Types of Bank Deposit Accounts and KYC Norms for Opening an Account

Every banking relationship begins with an account. Which account a customer opens decides whether his money is a demand or a time liability of the bank, whether it earns interest, whether he may overdraw and whether it counts towards the bank's cash reserve obligation. Before any of that, the bank must satisfy itself who the customer is, which is no longer a matter of introduction and courtesy but a statutory duty under anti money laundering law.

1. The Kinds of Deposit

Figure 1: The four principal deposit accounts

• Demand and time liabilities: the basic division. A demand liability is repayable on demand, such as a savings or current account balance; a time liability is repayable after a period, such as a fixed or recurring deposit. The distinction decides what counts for the cash reserve ratio and the statutory liquidity ratio.
• Savings account: intended for individuals and for the savings of small institutions. Interest is paid at a rate the bank sets, since deregulation in 2011, calculated on the daily closing balance. The number of withdrawals may be restricted, and the account is not intended for business turnover.
• Current account: intended for business, with unlimited transactions and no interest, because the bank cannot rely on the balance. An overdraft facility may be attached. The Reserve Bank restricts the opening of current accounts by borrowers who have availed credit facilities from the banking system, to prevent the diversion of funds away from lending banks.
• Fixed deposit: a sum placed for a stated period at a higher rate, evidenced by a receipt. Premature withdrawal is ordinarily permitted subject to a penalty, and a loan or overdraft against the deposit is usually available.
• Recurring deposit: a fixed sum paid monthly for a stated term, repaid with interest at maturity. It suits a saver with a regular income and no lump sum.
• Other accounts: flexi or sweep accounts which move surplus balances into term deposits automatically, tax saver term deposits with a five year lock in, and accounts for non-residents under the Foreign Exchange Management Act, 1999.

2. Financial Inclusion Accounts

Figure 2: Two accounts designed for those without ordinary banking

• The basic savings bank deposit account: every bank must offer a no frills savings account without any requirement of a minimum balance, carrying a passbook or statement, an ATM or debit card without issuance charge, and a prescribed number of free withdrawals each month.
• No ceiling: the account carries no limit on the balance or on credits. It is not confined to any class of customer, and a person holding one may not simultaneously hold an ordinary savings account in the same bank.
• The small account: a separate category for a person who cannot produce an officially valid document. It is opened on a self-attested photograph and signature or thumb impression in the presence of a bank official, and carries limits: the balance may not exceed ₹50,000, total credits in a year may not exceed ₹1,00,000, and withdrawals and transfers may not exceed ₹10,000 in a month.
• Duration: a small account is valid for twelve months, extendable for a further twelve where the holder shows that he has applied for an officially valid document.
• Jan Dhan accounts: the accounts opened under the financial inclusion programme are basic savings bank deposit accounts, with an attached accident insurance cover and an overdraft facility within a prescribed limit for eligible holders.

3. Opening an Account

• Application and specimen signature: the customer applies in the prescribed form and gives a specimen signature, against which cheques are later compared. The signature is the bank's authority to pay, so an unverified signature is the root of most wrongful payment disputes.
• Introduction: the older practice of requiring an introduction by an existing customer has been replaced by document based identification, although an introduction remains relevant evidence of good faith if a dispute arises later.
• The mandate: the account opening form records who may operate the account and on what terms, which is the mandate binding the bank. Any payment outside the mandate is made at the bank's own risk.
• Nomination: the customer should nominate a person to receive the balance on his death, under Section 45ZA of the Banking Regulation Act for deposits, Section 45ZC for articles in safe custody and Section 45ZE for lockers. Since 1 November 2025, under the Banking Laws (Amendment) Act, 2025, a depositor may name up to four nominees, either simultaneously with fixed shares or successively, while articles in safe custody and lockers admit only successive nomination. A nominee receives the money; he does not own it against the heirs.
• Terms and charges: the schedule of charges, the right of set-off and the conditions of operation form part of the contract, and are controlled by the Reserve Bank through the fair practices code and the charter of customer rights.

4. Know Your Customer

• The statutory source: Section 12 of the Prevention of Money-Laundering Act, 2002 obliges every banking company to verify the identity of its clients, maintain records of transactions, and furnish information to the Financial Intelligence Unit. The details are in the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.
• The regulatory source: the Reserve Bank's Master Direction on Know Your Customer, issued under Section 35A, which is the operative document and is amended frequently.
• Officially valid documents: the passport, driving licence, proof of possession of an Aadhaar number, voter identity card, a job card issued by NREGA signed by a State Government officer, and a letter from the National Population Register containing name and address.
• The four elements: a customer acceptance policy, customer identification procedures, monitoring of transactions, and risk management. Every bank must have a board approved policy covering all four.
• Beneficial ownership: for a company, partnership or trust, the bank must identify the natural person who ultimately owns or controls the entity, using the thresholds in the Rules. Identifying the entity alone is not enough.
• Politically exposed persons: persons entrusted with prominent public functions in a foreign country require senior management approval and enhanced monitoring.
• Record keeping: transaction records must be preserved for five years from the date of the transaction, and identification records for five years after the end of the relationship.
• Reporting: banks file cash transaction reports, suspicious transaction reports and counterfeit currency reports with the Financial Intelligence Unit. A suspicious transaction report must not be disclosed to the customer, which is the prohibition on tipping off.

