Banking Central | Indian Banks’ mis-selling mess: Act now or pay later

Driven by tough targets and incentives linked to sales targets, the banking sector has been pushing risky insurance and financial products on customers, leaving the rural borrowers particularly vulnerable

Let's discuss a critical issue in this week's column. Of late, mis-selling — pushing dodgy insurance policies and complex financial products on unsuspecting customers — has turned rampant in the Indian banking industry. The RBI has acknowledged the problem calling it out as a disturbing trend that’s giving banks a bad name and threatening the whole idea of financial inclusion. There are reports that the RBI may even come with fresh guidelines to curb mis-selling.

Recently, RBI deputy governor M Rajeswhar Rao slammed banks for their aggressive sales tactics, especially mis-selling insurance and wealth management products. How severe is the issue? A 2024 SEBI report flagged over 12,000 complaints about mis-sold insurance-linked investment products in FY24 alone. The Insurance Regulatory and Development Authority of India (IRDAI) noted an 18 per cent jump in life insurance mis-selling complaints year-on-year in FY24, many tied to banks acting as corporate agents.

Banking Central

These tactics don’t just hurt customers; they leave banks open to legal trouble and a battered reputation, making a mockery of financial inclusion. The problem is a proper mess. Banks, desperate to rake in fee-based income, have turned their branches into pressure-cooker sales dens. Tellers and relationship managers, lured by fat commissions, push bundled products like unit-linked insurance plans (ULIPs) or mutual funds without spelling out the risks or costs.

A 2024 study by the Centre for Financial Inclusion found that 62 per cent of rural banking customers felt bullied into buying add-on products during loan disbursals. Customers lose their hard-earned savings, face dashed hopes, and, in some cases, end up in financial ruin.

RBI’s own data shows consumer complaints against banks for unfair practices shot up 15 per cent in FY24, with mis-selling leading the pack. The RBI isn’t just twiddling its thumbs. Rao revealed they’re working on new guidelines to tackle mis-selling, hinting at a stricter regime. While the details of the new rules aren't known yet, word is the rules will push for clearer disclosures, mandatory checks to ensure products suit customers, and stiff penalties for those who don’t play ball.

The RBI’s 2024 tightening of bancassurance rules, limiting banks’ tie-ups with insurers, was a step in this direction. The central bank has also been nudging banks to clean up their act, urging them to link employee incentives to customer welfare, not just sales targets. Governor Sanjay Malhotra, in his June 2025 monetary policy speech, stressed the need for ethical conduct to rebuild trust, a point Rao echoed by saying banks must focus on long-term relationships, not quick bucks.

But can new rules really sort out this mess? It’s not so simple. Mis-selling isn’t just a few rogue players; it’s baked into the system, driven by a culture obsessed with numbers. Despite RBI’s prodding, banks still lean heavily on cross-selling, with fee income from insurance and wealth products making up 20 percent of private banks’ non-interest income in FY24, according to a Crisil report.

The pressure to hit targets trickles down to branch staff, who face impossible quotas or lose their bonuses. Add to that India’s low financial literacy—only 27 per cent of adults know their way around money matters, per a 2023 S&P Global survey—and you’ve got a recipe for disaster, with customers easy prey for smooth-talking bankers.

The bigger picture isn’t exactly cheerful either. With bank credit growth slowing to 9 per cent year-on-year by May 2025, banks are scrambling to boost profits, often by cutting corners on ethics. Rural and semi-urban areas, where microfinance and retail lending are big, are especially vulnerable, as borrowers with few options get saddled with products they don’t need.

Rao’s talk of “tragic consequences” isn’t just hot air—take the 2024 case in Maharashtra, where a farmer was duped into buying a risky ULIP instead of a simple savings plan, sparking outrage and a probe into bank practices. The RBI’s upcoming guidelines are a good start, but it’s going to be a tough slog. Making banks stick to suitability checks and transparency is easier said than done. Without tight monitoring and heavy fines, these rules could end up as mere paper tigers.

The RBI’s push for digital tools, like mandatory audio-visual disclosures for complex products, might help, but it’s no magic wand. The real fix lies in changing the banking sector’s mindset—moving away from a sales-first attitude to one that puts customers front and centre. Until banks rework their reward systems and start acting responsibly, mis-selling will remain a stubborn blot.

(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)