the basis that the mother has provided documentary evidence of her own residence. Are we worried that a 10-month-old infant could be indulging in nefarious activities?

It is bad enough that a customer might be thrown out of a bank for the unpardonable sin of wanting to open a bank deposit account. Why cannot the financial services sector provide service quality that is on a par with other public utilities? The authorities simply cannot afford to talk about high finance and be unaware of the brutal treatment meted out to depositors.

MUTUAL FUNDS NO BETTER

Mutual funds are equally competitive in their endeavour to win the wooden spoon in the league of service providers. Spokespersons of mutual funds would vigorously deny their predilection for corporate/large institutional investors. As far back as in the 1960s the officials in the RBI and government were against opening up mutual funds to corporates and institutions, yet the brute force of the big boys saw to it that corporates and large institutional investors were given access to mutual funds.

Corporates and other large institutional investors enter and exit from mutual funds schemes at their own free will, leaving the small individual investor to carry the can. Intentions to separate individual and institutional investors have remained just that — an intent — for decades. In the recent period banks have been putting large funds into mutual funds and in turn mutual funds are parking large funds with banks. Of course, the RBI obliges with refinance facilities for mutual funds!

Not to be outdone by banks, mutual funds have also unleashed a reign of terror. The intent and content of the mutual funds’ KYC norms are unexceptionable. But these are totally derailed at the actual implementation stage. The grand design was that there would be a centralised registry under the aegis of the Central Securities Depository Limited Ventures which would imply a single point registration.

In practice, there are horror stories. Illustratively, in the case of joint holders, there is a communication that ‘A’ is not compliant but ‘B’ is. Shortly, thereafter a communication is received that ‘A’ is compliant but that ‘B’ is not. Now while all this confusion prevails, the mutual fund holders are told that they cannot transact.

Mutual funds apply their own interpretation on the practices by the tax authorities. While the income tax authorities grant a PAN Card on the basis of a power of attorney, the mutual funds, on the authority of the majestic CSDL Ventures, disallows such documentation.

REMEDIAL ACTION

This is not meant to be a litany of complaints. Rather, it is to stress the need for the authorities to undertake remedial action. There should be a Committee chaired by the RBI Deputy Governor in charge of the regulatory department dealing with KYC.

The Committee should look at issues at the grassroots level and come up with specific remedial action to be implemented within a period of three months. Such a Committee has to be an infantry brigade and not undertake esoteric, ivory-tower discussions.

A second Committee headed by SEBI Chairman/Member should undertake a similar exercise for mutual funds. There should be close consultation between the two committees. Pending these two Committees resolving genuine problems at the grassroots level, the banks and mutual funds should be advised to hold back any form of punitive action against individual investors.

It is essential that KYC does not become a licence to ‘Kill Your Customer’. This issue brooks no further delay. The Banking Codes and Standards Board of India, a noble Florence Nightingale, tends to the wounded, the dying and the dead. The RBI and SEBI need to put an early end to the harassment of innocent customers of the financial sector — Les Miserables.

(The author is an economist. blfeedback@thehindu.co.in)

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