5. Digital Identification

• Aadhaar after Puttaswamy: the Supreme Court struck down the provision that permitted private entities to require Aadhaar authentication. The Aadhaar and Other Laws (Amendment) Act, 2019 restored a voluntary route, so a bank may use Aadhaar authentication or offline verification where the customer consents, and must offer an alternative to a customer who does not.
• Video based customer identification: permitted from January 2020, this allows an account to be opened through a live video interaction initiated from the bank's domain, with geotagging to confirm the customer is in India, random question verification to confirm liveness, and the capture of a clear image of the officially valid document.
• Central KYC Records Registry: a central repository to which a bank uploads a customer's verified records, so that other regulated entities may rely on them and the customer need not repeat the process at every institution.
• Periodic updation: identity and address must be re-verified at intervals fixed by risk category, and the Reserve Bank has progressively simplified the process, permitting a self declaration where there is no change in address or documents.
• Freezing for non-compliance: where a customer does not complete updation after due notice, the account may be restricted and eventually frozen, a power that must be exercised with notice and in a manner proportionate to the default.

6. Questions Arising

Can a bank refuse to open an account?

Yes, but not arbitrarily. There is no general duty on a bank to accept every applicant, and it must refuse where know your customer requirements cannot be met. But a public sector bank is State under Article 12 and must act fairly and without discrimination, and the Reserve Bank's instructions require every bank to offer a basic savings bank deposit account and a small account, so a refusal grounded only on the absence of documents or of a minimum balance would not stand.

Does a nominee become the owner of the deposit?

No. Section 45ZA entitles the nominee to receive the amount from the bank, and payment to him gives the bank a valid discharge. It does not decide ownership, which is governed by the law of succession. The nominee holds the money for those entitled under the will or the personal law, as the Supreme Court held for insurance in Sarbati Devi v. Usha Devi, (1984) 1 SCC 424 and for securities in Shakti Yezdani v. Jayanand Jayant Salgaonkar (2023). The 2025 amendment allowing up to four nominees changes who may receive, not who owns.

7. Quick Revision

8. Frequently Asked Questions

What is the difference between a savings account and a current account?

A savings account is meant for individuals and small institutions, pays interest at a rate the bank sets, and may carry restrictions on the number of withdrawals. A current account is meant for business, carries no interest because the bank cannot rely on the balance, permits unlimited transactions, and may have an overdraft facility attached. Both are demand liabilities of the bank.

What is a basic savings bank deposit account?

A no frills savings account that every bank must offer, with no requirement of a minimum balance, a passbook or statement, an ATM or debit card issued without charge, and a prescribed number of free withdrawals each month. There is no ceiling on the balance or on credits, but the holder may not simultaneously keep an ordinary savings account in the same bank.

What are officially valid documents for opening a bank account?

The passport, the driving licence, proof of possession of an Aadhaar number, the voter identity card, a job card issued under the rural employment guarantee scheme and signed by a State Government officer, and a letter from the National Population Register containing name and address.

Is Aadhaar compulsory for opening a bank account?

No. The Supreme Court struck down the provision allowing private entities to require Aadhaar authentication, and the Aadhaar and Other Laws (Amendment) Act, 2019 restored only a voluntary route. A bank may use Aadhaar authentication or offline verification where the customer consents, and must offer an alternative officially valid document to one who does not.

How long must a bank keep know your customer records?

Five years. Records of transactions must be preserved for five years from the date of the transaction, and records of the identity of clients for five years after the business relationship ends, under the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.

What is the central KYC records registry?

A central repository to which a regulated entity uploads a customer's verified identification records after it has completed the process once. The customer receives a KYC identifier, and another bank, insurer or intermediary may then download the records instead of repeating the verification. It reduces cost and duplication, and it is the reason a customer who has already been identified by one institution can usually open an account elsewhere without producing documents again.

Can a bank freeze an account for failure to complete KYC updation?

It may, but only as a last step. The Reserve Bank requires periodic updation at intervals fixed by the customer's risk category, and permits a self declaration where the address and documents have not changed. Where a customer does not respond, the bank must give notice, may then restrict operations, and may freeze the account only after that. The action must be proportionate, and the account must be restored once the updation is done.

9. Related Topics and Provisions

• Nature of the banker and customer relationship
• Special types of customer
• Duties of a banker: secrecy, care and honouring cheques
• Garnishee orders, attachment and termination of the relationship
• Deposit insurance
• Instruments of monetary control