A bank for welfare transfers can fix India's KYC crisis

KYC rules are locking out millions of DBT beneficiaries and depriving them of welfare provisions

- SRINATH SRIDHARAN & ANAND VENKATANARAYANAN

When millions of Indians cannot afford a ₹10 packet of Parle-G biscuits, how do we expect them to spend ₹100 a month on a 4G SIM card to access their own money? Financial inclusion should mean ease of access. But for many, it has become an uphill battle. Bank accounts being suddenly frozen due to KYC issues is a growing crisis across India, leaving millions locked out of their savings. While customers blame banks and banks blame regulations, the real issue runs much deeper.

Banks are bound by regulations, including the Prevention of Money Laundering Act (PMLA), which requires them to track suspicious transactions. They must file suspicious transaction reports when red flags arise. These indicators may be either probabilistic, such as high transaction volumes, or deterministic, involving a law-enforcement notice, for example. However, the rules do not let banks disclose this to their customers. Every KYC verification comes at a cost.

Banks do not just bear routine expenses. They also bear the financial and operational burden of compliance. When the cost of maintaining an account outweighs its value, banks face difficult choices. Rural branches are hit the hardest. They operate on thin margins and are usually understaffed. Yet, they handle a disproportionate number of direct benefit transfer (DBT) accounts. When the Reserve Bank of India (RBI) mandates mass re-KYC under the PMLA, these branches struggle with backlogs that take months to clear. Customers, frustrated by frozen accounts, direct their anger at banks, often unaware that the latter have no choice.