Bank Accounts, Deposits and KYC Rules for Exams

A bank does two things with the public: it takes deposits and it lends. This chapter covers the first half, the kinds of accounts a bank opens and the identification rules it must follow before opening them. For banking examinations it is a scoring chapter because the rules are written down by the Reserve Bank of India and do not shift from year to year, and the same handful of points, the documents accepted for identification, the features of a basic savings account and the limits on a small account, come back in paper after paper.

The four kinds of deposit accounts

Deposits are divided into demand deposits, which the customer can withdraw at will, and time deposits, which are kept for a fixed period.

A current account earns no interest because the bank must keep the money ready at all times; the compensation to the customer is an unlimited number of transactions and the overdraft facility. Interest on savings accounts is now decided by each bank, since the Reserve Bank deregulated the rate in October 2011. Interest on deposits is paid on a quarterly compounding basis in most banks, and tax is deducted at source on interest above the limit fixed by the income tax law.

Accounts for financial inclusion

The Basic Savings Bank Deposit Account, or BSBDA, replaced the older no-frills account. It can be opened by anyone with valid KYC documents, needs no minimum balance, and carries a free ATM or debit card and a fixed number of free withdrawals in a month; the bank may not levy a charge for not keeping a balance in it. A customer who holds a BSBDA cannot hold another savings account in the same bank.

A small account is for a person who does not have any officially valid document at all. It is opened on the strength of a self-attested photograph and signature before a bank officer, and carries strict limits: the balance may not exceed fifty thousand rupees, total credits in a year may not exceed one lakh rupees, and withdrawals and transfers may not exceed ten thousand rupees a month. It is valid for twelve months and may be continued for a further twelve months if the holder shows proof of having applied for an officially valid document.

The Pradhan Mantri Jan Dhan Yojana, launched on 28 August 2014, opens such basic accounts with a RuPay debit card, accident insurance cover and an overdraft facility of up to ten thousand rupees for eligible account holders.

Accounts for non-residents

• NRE account, the Non-Resident External account, is kept in rupees, is freely repatriable and the interest on it is exempt from income tax in India.
• NRO account, the Non-Resident Ordinary account, is for income earned in India such as rent or dividend; repatriation from it is restricted and the interest is taxable.
• FCNR (B) account is a term deposit held in a permitted foreign currency for one to five years, so the depositor carries no exchange risk.

Know Your Customer

KYC means Know Your Customer, the process by which a bank satisfies itself about the identity and address of a person before it opens an account. The rules flow from the Prevention of Money Laundering Act, 2002 and the rules of 2005 made under it, and are collected in the Reserve Bank's Master Direction on KYC. The policy has four elements: a Customer Acceptance Policy, Customer Identification Procedures, monitoring of transactions and risk management.

Identity and address are proved by an officially valid document, and the list is closed: passport, driving licence, proof of possession of an Aadhaar number, voter identity card issued by the Election Commission, a job card issued under MGNREGA and signed by a state government officer, and a letter issued by the National Population Register. The PAN card is not an officially valid document for KYC, although the bank separately needs the PAN or Form 60 for tax purposes. Identification may also be completed through Aadhaar based electronic KYC, or through the Video based Customer Identification Process permitted since January 2020. Records are also filed with the Central KYC Records Registry, which is operated by CERSAI, so that a customer identified once need not repeat the process at every institution. KYC has to be refreshed periodically, once in two years for high risk customers, once in eight years for medium risk and once in ten years for low risk.

Safety, dormancy and unclaimed money

Deposits are insured by the Deposit Insurance and Credit Guarantee Corporation, a subsidiary of the Reserve Bank, up to five lakh rupees for each depositor in each bank, counting principal and interest together; the premium is paid by the bank, never by the customer. An account in which there has been no customer induced transaction for over two years is classified as inoperative or dormant and can be revived on fresh KYC. Deposits that remain unclaimed for ten years are transferred to the Depositor Education and Awareness Fund maintained by the Reserve Bank, and the depositor or the legal heir can still claim the amount with interest from the bank.