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Relationship between bank and customer:

The relationship between a banker and a customer depends on the activities; products
or services provided by bank to its customers or availed by the customer. Thus the
relationship between a banker and customer is the transactional relationship. Banks business
depends much on the strong bondage with the customer. Trust plays an important role in
building healthy relationship between a banker and a customer.
Definition of a B!"#$%
The Banking %egulations !ct &B % !ct' ()*) does not define the term banker but
defines
what banking is+
!s per ,ec.- &b' of the B % !ct Banking. means accepting/ for the purpose of lending
or investment/ of deposits of money from the public repayable on demand or otherwise
and withdrawable by che0ue/ draft/ order or otherwise.1
!s per ,ec. 2 of the 3ndian "egotiable 3nstruments !ct (44(/ the word banker includes
any person acting as banker and any post office savings bank.
!ccording to ,ec. 5 of the Bill of $6change !ct/ (445/ banker includes a body of
persons/ whether incorporated or not who carry on the business of banking.
,ec.-&c' of B% !ct defines 1banking company1 as a company that transacts the
business of banking in 3ndia. ,ince a banker or a banking company undertakes banking
related activities we can derive the meaning of banker or a banking company from ,ec
-&b' as a body corporate that7
&a' !ccepts deposits from public.
&b' 8ends or
&c' 3nvests the money so collected by way of deposits.
&d' !llows withdrawals of deposits on demand or by any other means.
!ccepting deposits from the public means that a bank accepts deposits from anyone
who offers money for the purpose. 9nless a person has an account with the bank/ it
does not accept deposit. :or depositing or borrowing money there has to be an account
relationship with the bank. ! bank can refuse to open an account for undesirable
persons. 3t is banks right to open an account. %eserve Bank of 3ndia has stipulated
certain norms #now ;our <ustomer &#;<' guidelines for opening account and banks
have to strictly follow them.
3n addition to the activities mentioned in ,ec.- &b' of B % !ct/ banks can also carry out
activities mentioned in sec = of the !ct.
Who is a customer?
The term <ustomer has not been defined by any act. 3n terms of ,ec.(2( of
"egotiable 3nstrument !ct/ when a banker receives payment of a crossed che0ue in
good faith and without negligence for a customer/ the bank does not incur any liability to
the true owner of the che0ue by reason only of having received such payment. 3t
obviously means that to become a customer account relationship is must. !ccount
relationship is a contractual relationship.3t is generally believed that any individual or an
organi>ation/ which conducts banking transactions with a bank/ is the customer of bank.
The practice followed by banks in the past was that for opening account there has to be
an initial deposit in cash. ?owever the condition of initial cash deposit for opening the
account appears to have been dispensed with the opening of "o :rill account by
banks as per directives of %eserve Bank of 3ndia. "o :rill accounts are opened with
"il or with meager balance.
#now ;our <ustomer @uidelines and <ustomer7
!s per #now ;our <ustomer guidelines issued by %eserve Bank of 3ndia/ customer
has been defined as7
&i'! person or entity that maintains an account andAor has a business relationship
with the bank;
&ii'Bne on whose behalf the account is maintained &i.e. the beneficial owner';
&iii'Beneficiaries of transactions conducted by professional intermediaries/ such
as ,tock Brokers/ <hartered !ccountants/ ,olicitors etc. as permitted under the law/
and
&iv'!ny person or entity connected with a financial transaction/ which can
pose significant reputational or other risks to the bank/ say/ a wire transfer or issue of a
high value demand draft as a single transaction.
BankerC<ustomer %elationship7
Banking is a trustCbased relationship. There are numerous kinds of relationship
between the bank and the customer. The relationship between a banker and a
customer depends on the type of transaction. Thus the relationship is based on
contract/ and on certain terms and conditions.
@eneral %elationship7
DebtorC<reditor7 Dhen a .customer. opens an account with a bank/ he fills in and
signs the account opening form. By signing the form he enters into an
agreementAcontract with the bank. Dhen customer deposits money in his account the
bank becomes a debtor of the customer and customer a creditor. The money so
deposited by customer becomes banks property and bank has a right to use the money
as it likes. The bank is not bound to inform the depositor the manner of utili>ation of
funds deposited by him. Bank does not give any security to the depositor i.e. debtor.
The bank has borrowed money and it is only when the depositor demands/ banker
pays. Banks position is 0uite different from normal debtors.
