Question: The bank says my KYC is incomplete and will stop debits after notice. Is this allowed?
Answer: Yes. RBI permits phased restrictions, including partial freezing, after due notice if KYC remains incomplete.

Supporting evidence:
title: rbi.org.in/Notification.aspx
quote: In cases of non-compliance of KYC requirements by the customers despite repeated reminders by banks, banks were allowed to impose ‘partial freezing’ on such KYC non-compliant in a phased manner, after giving due notice
context: rtification by the customer in case of no change in status with respect to their identities and addresses. In case of change of address of such ‘low risk’ customers, they could merely forward a certified copy of the document (proof of address) by mail/post, etc. Banks may not insist on physical presence of such low risk customer at the time of periodic updation.
If an existing KYC compliant customer of a bank desires to open another account in the same bank, there should be no need for submission of fresh proof of identity and/or proof of address for the purpose.
In cases of non-compliance of KYC requirements by the customers despite repeated reminders by banks, banks were allowed to impose ‘partial freezing’ on such KYC non-compliant in a phased manner, after giving due notice.
73
DBR.AML.BC.No.77/14.01.001/2014-15 dated March 13, 2015
Know your Customer (KYC) guidelines – in respect of accounts of proprietary concerns

With a view to ease the process of opening bank accounts of proprietary concerns while keeping the default rule for submitting any two documents as activity proof by a proprietary concern, it was allowed that in cases where the banks are satisfied that it is not possible to furnish two such documents, they would have the discretion to accept only one of those documents as activity proof. In such cases, the banks, however, would have to undertake contact point verification, collect such information as would be required to establish the existence of such firm, confirm, clarify and satisfy themselves that the business activity has been verified from the address of the proprietary concern. It was further clarified that the list of registering authorities indicated in the Master circular is only illustrative and includes license/certificate of practice issued in the name of the proprietary concern by any professional body incorporated under a statute, as one of the documents to prove the activity of the proprietary concern.
74
DBR.AML.BC.No.104/14.01.001/2014-15 dated June 11, 2015
Amendment to Prevention of Money Laundering (Maintenance of Records) Rules, 2005 – additional documents for the limited purpose of ‘proof of address’
Based on the amendments to PML Rules notified vide Government of India’s Gazette Notification dated April 15, 2015, banks/financial institutions were advised about certain additional documents for the limited purpose of proof of address under ‘simplified measures’.
A. List of Circulars consolidated in the Master Circula