KYC Framework Strengthened: RBI’s 2nd Amendment Directions, 2025

Introduction

The Reserve Bank of India (“RBI”) issued the Know Your Customer (KYC) (2nd Amendment) Directions, 2025 on August 14, 2025. The directions have substituted the first RBI (KYC) Directions, 2016 issued under the Prevention of Money Laundering Act, 2002 (PMLA) and related rules. The new directions aim to improve the customer due diligence mechanism, increase inclusion of vulnerable groups, and adopt technological innovations in authentication procedures. The amendment directions are effective immediately.

Background

In order to bring India’s banking practices into compliance with the PMLA, 2002’s anti-money laundering (“AML”) and counter-terrorism financing (“CTF”) requirements, the RBI (KYC) Directions, 2016 were released. These guidelines, which are applicable to banks, NBFCs, payment system operators, and other regulated organizations, mandate that they perform due diligence when onboarding new clients, keep an eye on ongoing transactions, and update records on a regular basis.

The 2025 amendments were made under powers delegated by various legislations, such as the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934, the Payment and Settlement Systems Act, 2007, and the Foreign Exchange Management Act, 1999. The RBI, after analyzing the operation of the 2016 Directions and the implementation difficulties, felt it important to make public interest changes.

The amended directions specifically provide:

1. Insertion of a new sub-paragraph allowing access to RBI’s official FAQs on KYC through its website.
2. A requirement that applications from disadvantaged persons, including PwDs, cannot be rejected without recorded reasons.
3. Extension of KYC requirements to occasional transactions of ₹50,000 or above and international money transfer operations.
4. Explicit recognition of Aadhaar face authentication as an accepted method of identity verification.
5. A safeguard ensuring liveness checks in electronic KYC do not result in exclusion of persons with special needs.
6. Updates to the Appendix of earlier circulars by inserting references to past notifications relevant to NBFCs.

Analysis

A mix of social, technological, and regulatory factors are reflected in the amendments. First, customers can access KYC FAQs straight from RBI’s website, increasing transparency. This lowers the possibility of KYC standards being misunderstood by ensuring consistency of understanding between institutions and customers.

Second, Persons with Disabilities as a specifically protected class is included, a move towards financial inclusion. By mandating that rejections have to be justified and documented, the RBI puts responsibility on officials who process KYC applications. This aligns with general national obligations under the Rights of Persons with Disabilities Act, 2016.

Third, the revision to paragraph 14 expands the scope of transactions that need KYC verification. Previously, KYC was mainly used for verification of business relationship. Now, one-off transactions of ₹50,000 and above, whether in a single transaction or in multiple related transactions, also need due diligence. This step aligns Indian practice more with international AML guidelines, where thresholds for cash payments and cross-border transactions are kept under scrutiny to limit money laundering and terror financing.

Fourth, the RBI’s official acceptance of Aadhaar face authentication shows that it is receptive to new digital verification methods. Although Aadhaar-based KYC has long been a component of India’s digital identity infrastructure, this amendment goes beyond biometric fingerprints or iris scans by explicitly validating face authentication.

Fifth, the clarification regarding liveness checks addresses concerns about exclusionary impacts of digital verification. Liveness checks, which confirm that biometric inputs come from a live person and not a spoof, are increasingly used in video-KYC processes. By mandating that such checks should not exclude persons with special needs, the RBI balances security requirements with accessibility.

Finally, the updates in the Appendix incorporate earlier circulars for cross-reference, improving the comprehensiveness of the regulatory framework for NBFCs.

Implications

Though the directions for amendment do not entail adjudication, they greatly impact regulated institutions and customers. NBFCs and banks will now be required to comply with increased KYC norms in case of infrequent high-value transactions and overseas remittances. This may necessitate software system updates, staff training, and updated customer communication guidelines. Institutions will also have to integrate Aadhaar face authentication on their digital KYC platforms and make changes in liveness checks to make them more inclusive.

For customers, the changes enhance clarity and availability. Direct access to FAQs from RBI ensures authoritative information. Persons with Disabilities would gain from clear protection against arbitrary refusal of KYC applications. Customers, on the other hand, will have to be ready for more checks in transactions above ₹50,000 or foreign remittances. In regulatory terms, the amendments align India more closely with international Financial Action Task Force (“FATF”) standards, which stress both enhanced due diligence for large transactions and the importance of financial inclusion. They also reflect RBI’s continuing effort to balance compliance with user accessibility in a digital-first banking environment.

Conclusion

The RBI (KYC) (2nd Amendment) Directions, 2025 replace the regulatory framework to meet functional challenges and enhance financial integrity. Through the broadening of the scope of KYC to high-value and cross-border transactions, inclusion of new technologies such as Aadhaar face authentication, and the express protection of rights of PwDs, the RBI has enhanced the twin goals of thwarting financial crimes and fostering inclusion.