Banker does not pay money on its own/ as banker is not re0uired to repay the debt
voluntarily. The demand is to be made at the branch where the account e6ists and in a
proper manner and during working days and working hours.
The debtor has to follow the terms and conditions of bank said to have been mentioned
in the account opening form. EThough the terms and conditions are not mentioned in
the account opening form/ but the account opening form contains a declaration that the
terms and conditions have been read and understood or has been e6plained. 3n fact the
terms and conditions are mentioned in the passbook/ which is issued to the customer
only after the account has been opened.F
3n the past while opening account some of the banks had the practice of giving a
printed handbill containing the terms and conditions of account along with the account
opening form. This practice has since been discontinued. :or convenience and
information of prospective customers a few banks have uploaded the account opening
form/ terms and conditions for opening account/ rate charge in respect of various
services provided by the bank etc./ on their web site.
Dhile issuing Demand Draft/ Gail A Telegraphic Transfer/ bank becomes a debtor as it
owns money to the payeeA beneficiary.
5. <reditorHDebtor7 8ending money is the most important activities of a bank. The
resources mobili>ed by banks are utili>ed for lending operations. <ustomer who
borrows money from bank owns money to the bank. 3n the case of any loanAadvances
account/ the banker is the creditor and the customer is the debtor. The relationship in
the first case when a person deposits money with the bank reverses when he borrows
money from the bank. Borrower e6ecutes documents and offer security to the bank
before utili>ing the credit facility.
3n addition to opening of a depositAloan account banks provide variety of services/
which makes the relationship more wide and comple6. Depending upon the type of
services rendered and the nature of transaction/ the banker acts as a bailee/ trustee/
principal/ agent/ lessor/ custodian etc.
3n case of trust banker customer relationship is a special contract. Dhen a person
entrusts valuable items with another person with an intention that such items would be
returned on demand to the keeper the relationship becomes of a trustee and trustier.
<ustomers keep certain valuables or securities with the bank for safekeeping or
deposits certain money for a specific purpose &$scrow accounts' the banker in such
cases acts as a trustee. Banks charge fee for safekeeping valuables
5. Bailee H Bailor7
Banks secure their advances by obtaining tangible securities. 3n some cases physical
possession of securities goods &Iledge'/ valuables/ bonds etc./ are taken. Dhile taking
physical possession of securities the bank becomes bailee and the customer bailor.
Banks also keeps articles/ valuables/ securities etc./ of its customers in ,afe <ustody
and acts as a Bailee. !s a bailee the bank is re0uired to take care of the goods bailed.
2.8essor and 8essee7
The relationship between the bank and the customer is that of lessor and lessee. Banks
lease &hire lockers to their customers' their immovable property to the customer and
give them the right to enJoy such property during the specified period i.e. during the
officeA banking hours and charge rentals. Bank has the right to breakCopen the locker in
case the locker holder defaults in payment of rent. Banks do not assume any liability or
responsibility in case of any damage to the contents kept in the locker. Banks do not
insure the contents kept in the lockers by customers.
*. !gent and Irincipal7
Thus an agent is a person/ who acts for and on behalf of the principal and under the
latters e6press or implied authority and the acts done within such authority are binding
on his principal and/ the principal is liable to the party for the acts of the agent.
Banks collect che0ues/ bills/ and makes payment to various authorities vi>./ rent/
telephone bills/ insurance premium etc./ on behalf of customers. . Banks also abides by
the standing instructions given by its customers. 3n all such cases bank acts as an
agent of its customer/ and charges for these services. !s per 3ndian contract !ct agent
is entitled to charges. "o charges are levied in collection of local che0ues through
clearing house. <harges are levied in only when the che0ue is returned in the
clearinghouse.
-. !s a <ustodian7 ! custodian is a person who acts as a caretaker of some thing.
Banks take legal responsibility for a customers securities. Dhile opening a dmat
account bank becomes a custodian.
=. !s a @uarantor7 Banks give guarantee on behalf of their customers and enter in
to their shoes. @uarantee is a contingent contract. !s per sec 2(/of 3ndian contract !ct
guarantee is a 1 contingent contract 1. <ontingent contract is a contract to do or not to
do something/ if some event/ collateral to such contract/ does or does not happen.3t
would thus be observed that banker customer relationship is transactional
relationship.
