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Finance Minister Smt. Nirmala Sitharaman seems to have hit the nail on the head. She recently expressed deep concern over the large volume of unclaimed financial assets lying idle in the system—arising from unclaimed bank deposits, insurance and mutual fund payouts, pension settlements, and more. Over the years, various entities across the BFSI (Banking, Financial Services, and Insurance) sector have accumulated these unclaimed amounts and subsequently transferred them to their respective regulators.

For instance, the Reserve Bank of India (RBI)—the apex regulator for commercial banks—held a balance of ₹78,213 crore under its Depositor Education and Awareness Fund as of March 2024, reflecting a sharp 26% increase from the previous financial year. Similarly, SEBI—the capital market regulator—reported a balance of ₹533.17 crore in the Investor Protection and Education Fund (IPEF) at the close of FY24. Numerous demat accounts and mutual fund folios also remain inaccessible due to the inability to verify or trace their rightful owners.

This accumulation of unclaimed assets highlights a critical gap in the financial ecosystem—specifically, in the capturing and updating of customer records. While the onboarding process for opening bank accounts, demat accounts, or purchasing financial products is built around KYC (Know Your Customer) verification, as mandated under the Prevention of Money Laundering (PML) Act, the current system has limitations. Over time, customer details can become outdated due to reasons such as death, change of address, phone number, email, or even name changes. The lack of a standardized KYC updation mechanism across institutions only adds to customer inconvenience, as they are often forced to repeat the same process with each new service provider.

The Central KYC Registry (C-KYC), created under Section 20 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and managed by CERSAI, was envisioned as a solution to this very issue. It aimed to store a customer’s verified KYC data under a unique identifier, allowing the customer to refer to it across institutions. The system also permitted updates as needed. However, despite its potential, the C-KYC system never gained widespread adoption. Most financial institutions still insist on fresh KYC documentation every time a customer seeks a new service, perpetuating inefficiencies and data fragmentation—concerns echoed by the Finance Minister.

In a recent meeting of the Financial Stability and Development Council (FSDC), which serves as the principal forum for coordination between the Finance Ministry and financial regulators, the Finance Minister emphasized the urgent need to identify the beneficiaries or rightful heirs of unclaimed assets to enable rightful transfers. Following this, the RBI introduced important amendments to the Master Direction – Know Your Customer (KYC), 2016. As per the revised norms, Regulated Entities (REs) are now required to adopt a risk-based approach to KYC updation, ensuring that customer due diligence (CDD) information remains current and relevant. Specifically:

High-risk customers must undergo KYC updation at least once every two years.

Medium-risk customers, every eight years.

Low-risk customers, every ten years from the date of account opening or last KYC update.

Each RE must incorporate this into its internal KYC policy, duly approved by its Board or delegated committee.

Another RBI directive mandates that banks issue three advance notifications to customers before the KYC update due date, with at least one notification sent by physical letter. This move responds to widespread complaints that digital alerts—via SMS or email—often arrive only after account operations are already suspended, inconveniencing customers.

The RBI has further urged REs to adopt an “empathetic view” when dealing with low-risk customers seeking to reactivate dormant accounts. It has also encouraged the involvement of Banking Correspondents (BCs), especially in rural and semi-urban areas, where KYC compliance is often lower due to customer dislocation for livelihood reasons. Additionally, banks have been instructed to conduct focused KYC update campaigns in rural branches with a high volume of pending updates. This is especially crucial as many of these accounts are linked to Direct Benefit Transfers (DBT) and Jan Dhan schemes, where compliance gaps have persisted.

Following the FSDC directive, all major regulators—SEBI, RBI, IRDAI, PFRDA—and the Ministry of Corporate Affairs are expected to coordinate their efforts to reduce procedural bottlenecks and usher in a unified framework.

Going forward, the Indian BFSI ecosystem urgently needs a standardized and universally accepted KYC framework—not only to safeguard customer interests but also to ensure better governance and asset traceability.