NBFC & Its Registration
Non-Banking Finance Company (NBFC) is a financial institution offering a variety of banking and non-banking services and majorly deals in loans & advances, stocks & shares, hire & purchase, leasing, insurance, etc.
In India, the NBFCs registration is regulated by The Reserve Bank of India (RBI) and follow the rules & regulations laid down by it. Chapter III B of the RBI Act, 1934, lays down the provisions related to functions of NBFCs and hence, are supervised & regulated based on them.
In addition, it is mandatory for the NBFCs to be duly registered as required under the Companies Act, 2013.
Introduction To Master Direction – Know Your Customer (KYC) Direction, 2016
Time and again, RBI being the regulatory authority, comes out with amendments, updates & additions related to certain provisions. The need for such amendments, etc. arises from time to time, as to keep up with new changes and demands which are essential for the health of the institutions.
In one such move, the RBI has published on February 25, 2016, Master Direction – Know Your Customer (KYC) Direction, 2016, which should be followed by all Regulated Entities (REs).
Who Are Regulated Entities (REs)?
Regulated Entities covers all Scheduled Commercial Banks, Financial Institutions, Non-Banking Finance Companies, all Payment System Providers, agents of Money Transfer Service Scheme, “Domestic and cross-border wire transfer” Banks, etc.
Salient Features of Know Your Customer (KYC) Direction, 2016
In terms of the provisions of Prevention of Money-Laundering (PML) Act, 2002 and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, Regulated Entities (REs) are required to follow certain customer identification procedures while undertaking a transaction either by establishing an account-based relationship or otherwise, and monitor their transactions.
The revised Master Direction is in accordance with the changes carried out in the PML Rules vide Gazette Notification GSR 538 (E) dated June 1, 2017, and thereafter and is subject to the final judgment of the Hon’ble Supreme Court in the case of Justice K.S. Puttaswamy (Retd.) & Anr. V. Union of India, W.P. (Civil) 494/2012, etc. (Aadhar Cases)
These Directions are called the Reserve Bank of India (Know Your Customer (KYC)) Directions, 2016 and came into effect from the day it was published.
1. Chapter-I of the document covers basic information on applicability and definition of different terms which are later used in reference.
2. Chapter-II gives general guidelines to the REs about framing the Know Your Customer (KYC) Policy. It mandates the inclusion of four key elements:
(a) Customer Acceptance Policy;
(b) Risk Management;
(c) Customer Identification Procedures (CIP); and
(d) Monitoring of Transactions
There should be a Designated Director and a Principal Officer to ensure compliance as required by law.
3. Chapter-III deals with the guidelines to frame the Customer Acceptance Policy, with a special note that the financially or socially disadvantaged people should not be denied banking or financial facilities.
4. Chapter-IV enumerates the factors to be adopted by the REs for risk management.
5. Chapter-V gives instructions to REs on how to undertake the Customer Identification Process in varied cases.
6. Chapter-VI covers the Customer Due Diligence (CDD) Procedure at great length and additionally discusses the procedure for obtaining Identification Information. The first part establishes the CDD Procedure in case of Individuals along with describing the simplified procedure for opening accounts by Non-Banking Finance Companies (NBFCs).
The second part prescribes CDD measures for Sole Proprietary firms, followed by third party dealing with details of CDD measures for Sole Proprietary firms. The fourth part throws light on steps to be adopted for the identification of Beneficial Owner. Next part of the chapter guides REs on how to undertake On-going Due Diligence and further talks about Periodic Updation of different categories of customers. The last part touches upon Enhanced and Simplified Due Diligence Procedure and gives out guidelines for various categories of customers.
7. Chapter-VII enumerates steps related to Record Management, steps that shall be taken by REs regarding maintenance, preservation, and reporting of customer account information, with reference to provisions of PML Act and Rules.
8. Chapter-VIII covers Reporting Requirements to Financial Intelligence Unit of India, guiding the REs towards it.
9. Chapter-IX describes requirements/obligations under International Agreements and Communications from International Agencies. REs have to ensure that they do not have an account in the name of individuals/entities, who are suspected of having terrorist links, appearing in the lists circulated by the United Nations Security Council (UNSC)- ISIL (Daesh) & Al-Qaida Sanctions List, 1988 Sanctions List.
10. Chapter-X covers guidelines on varied topics and is aptly titled as ‘Other Instructions’. The first subsection gives away instructions about Secrecy Obligations and Sharing of Information by REs. NBFCs are required to maintain the confidentiality of information as provided in Section 45NB of RBI Act 1934.
The next factor covered is CDD Procedure and sharing KYC information with Central KYC Records Registry (CKYCR). REs have to capture the KYC information for sharing with the CKYCR in the manner as mentioned in the Rules, as required by the revised KYC templates prepared for ‘individuals’ and ‘Legal Entities’, accordingly.
What Does CKYC Refer To?
Central KYC Registry is a centralized repository of KYC records of customers in the financial sector with uniform KYC norms.
What’s The Purpose Behind Creating CKYC?
This has been created with the aim of-
- Inter-usability of the KYC records across the sector,
- reducing the burden of producing KYC documents and getting it verified every time when the customer creates a new relationship with a financial entity,
- substantial cost reduction by avoiding multiplicity of registration and data upkeep.
Who Is Entitled To Upload, Search, Download, Update KYC Records As Per the Prevention of Money Laundering Act?
All REs are entitled to this facility.
Rule (9) (I) (1) of PMLA mandates all REs to file an electronic copy of the client’s KYC records with the Central KYC Records Registry within three days.
If a client submits a KYC identifier to a reporting entity, then the authority can simply retrieve the records and verify it.
Central KYC Registry is a user-friendly web portal that has unique KYC identifier linked with independent ID proofs. On this portal, KYC data documents are stored in a digitally secure electronic format that provides advanced user authentication mechanisms for system access.