Duties of a banker7
! .Banker. has certain duties visCKCvis his customer. These are7
&a'Duty to maintain secrecyAconfidentiality of customers. accounts.
&b'Duty to honour che0ues drawn by customers on their accounts and collect
che0ue/
bills on his behalf.
&c'Duty to pay bills etc./ as per standing instructions of the customer.
&d'Duty to provide proper services.
&e'Duty to act as per the directions given by the customer. 3f directions are not
given the banker has to act according to how he is e6pected to act.
&f'Duty to submit periodical statements i.e. informing customers of the state of the
account
&g'!rticlesAitems kept should not be released to a third party without due
authori>ation by the customer
Duty to maintain secrecy7
Banker has a duty to maintain secrecy of customers. accounts. Gaintaining secrecy is
not only a moral duty but bank is legally bound to keep the affairs of the customer
secret. The principle behind this duty is that disclosure about the dealings of the
customer to any unauthori>ed person may harm the reputation of customer and the
bank may be held liable. The duty of maintaining secrecy does not cease with the
closing of account or on the death of the account holder.
!s per ,ec. (2 of Banking <ompanies !c0uisition and Transfer of 9ndertakings !ct
()LMC
$very corresponding new bank shall observe/ e6cept as otherwise re0uired by law/
the practices and usages customary among bankers/ and/ in particular/ it shall not
divulge any information relating to or to the affairs of its constituents e6cept in
circumstances in which it is/ in accordance with law or practices and usages
customary among bankers/ necessary or appropriate for the corresponding new bank
to divulge such information.
Gaintaining secrecy is implied terms of the contract with the customer which bank
enters into with the customer at the time of opening an account.
Bank has not only to maintain secrecy of transactions/ but secrecy is also to be
maintained in respect of operations through !TGA debit cards. Bank has also to
maintain secrecy of user 3D pins with due care so that it does fall in wrong hands.
:ailure to maintain secrecy7
Bank is liable to pay damages to the account holder for loss of money and reputation
if it fails in its duty to maintain secrecy and discloses information relating to a
customer.s account or conduct of the account to any unauthori>ed person. Bank can
also be liable to the third party if its wrongful disclosure harms the interest of the thirdC
party. 3f bank #nowingly furnishes wrong information
There has been a misrepresentation Bver estimation of favorable opinion
3nsurance of Bank Deposits7
The Deposit 3nsurance and <redit @uarantee <orporation of 3ndia/ a public limited
company promoted by %eserve Bank of 3ndia/ insure bank deposits. The authorised
capital of the <orporation is %s.-M crore/ which is fully issued and subscribed by the
%eserve Bank of 3ndia &%B3'. The management of the <orporation vests in a Board of
Directors of which a Deputy @overnor/ %eserve bank of 3ndia/ is the <hairman.
The <orporation protects the interest of depositors and infuses confidence by
providing deposit insurance on account of failure of banks. !ll commercial banks
including the branches of foreign banks functioning in 3ndia/ local area banks/ regional
rural banks/ all eligible coCoperative banks are covered under the Deposit 3nsurance
,cheme. The insurance covers the loss of all or part of their deposits in all branches
of a bank to a ma6imum of %s.(/ MM/MMM. 3t insures all deposits such as savings/ fi6ed/
current/ recurring/ etc e6cept the following types of deposits.
&i' Deposits of foreign @overnments/
&ii' Deposits of <entralA,tate @overnments/
&iii' 3nterCbank deposits/
&iv' Deposits of the ,tate 8and Development Banks with the ,tate coCoperative bank;
&v' any amount due on account of and deposit received outside 3ndia
&vi' any amount/ which has been specifically e6empted by the corporation with the
previous approval of %eserve Bank of 3ndia.
The <orporation charges insurance premium from banks on deposits N(M paisa per
%s.(MMof assessable deposits per annum. The premium is charged twice a year on
the assessable deposits as at 2(st Garch and 2Mth ,eptember. Though the premium
is charged on the full amount of deposit kept by depositors in a bank is insured up to
a ma6imum of %s.(/MM/MMM &%upees Bne 8akh' only for both principal and interest
amount.
The corporation pays to each depositor through the li0uidator/ the amount of his
deposit up to %upees one lakh within two months from the date of receipt of claim list
from the li0uidator. 3f a bank is reconstructed or amalgamated A merged with another
bank/ it pays the bank concerned/ the difference between the full amount of deposit or
the limit of insurance cover in force at the time/ whichever is less and the amount
received by him under the reconstruction A amalgamation scheme within two months
from the date of receipt of claim list from the transferee bank A <hief $6ecutive Bfficer
of the insured bankAtransferee bank as the case may be.
