What is KYC?
Banks and other financial institutions need to follow certain customer identification procedures following certain guidelines. These guidelines are in the form of Know Your Customer(KYC). So, it is basically the process to verify the identity and other credentials of the users.
What documents are required for KYC?
The process is carried out for both individuals as well as organizations. The documents you may be asked for KYC during a business loan application include:
- Business entity proof such as the company’s incorporation certificate with its Corporate Identification Number (CIN), Business Establishment Certificate, Articles of Association (AOA), Partnership Deed in case of a partnership firm, etc.
- Aadhar card as proof of individual’s identity. Any other identity proof may or may not be required such as a passport, driving licences, voter ID, etc.
- Permanent Account Number (PAN) card of the business as well as of individual partners (in case of partnership firm or private limited), directors and promoters. For proprietors, individual PAN cards are only required for the business as well. There is no different PAN card issued to a proprietor firm.
- Latest utility bill copy such as that of telephone bill, electricity bill, etc. as residence proof.
- Bank statements for a financial record (usually past 6-9 months).
- Property contracts and rent agreements of business premises, whichever is applicable.
- Previous year Income Tax Return (ITR).
If you want to apply for a business loan with a bank or a Non-Banking Financial Company (NBFC), submitting the documents on time can result in a faster evaluation of documents resulting in faster processing of your loan application.
Why is KYC important for business loan applications?
KYC has become an integral part of any form of a business loan or any other loan application. No loans are processed without having the customer verify his/her credentials via this KYC procedure. It is a mandatory process that lets a financial institution verify that the customers are actually who they are claiming to be.
The importance of KYC lies in the fact that it verifies the customer’s identity and hence allows the financial institutions offering commercial loans to monitor transactions of suspicious nature. Hence, it prevents financial institutions and banks from being used, intentionally or unintentionally, against activities such as money laundering or financing to wrongful beneficiaries and even anti-social activities such as tax evasion, terrorism financing and others.
KYC helps the lender track the financial history of the business loan applicant by performing a risk assessment where the creditworthiness of the client is also ascertained. The client’s owned assets and previous financial history are identified through this process. It limits fraudulent activities that can happen with the client trying to hide his/her identity. In addition, it is crucial to ascertain the probability of the borrower being able to repay the loan on time.
During the financial scrutiny, as a part of the KYC for approving a business loan, the financial institution checks for the transactions done by the applicant. Fintechs like Oxyzo Financial Services Pvt Ltd have been using several data analytics tools and techniques to shorten the length of the KYC procedure and decrease the turnaround time of any commercial loan. Suspicious transactions like those that are different from the pattern, are high-valued or are frequent are flagged automatically. They then undergo a stringent manual checking process. After the completion of the required checks of identity, residence proof and financial transactions, the individual/body is deemed KYC verified.
The KYC process is quite simple for single users depending on their needs. However, when it comes to disbursing a financial loan, the financial institution’s verification process needs dedication and diligence.
Such a reliable system of establishing a person’s identity and financial status is essential for a strong financial framework. It makes the framework trustworthy and less risky which further brings financial stability to the lending organization. It covers two crucial factors for any lender – risk assessment and thoroughness in documents.
Since the chances of uncertain events decrease largely after following KYC guidelines, financial institutions find themselves in a stable position to be able to lend more to customers. KYC helps lending institutions not only know but also understand their customers and how they handle their finances. This, in turn, provides them with an opportunity for risk assessment and evaluation for prudent management.