RBI tightens domestic Money Transfer rules, adds new security factors

Reserve Bank of India (RBI), in a significant move, has tightened the rules governing domestic money transfers. This development, announced on July 24, 2024, is set to bring about a more rigorous but safer transaction process for individuals using domestic money transfer services.

The RBI, in its circular, stated that the remitting bank shall obtain and keep a record of the name and address of the beneficiary in the case of cash pay-out service. This is a crucial step towards ensuring that the identity of the beneficiary is known and recorded, thereby reducing the risk of fraudulent transactions.

In addition to this, the circular also mentioned that in the case of cash pay-in service, the remitting banks or business correspondents shall register the remitter based on a verified cell phone number and a self-certified ‘Officially Valid Document (OVD)’ as per the Master Direction – Know Your Customer Direction 2016, as amended from time to time. This implies that individuals will now need to provide more identification for transactions, which includes a verified cell phone number and an OVD for registration.

The RBI has also mandated that every transaction by a remitter will have to be validated by an Additional Factor of Authentication (AFA). This step is intended to provide an extra layer of security, making it more difficult for fraudsters to exploit the system.

Furthermore, the circular states that Remitting banks and their business correspondents shall conform to provisions of the Income Tax Act, 1961 and the rules/ regulations framed thereunder (as amended from time to time), pertaining to cash deposits. This means that banks and business correspondents must also adhere to Income Tax Act provisions for cash deposits, thereby ensuring compliance with tax laws.

The remitter bank shall include remitter details as part of the IMPS/NEFT transaction message, it added. The transaction message will have to include an identifier to identify the fund transfer as a cash-based remittance. This is another measure aimed at enhancing the traceability of transactions.

However, it’s important to note that the new rules by the RBI do not apply to card-to-card transfers. These transfers will continue to be governed by separate guidelines specific to such transactions.

The RBI explained that since the framework for Domestic Money Transfer (DMT) was introduced in 2011, there has been a significant increase in the availability of banking outlets, developments in payment systems for funds transfers, and ease in fulfilling KYC requirements, etc. Now, users have multiple digital options for fund transfer.

The RBI said that the changes are being introduced following a review that was undertaken recently of various services facilitated in the current framework. This indicates that the RBI is actively monitoring and updating its regulations to keep pace with the evolving financial landscape and to ensure the safety and security of transactions.

Historically, the RBI has been proactive in implementing measures to enhance the security of financial transactions. For instance, in 2016, the RBI introduced the Unified Payments Interface (UPI), a real-time payment system that allows multiple bank accounts to be operated via a single mobile application, thereby facilitating seamless fund routing and merchant payments. The UPI system also uses two-factor authentication, similar to the AFA mandated in the new rules, for added security.

The tightened rules for domestic money transfers by the RBI represent a significant step towards enhancing the security and accountability of these transactions. While these measures may lead to a more rigorous transaction process, they are crucial for safeguarding the interests of individuals and ensuring the integrity of the financial system. The RBI’s proactive approach in updating its regulations to keep pace with the evolving financial landscape is commendable and is a testament to its commitment to ensuring the safety and security of transactions.