3n the second report of "arasimham <ommittee &!pril ())4' on Banking ,ector
%eforms recommendations have been made for reforming scheme of Deposit
insurance. The committee has recommended that instead of flat rate premium/ it
should be risk based or variable rate premium.
#now ;our <ustomer "orms and <ash transactions7
The obJective of #;< guidelines is to prevent banks from being used/ intentionally or
unintentionally/ by criminal elements for money laundering activities. #;< procedures
enable banks to knowAunderstand their customers and their financial dealings better/
which in turn help them/ manage their risks prudently. "ecessary checks before
opening a new account ensures that the identity of the customer does not match with
any person with known criminal background or with banned entities such as individual
terrorists or terrorist organi>ations etc. and that no account is opened in anonymous
or fictitiousA benami name&s'.
Banks are supposed to adopt due diligence and appropriate #;< norms at the time of
opening of accounts. The obJectives of the #;< are to ensure appropriate customer
identification and to monitor transactions of a suspicious nature. Dhile opening an
account a bank is supposed to obtain all information necessary for establishing the
identityAlegal e6istence of each new customer by taking and verifying the introductory
reference from an e6isting account holderAa person known to the bank or on the basis
of documents provided by the customer. The means of establishing identity can be
passport/ driving license etc. 3n respect of e6isting customers banks are re0uired to
complete customer identification at the earliest.
<eiling and monitoring of cash transactions
!s per %B3 guidelines issued under ,ection 2- &!' of the Banking %egulation !ct/
()*)7
&i'Banks are re0uired to issue travellers che0ues/ demand drafts/ mail transfers/ and
telegraphic transfers for %s.-M/ MMM and above only by debit to customers accounts
or against che0ues and not against cash. Dhile purchasing travellers che0ues/
demand drafts/ mail transfers/ and telegraphic transfers for %s.-M/ MMM and above
purchaser has to mention his Iermanent 3ncome Ta6 !ccount "umber &I!"' on the
application.
&ii' The banks are re0uired to keep a close watch of cash withdrawals and deposits for
%s.(M lakhs and above in deposit/ cash credit or overdraft accounts and keep record
of details of these large cash transactions in a separate register. Branches of banks
are re0uired to report all cash deposits and withdrawals of %s.(M lakhs and above as
well as transactions of suspicious nature with full details in fortnightly statements to
their controlling offices.
Bankers :air Iractice <ode7
3ndian Banks !ssociation has prepared a code/ which sets standards of fair banking
practices. This document is a broad framework under which the rights of common
depositors are recogni>ed. 3t is a voluntary <ode that promotes competition and
encourages market forces to achieve higher operating standards for the benefit of
customers. The <ode applies to current/ savings and all other deposit accounts/
collection and remittance services offered by the banks/ loans and overdrafts/ foreignC
e6change services/ card products and third party products offered by banks.
GoneyClaundering7
The concept of Goney 8aundering can be traced back to the 1?awala1 transactions.
?awala mechanism facilitates the conversion of black money to white. Goney
laundering has become the centre of focus for criminals and governments alike.
!s per sec.2 of Irevention of Goney 8aundering !ct/ 5MM5&IG8!ct' money
laundering has been defined as an offence. The main obJective of this !ct is to
prevent/ combat and control money laundering in 3ndia/ and to confiscate/ sei>e the
property obtained from the laundered money. Goney laundering is defined as the
conversion of illegally ac0uired currency i.e. from drug trafficking/ terrorist activity or
other serious crimes as appearing to have been obtained from a legitimate source
into legitimate funds. 3t is disguising of illegally obtained financial assets.
,ec.(5 of the IG8!ct re0uires every banking company/ financial institution and
intermediary to verify and maintain a record of all transactions of a prescribed value
and to furnish information whenever sought within a prescribed time period. 9nder
,ection 2-! of the Banking %egulation !ct/ ()*)/ %eserve Bank of 3ndia has issued
guidelines to banking companies/ financial institutions and intermediaries to maintain
a record of all transactions. The %B3 has said that every bank should set key
indicators for accounts/ taking note of the background of the customer/ such as the
country of origin/ sources of funds/ the type of transactions involved and other risk
factors.
