KYC Norms and Bank Accounts: JAIIB PPB Guide
Understanding KYC norms is the foundation of the JAIIB paper Principles and Practices of Banking (PPB), and it is one of the most heavily tested areas in the exam. Know Your Customer (KYC) is the process by which a bank identifies and verifies the identity of every customer before and during an account relationship. For any aspiring banker, mastering KYC norms, Customer Due Diligence (CDD), the account-opening process, negotiable instruments, the banker-customer relationship and deposit insurance is non-negotiable. This guide walks you through each of these building blocks with India-specific accuracy so you can score confidently in PPB. If you are preparing seriously, pair this reading with the structured lessons in our JAIIB course.
KYC Norms and Customer Due Diligence (CDD)
KYC norms in India are governed by the Prevention of Money Laundering Act (PMLA), 2002 and the Reserve Bank of India's Master Direction on KYC. The core objective is to prevent banks from being used, intentionally or otherwise, for money laundering or terrorist financing. Every bank must follow a four-pillar KYC framework: a Customer Acceptance Policy, Customer Identification Procedure (CIP), Customer Due Diligence, and ongoing monitoring of transactions.
Customer Due Diligence is the heart of the process. At account opening, banks collect an Officially Valid Document (OVD) such as Aadhaar, passport, voter ID, driving licence, or NREGA job card, along with a recent photograph and PAN (or Form 60). CDD is risk-based: low-risk customers undergo simplified due diligence, while high-risk customers face Enhanced Due Diligence (EDD) with deeper scrutiny of source of funds and beneficial ownership. Banks must also periodically update KYC records — typically every ten years for low-risk, eight years for medium-risk, and two years for high-risk customers.
Video-based Customer Identification Process (V-CIP) is now a fully accepted digital onboarding channel. The Reserve Bank of India permits Aadhaar-based e-KYC and offline verification, making onboarding faster while retaining strong safeguards against fraud.
Account Opening and Types of Bank Accounts
Once KYC is complete, the account can be opened. Indian banks offer several deposit account types, each serving a distinct purpose. Understanding these distinctions is a frequent PPB exam theme.
- Savings Bank Account: Meant for individuals and non-trading entities to encourage saving. It earns interest but places restrictions on the number of withdrawals in some product variants.
- Current Account: Designed for businesses, firms and companies with frequent transactions. It carries no interest and offers overdraft facilities.
- Term/Fixed Deposit: A lump sum locked for a fixed tenure at a higher interest rate.
- Recurring Deposit: Fixed monthly instalments over a chosen period, ideal for disciplined saving.
- Basic Savings Bank Deposit Account (BSBDA): A zero-minimum-balance account central to financial inclusion, offered to all under the RBI framework and heavily used for PMJDY.
Accounts can be opened as single, joint, or with operating mandates such as "Either or Survivor" and "Former or Survivor". Special customers — minors, illiterate persons, blind persons, partnership firms, companies, trusts and HUFs — have specific documentation and operational rules that PPB tests in detail. Practising these on our mock tests helps lock the concepts in memory. You can also revise account types quickly using our match game.
Negotiable Instruments and the Banker-Customer Relationship
The Negotiable Instruments Act, 1881 governs cheques, bills of exchange and promissory notes. A negotiable instrument is a document guaranteeing payment of a specific sum, transferable by delivery or endorsement. A cheque is the most common instrument a banker handles — it is a bill of exchange drawn on a specified banker and payable on demand.
Key concepts include crossing (general and special), endorsement, and the statutory protection available to the paying and collecting banker who acts in good faith and without negligence. Dishonour of a cheque for insufficiency of funds attracts penal consequences under Section 138 of the Act, a favourite exam point.
The banker-customer relationship is fundamentally that of debtor and creditor. When a customer deposits money, the bank becomes the debtor and the customer the creditor; when the bank grants a loan, the roles reverse. Beyond this, the relationship takes many forms — principal and agent (collecting cheques), bailor and bailee (safe custody), lessor and lessee (safe deposit lockers), and trustee and beneficiary. The banker also owes a duty of secrecy, subject to well-defined exceptions such as disclosure under law or in the bank's own interest. These layered relationships are examined repeatedly in PPB, so review them alongside the current policy environment on our RBI rates page.
DICGC Deposit Insurance and Depositor Protection
Deposit insurance protects small depositors if a bank fails. In India, this is provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI established under the DICGC Act, 1961. DICGC insures all commercial banks, including branches of foreign banks in India, local area banks, regional rural banks, and cooperative banks.
Each depositor in a bank is insured up to a maximum of Rs 5 lakh for both principal and interest, a limit raised from Rs 1 lakh in 2020. This insurance covers savings, current, recurring and fixed deposits. Importantly, the Rs 5 lakh cover applies per depositor per bank, aggregating all accounts held in the same capacity and right. If deposits are held in different capacities — for example, one account as an individual and another as a partner of a firm — they are insured separately.
The premium for deposit insurance is paid entirely by the insured bank, never by the depositor. Under the DICGC (Amendment) Act, 2021, depositors of a bank under moratorium can access their insured amount up to Rs 5 lakh within 90 days, a major depositor-protection reform. Understanding DICGC in detail rounds out the safety-net topics in PPB. Stay current with reforms via our IIBF news page.
Frequently Asked Questions
What are KYC norms in banking?
KYC norms are the Know Your Customer procedures mandated by RBI and PMLA that require banks to verify a customer's identity and address using Officially Valid Documents before opening an account, and to monitor transactions on an ongoing basis to prevent money laundering.
What is Customer Due Diligence (CDD)?
CDD is the risk-based process of identifying and verifying a customer, understanding the nature of their activity, and assessing money-laundering risk. Low-risk customers get simplified due diligence, while high-risk customers undergo Enhanced Due Diligence with deeper scrutiny.
How much deposit insurance does DICGC provide?
DICGC insures each depositor of a bank up to Rs 5 lakh, covering both principal and interest, per depositor per bank for deposits held in the same capacity. The premium is paid entirely by the bank, not the depositor.
What is the banker-customer relationship?
The primary relationship is debtor and creditor — a deposit makes the bank a debtor, a loan makes the customer a debtor. Secondary relationships include principal-agent, bailor-bailee, and trustee-beneficiary, along with the bank's duty of secrecy.
KYC norms, account types, negotiable instruments, the banker-customer relationship and DICGC deposit insurance together form the backbone of the PPB syllabus. Master these foundations, practise regularly, and you will handle exam questions with confidence. Ready to test yourself? Take a full PPB mock on our practice tests or start structured preparation with the JAIIB course today.
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