Imagine you are a labourer in a village in Odisha and have painstakingly completed your Aadhaar formalities (for which you gave a proof of permanent address and your fingerprints). You moved to Chennai for some short-term opportunities on a construction site. While in Chennai, you are staying in a tenement with a few people from your village and want to open a bank account so that it’s easier to remit money to your family back in Odisha. You would realize that despite having an Aadhaar number, you need to have some proof of address in Chennai to be eligible for a bank account; a document extremely hard to produce for someone newly arrived in the city. This single requirement of a local address proof was potentially a barrier for millions of migrant workers (not just low-income) from accessing a bank account.
The requirement for a proof of identity, along with a proof of permanent address and a proof of local address, although motivated by anti-money laundering (AML) and countering of financing of terrorism considerations, was unusual in its over-zealousness. US regulations (31 CFR 103.121), for example, do not require banks to verify current address and defines address broadly, even to include “a description of the customer’s physical location”. The Financial Action Task Force (FATF) guidance expresses a concern that controls that have been designed for standard risks and higher risks get applied to situations where the risks are lower, and therefore, this “over-compliance” approach by regulators and financial institutions could exacerbate financial exclusion risk, which, in turn, increases the overall money laundering/terrorism financing risk. In India, this rule had inadvertently kept large swathes of population out of the reach of basic banking services. Such population is typically migrant labourers and other workers who move to different locations for seasonal work as well as for permanent relocation, and women who move to new locations after marriage.
On 9 June, the Reserve Bank of India (RBI) changed this by specifying that the new know-your-customer (KYC) rules no longer require an individual who wishes to open a bank account to furnish a valid proof of both permanent and local address along with a valid identity proof—proof of either the permanent or the local address would suffice. In instances where the customer is residing in an address that is different from the address furnished for account opening, the customer need only provide a declaration of the local address to which all correspondence is to be sent by the bank—no proof needs to be submitted for such an address and the bank may verify this address through “positive confirmation” such as by the acknowledgement of receipt of a letter, cheque books, or automated teller machine card, telephonic conversations or visits. This would come as a relief to potentially 60% of India’s population that do not have bank accounts and to 29% Indians who migrate to locations within India in search of gainful employment.
The Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households chaired by Nachiket Mor had in its report recommended waiving the requirement for documentary proof of the current address. The Committee had recommended that in addition to a strong proof of identity such as Aadhaar, banks be required to carry out careful tracking of usage and transaction patterns through a risk-based surveillance process developed internally by each bank. This would require strengthening of existing frameworks that banks use to look at bank account transactions. Transactions characterized by high volume or high value or a combination of both, or deposits or withdrawals associated with multiple accounts that are not commensurate with the characteristics of the account holders such as their backgrounds, income sources, nature of business, geographic location and such, can be identified and reported, as well as additional checks be built in for authorizing such transactions.
RBI’s waiver has removed a big hurdle in the path to opening a bank account for a large section of population that can be characterized as carrying out “low value, low risk” transactions—a category of individuals who would previously have been excluded due to KYC or AML compliance requirements placed on banks. In conjunction with a national unique identity repository, it will become possible to authenticate transactions on a real-time basis, thereby obviating the need for knowing the current location of a customer.
Some would argue that none of these restrictions applied to “small accounts”—accounts where transaction amounts are less than Rs.50,000. Despite neither proof of identity or address being required, banks have been reluctant to open these accounts. Clearly, therefore, implementation of these guidelines needs to be tracked carefully.
Bindu Ananth is president, IFMR Trust.