!ccording to IG8 !ct/ 5MM5/ whoever7
&a' !c0uires/ owns/ possesses or transfer any proceeds of crime; or
&b' #nowingly enters into any transaction which is related to proceeds of crime either
directly or indirectly; or
&c' <onceals or aids in the concealment of the proceeds of crime/
<ommits the offence of money laundering
The IG8!/ 5MM5 casts certain obligations on the banking companies in regard to
maintenance
and reporting of the following types of transactions7
a' all cash transactions of the value of more than %s (M lakh or its e0uivalent in foreign
currency;
b' all series of cash transactions integrally connected to each other which have been
valued below %s (M 8akh or its e0uivalent in foreign currency where such series of
transactions have taken place within a month and the aggregate value of such
transactions e6ceeds %s (M 8akh;
c' all cash transactions where forged or counterfeit currency notes or bank notes have
been used as genuine and where any forgery of a valuable security or a document has
taken place facilitating the transaction; and
d' all suspicious transactions whether or not made in cash.
Services to different Customer Groups
Developing and properly categori>ing a customer data base forms part of the core strategy of
a bank. ! typical bank with a widespread network of branches aims at serving the following
broad customer groups.
O retail customers;
O corporate customers;
O international customers;
O rural customers.
! bank formulates its overall customer strategy to increase profitable business keeping in
mind its strengths and weaknesses. The key strategy components and trends in each of these
customer groups are briefly discussed below.
Retail Customers
Dith growing household incomes/ the 3ndian retail financial services market has high growth
potential. The key dimensions of the retail strategy of a bank include customer focus/ a wide
range of products/ customer convenience/ widespread distribution/ strong processes and
prudent risk management. The fee income that banks earn while e6tending commercial
banking services to retail customers includes retail loan processing fees/ credit card and debit
card fees/ transaction banking fees and fees from distribution of third party products. <ross
selling of the entire range of credit and investment products and banking services to
customers is often a key aspect of the retail strategy.
Retail Lending Activities
There is widespread acceptance by the average consumer of using credit to finance
purchases. @iven this background/ retail credit has emerged as a rapidly growing opportunity
for banks. Banks also focus on growth in retail deposit base which would include low cost
current account and savings bank deposits. %etail deposits are usually more stable than
corporate bulk deposits or wholesale deposits.
Banks offer a range of retail products/ including home loans/ automobile loans/ commercial
vehicle loans/ two wheeler loans/ personal loans/ credit cards/ loans against time deposits
and loans against shares. Banks also fund dealers who sell automobiles/ two wheelers/
consumer durables and commercial vehicles. ! few banks have set up home finance
subsidiaries in order to concentrate on this business in a more focused manner. Iersonal
loans are unsecured loans provided to customers who use these funds for various purposes
such as higher education/ medical e6penses/ social events and holidays. Iersonal loans
include microCbanking loans/ which are relatively small value loans to lower income customers
in urban and rural areas. <redit cards have become an important component of lending to the
retail segment in the case of a number of banks. !s the 3ndian economy develops/ it is
e6pected that the retail market will seek shortCterm credit for personal uses/ and the use of
credit cards will facilitate further e6tension of banks. retail credit business.
Lending to small and medium enterprises
Gost of the private and foreign banks have integrated the strategy with regard to small and
medium enterprises with their strategy for retail products and services. ?ence/ the retail focus
includes meeting the working capital re0uirements/ servicing deposit accounts and providing
other banking products and services re0uired by small and medium enterprises. Bf late/
public sector banks are also very active in lending to this business segment. Banks often
adopt a cluster or community based approach to financing of small enterprises/ that is/
identifying small enterprises that have a homogeneous profile such as apparel manufacturers
or Jewelry e6porters.
Corporate Customers
<orporate business covers proJect finance including infrastructure finance/ cross border
finance/ working capital loans/ nonCfund based working capital products and other feeCbased
services. Banks often have to make special efforts to get the business of highly rated
corporations. The recent emphasis on infrastructure in 3ndia/ including proJects being built on
privateCpublic partnership basis/ is leading to profitable business opportunities in this area.
