Despite introducing a revamped know-your-customer (KYC) framework for the 17th time, the Reserve Bank of India (RBI) continues to sidestep the most pressing issue faced by millions of Indian banking customers—arbitrary freezing of accounts, often without notice or legal justification. The latest RBI circular, while well-intentioned in language, remains toothless in enforcement and fails to hold banks accountable for the bureaucratic nightmare that customers endure during KYC updates.
One of the most glaring examples of this failure is
highlighted recently by X user Balaji (@sbalaji1), who shared the prolonged struggle of a Trust account frozen by HDFC Bank allegedly due to KYC non-compliance. Despite the Trust being operational for over 18 years and funding educational institutions, its account was frozen with little explanation. The Bank demanded not only the KYC of trustees and signatories but also beneficiaries, raising the absurd prospect of obtaining personal documentation for every child benefiting from the Trust’s work. Even after submitting documents, the Bank found excuses to delay, including citing unclear paperwork and relying on staff who lacked understanding of Trust structures.
"Banking is built on trust, not software," Mr Balaji rightly observed, questioning how such account actions go unchecked, unaccountable and possibly open to abuse.
RBI’s 12 June 2025 circular again lists several concessions: self-declaration for KYC updates, the ability to use digital and non-digital channels, and a simplified process for government-linked bank accounts. It also allows Aadhaar OTP-based e-KYC, video-based customer identification (V-CIP), and customer declarations through ATMs, mobile apps, email, and physical letters. These are positive on paper. But they are meaningless if banks continue to operate with opaque processes and refuse to adhere to even the basic customer protection mandates. (Read:
RBI Simplifies Re-KYC Process, Asks Banks To Run Special Camps for Updating KYCs)
Despite repeated RBI guidelines requiring banks to issue three warnings before freezing an account, customers across the country report being blindsided. Accounts are suspended without warning, causing distress to pensioners, students, small businesses and in cases like Mr Balaji’s, to non-profit institutions serving the public good.
The problem is compounded by the fact that no bank employee is held responsible. Front-end staff hide behind 'central processing teams' and systems automation, while affected customers are left navigating a Kafkaesque maze of calls, branch visits and document re-submissions, Mr Balaji says.
Earlier, Union minister of finance Nirmala Sitharaman has rightly advocated for KYC simplification and common norms across sectors. Her public call for digital on-boarding, particularly for non-resident Indians (NRIs) and overseas Indians, underscores the broader policy intent. (Read:
FM Sitharaman Emphasises Speedy Refund of Unclaimed Funds)
However, the execution remains mired in regulatory hesitation. RBI continues to tweak rules and run awareness campaigns, but refuses to implement hard obligations on banks or impose penalties for non-compliance.
Even the 2023 high-level committee on customer service, chaired by former RBI deputy governor BP Kanungo, had offered concrete recommendations: enforceable SOPs, time-bound procedures, traceable notifications, model forms, and, most importantly, accountability mechanisms. Yet, none have been adopted. Instead, the RBI’s approach has remained advisory and voluntary, allowing banks wide discretion that too often translates into customer harassment. (Read:
RBI’s Draft KYC Proposals: More Tinkering, Still No Teeth)
Sucheta Dalal, managing editor of Moneylife, has been vocal about this mismatch between intention and outcome. She notes that a simple internet search reveals “thousands of horror stories involving frozen accounts,” all for minor KYC lapses or failures to respond to unclear requests. In the absence of mandated accountability, such incidents continue unchecked. It is not just about regulatory failure; it's a breach of trust in the financial system itself.
What is urgently needed is not a better-written circular but binding rules with strict timelines, penalties for banks that violate protocol and public disclosure of how many accounts are frozen, why, and for how long.
As Mr Balaji pointedly asked, “What if bankers freeze accounts and unfreeze them in exchange for bribes?”
Without transparency, the scope for abuse remains wide open.
Until RBI moves from suggestion to enforcement, India’s KYC problem will remain a regulatory charade—one that disproportionately punishes customers while insulating banks from any meaningful consequences. The system needs more than digital channels and optional declarations; it needs the rule of law, traceability and real accountability.
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