A new study by Moneylife Foundation confirms the depth and scale of challenges caused by the rigid enforcement of know-your-customer (KYC) norms, particularly in rural India. What was intended as a safeguard against financial crimes has, in practice, become a significant barrier to financial access for the poor, senior citizens and marginalised communities. The study presents a detailed analysis of how KYC-related disruptions—especially account freezes—are affecting vulnerable populations and puts forward practical, technology-enabled solutions to resolve these issues.
Despite clear Reserve Bank of India (RBI) guidelines, the study finds that banks are routinely denying people access to their own money, often without adequate notice or legitimate cause. This practice is particularly devastating in rural India, where documentation errors, limited access to official papers and infrastructural shortfalls are common.
The consequences are severe: basic government benefits, pensions, wages from schemes such as Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and life savings have all been blocked, pushing families into acute financial distress.
The challenges are multifaceted.
Minor discrepancies in identity documents—such as name misspellings, outdated information or changes in personal details—are enough for banks to declare KYC incomplete and freeze accounts. Rural customers, often with few valid documents and little ability to correct errors, are forced into a
bureaucratic labyrinth.
The reliance on Aadhaar-based biometrics further exacerbates the crisis; labourers and the elderly frequently face fingerprint authentication failures and the remedy often requires travelling long distances to enrolment centres—an insurmountable hurdle for many. Banking infrastructure itself is often overwhelmed, with understaffed rural branches and poor internet connectivity causing huge backlogs for KYC updates, leading to endless delays and frustration.
The problem is compounded by petty corruption and demands for bribes from middlemen or officials to process paperwork, effectively putting compliance out of reach for the poorest. Beyond inconvenience, the study documents cases where families have been denied access to vital social benefits and even tragedies such as an
elderly man dying in a bank queue while trying to comply with KYC formalities.
Nevertheless, confusion persists due to the lack of uniform, enforceable standard operating procedures (SOPs) across banks. Each bank interprets KYC requirements differently, resulting in inconsistent and sometimes, punitive treatment that hits rural customers the hardest.
Even processes such as inheritance and nomination are being stalled by stringent KYC checks, preventing families from accessing the assets of deceased relatives due to minor documentary mismatches.
The study warns that this environment of procedural excess has eroded trust in the formal banking system. Many villagers view KYC-related freezes as a form of institutional betrayal, having been encouraged in the name of financial inclusion to open accounts and then later denied access to their own savings. This has led to a sense of financial death and is undermining the very financial inclusion policies meant to empower the rural poor.
Moneylife Foundation’s study does not stop at criticism—it puts forward a series of practical recommendations. It urges RBI and banks to end account freezes for low-risk rural customers, recommending partial transaction limits and proper notice instead. More flexible documentation should be accepted, including letters from local officials or panchayat heads, and not just Aadhaar.
The study calls for greater use of technology such as video KYC with the help of banking correspondents, better integration with the central KYC registry, and artificial intelligence (AI)-based tools to resolve minor data mismatches. It also presses for outreach efforts such as rural KYC camps and grievance redressal partnerships with local authorities and non-government organisations (NGOs). Most crucially, it recommends legal safeguards and explicit accountability for wrongful freezes, including compensation for those unjustly denied access to their funds.
As the study makes clear, India is at a crossroads. Without urgent reform, KYC compliance will continue to punish the very people it was supposed to protect. By implementing these practical solutions, regulators and banks can restore trust and ensure that the promise of financial inclusion is not lost to bureaucratic overreach.
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ML Foundation is not only exposing wrongdoing by the wealthy but is also a champion of the common man/woman who are ignored by the powerful.
Your newsletter goes to lakhs of people.
Perhaps a barrage of letters from citizens would make the officials take notice.
Who should we write to and at what address?
Every reader of your newsletter will be happy to be a part of the crusade and will get others too to weigh in.
The freezing of a bank account should be considered a criminal offense - because - it can lead to severe consequences - imagine that you have money but cannot access it in an emergency - are you supposed to run after fulfilling KYC (when there is NO CHANGE in your details!) or attend to the emergency?
I am wondering if there is anything I can do to help? Please let me know.