:urther/ 3ndian companies are also going global/ and making large ac0uisitions abroad. This
trend is likely to pick up momentum in future and banks which gear themselves up to meet
such re0uirements from their customers will gain. There is also a growing demand for foreign
e6change services from the corporate customers. Banks offer feeCbased products and
services including foreign e6change products/ documentary credits &such as letter of credit or
8<' and guarantees to business enterprises. <orporate customers are also increasingly
demanding products and services such as forward contracts and interest rate and currency
swaps.
nternational !resence
3ndian banks while e6panding business abroad have usually been leveraging home country
links. The emphasis has been on supporting 3ndian companies in raising corporate and
proJect finance overseas for their investments in 3ndia and abroad &including financing of
overseas ac0uisitions by 3ndian companies'/ and e6tending trade finance and personal
financial services &including remittance and deposit products' for nonCresident 3ndians.
Rural "anking Customers
Bver LMP of 3ndia.s citi>ens live in rural areas. ?ence/ there is a need for banks to formulate
strategies for rural banking/ which have to include products targeted at various customer
segments operating in rural areas. These customer segments include corporates/ small and
medium enterprises and finally the individual farmers and traders. Irimary credit products for
the rural retail segment include farmer financing/ microCfinance loans/ working capital
financing for agroCenterprises/ farm e0uipment financing/ and commodity based financing.
Bther financial services such as savings/ investment and insurance products customised for
the rural segment are also offered by banks.
Customer Relationship #anagement
Bver the years/ the %B3 has taken a number of initiatives to improve the 0uality of customer
service. These steps include grievance redress through the Banking Bmbudsman ,cheme *5
and setting up a <ustomer ,ervice Department within %B3. %B3 has set up a fullCfledged
<ustomer ,ervice Department with a view to making banks more customerCfriendly and has
taken a number of steps to disseminate instructionsA guidelines relating to customer service
and grievance redressal by banks by placing all customer related notifications and press
releases on its multiClingual 3nternet site. <ustomers of commercial banks can also approach
the %B3 with their grievances. 3n :ebruary 5MM=/ %B3 set up the Banking <odes and
,tandards Board of 3ndia &B<,B3' as an independent autonomous watchdog to ensure that
customers get fair treatment in their dealings with banks. The B<,B3 has published the 1<ode
of Banks. <ommitments to <ustomers 1&the <ode'1 which sets minimum standards of banking
practice and benchmarks in customer service for banks to follow. <ommercial banks have
become members of the B<,B3 and have adopted the <ode as their :air Iractice <ode in
dealings with customers.
Committees on Customer Service
Banks are re0uired to constitute a <ustomer ,ervice <ommittee of their respective Boards
and include e6perts and representatives of customers as invitees to enable improvements in
the 0uality of customer service. :urther/ banks have to establish <ustomer ,ervice <ommittee
at branch level. $ach bank is also e6pected to have a nodal department A official for customer
service in the ?ead Bffice and each controlling office whom customers with grievances can
approach in the first instance and with whom the Banking Bmbudsman and %B3 can liaise
BoardCapproved Iolicies on <ustomer ,ervice
<ustomer service is proJected as a priority obJective of banks along with profit/ growth and
fulfilment of social obligations. Banks need to have a board approved policy for the following7
O <omprehensive Deposit Iolicy
O <he0ue <ollection Iolicy
O <ustomer <ompensation Iolicy in areas such as erroneous debits/ payment of interest in
case of delays in collection/ etc.
O <ustomer @rievance %edressal Iolicy
Banks should provide a complaintsA suggestions bo6 at each of their offices. :urther/ at every
office of the bank/ a notice re0uesting the customers to meet the branch manager may be
displayed regarding grievances/ if the grievances remain unattended. ! complaint book with
perforated copies in each set may be introduced/ so designed as to instantly provide an
acknowledgement to the customers and intimation to the controlling office.
"anking $mbudsman Scheme
The Banking Bmbudsman ,cheme makes available an e6peditious and ine6pensive forum to
bank customers for resolution of complaints relating to certain services rendered by
banks.The Banking Bmbudsman ,cheme was introduced under ,ection 2- ! of the Banking
%egulation !ct &B% !ct'/ ()*) with effect from ())-. !ll ,cheduled <ommercial Banks/
%egional %ural Banks and ,cheduled Irimary <oCoperative Banks are covered under the
,cheme.
%now &our Customer '%&C( norms
Banks are re0uired to follow #now ;our <ustomer &#;<' guidelines. These guidelines are
meant to weed out and to protect the good ones and the banks. Dith the growth in organi>ed
crime/ #;< has assumed great significance for banks. The %B3 guidelines on #;< aim at
preventing banks from being used/ intentionally or unintentionally/ by criminal elements for
money laundering or terrorist financing activities. They also enable banks to have better
knowledge and understanding of their customers and their financial dealings. This in turn
helps banks to manage their risks better. The %B3 e6pects all banks to have comprehensive
#;< policies/ which need to be approved by their respective boards.
Banks should frame their #;< policies incorporating the following four key elements7
a' <ustomer !cceptance Iolicy;
b' <ustomer 3dentification Irocedures;
c' Gonitoring of Transactions; and
d' %isk Ganagement.
Customer Acceptance !olic)
$very bank should develop a clear <ustomer !cceptance Iolicy laying down e6plicit criteria
for acceptance of customers. The usual elements of this policy should include the following.
Banks/ for e6ample/ should not open an account in anonymous or fictitiousA benami name&s'.
"or should any account be opened where the bank.s due diligence e6ercises relating to
identity has not been carried out. Banks have to ensure that the identity of the new or e6isting
customers does not match with any person with known criminal background. 3f a customer
wants to act on behalf of another/ the reasons for the same must be looked into. ?owever/ the
adoption of customer acceptance policy and its implementation should not become too
restrictive and should not result in denial of banking services to general public/ especially to
those who are financially or socially disadvantaged.
Customer dentification !rocedures
<ustomer identification means identifying the customer and verifying hisAher identity by using
reliable/ independent source documents/ data or information. :or individual customers/ banks
should obtain sufficient identification data to verify the identity of the customer/ his address
and a recent photograph. :or customers who are legal persons/ banks should scrutini>e their
legal status through relevant documents/ e6amine the ownership structures and determine the
natural persons who control the entity.
#onitoring of *ransactions
Bngoing monitoring is an essential element of effective #;< procedures. Banks can
effectively control and reduce their risk only if they have an understanding of the normal and
reasonable activity of the customer so that they have the means of identifying the transactions
that fall outside the regular pattern of activity. Banks should pay special attention to all
comple6/ unusually large transactions and all unusual patterns which have no apparent
economic or visible lawful purpose. Banks may prescribe threshold limits for a particular
category of accounts and pay particular attention to the transactions which e6ceed these
limits.Banks should ensure that any remittance of funds by way of demand draftA mailA
telegraphic transfer or any other mode and issue of travellers. che0ues for value of %s -M/MMM
and above is effected by debit to the customer.s account or against che0ues and not against
cash payment.Banks should further ensure that the provisions of :oreign <ontribution
&%egulation' !ct/()L= as amended from time to time/ wherever applicable/ are strictly
adhered to.
Risk #anagement
Banks should/ in consultation with their boards/ devise procedures for creating risk profiles of
their e6isting and new customers and apply various antiCmoney laundering measures keeping
in view the risks involved in a transaction/ account or bankingA business relationship
Banks should prepare a profile for each new customer based on risk categori>ation. The
customer profile may contain information relating to customer.s identity/ socialA financial
status/ nature of business activity/ information about his clients. business and their location
etc. <ustomers may be categori>ed into low/ medium and high risk. :or e6ample/ individuals
&other than high net worth individuals' and entities whose identities and sources of wealth can
be easily identified and transactions in whose accounts by and large conform to the known
transaction profile of that kind of customers may be categorised as low risk. ,alaried
employees/ government owned companies/ regulators etc fall in this category. :or this
category of customers/ it is sufficient to meet Just the basic re0uirements of verifying identity.
There are other customers who belong to medium to high risk category. Banks need to apply
intensive due diligence for higher risk customers/ especially those for whom the sources of
funds are not clear. $6amples of customers re0uiring higher due diligence include &a'
nonresident customers; &b' high net worth individuals; &c' trusts/ charities/ "@Bs and
organi>ations receiving donations; &d' companies having close family shareholding or
beneficial ownership; &e' firms with .sleeping partners.; &f' politically e6posed persons &I$Is'
of foreign origin; &g'
nonCfaceCtoCface customers and &h' those with dubious reputation as per public information
available etc.
Banks. internal audit and compliance functions have an important role in evaluating and
ensuring adherence to the #;< policies and procedures. <oncurrentA 3nternal !uditors should
specifically check and verify the application of #;< procedures at the branches and comment
on the lapses observed in this regard.