Focus on Banking, Not Insurance Sales: Sitharaman Calls Out Banks Over Mis-Selling

Finance Minister Nirmala Sitharaman has sharply criticised banks for mis-selling financial products, saying the practice is now a punishable offence under the Bharatiya Nyaya Sanhita (BNS).

Speaking to reporters after her post-Budget address to the Central Board of the Reserve Bank of India (RBI), Sitharaman said banks should focus on their core business instead of aggressively selling insurance products. She expressed concern that banks were spending too much time pushing insurance even when customers did not need it, according to PTI.

She pointed out that customers were often asked to buy insurance policies despite already having adequate coverage.

According to her, this issue slipped through a regulatory gap, the RBI assumed insurance-related matters were overseen by the insurance regulator, while the Insurance Regulatory and Development Authority of India (IRDAI) believed banks did not fall directly under its supervision. As a result, customers ended up suffering.

Sitharaman questioned why home loan borrowers, who already pledge their property as collateral, are being asked to take additional insurance. She said if a person is offering property as security for a loan, it is unclear why they are being asked to "de-risk" further by purchasing another insurance policy.

She emphasised that banks should instead focus on understanding their customers—including their financial strengths, weaknesses and needs—rather than pushing products that may not be necessary.

What Are RBI's Mis-Selling Guidelines?

RBI had issued draft guidelines on mis-selling on February 11. The guidelines are aimed at tightening oversight of how loans, insurance, mutual funds and other third-party products are marketed to customers.

The draft, called the Reserve Bank of India (Commercial Banks-Responsible Business Conduct) Amendment Directions, 2026, will come into effect from July 1, 2026.

Under the proposed norms, mis-selling has been broadly defined to include selling products that are unsuitable for a customer’s financial profile, risk appetite or needs, even if the customer has signed the required documents. It also covers cases where incomplete, misleading or unclear information is provided, or where customers are pressured into buying products.

The draft rules require banks and regulated entities to obtain explicit and informed consent for each product sold. Institutions must clearly disclose all costs, risks and key features upfront, and ensure that marketing material is transparent and not misleading.

The apex bank has also proposed restrictions on bundling third-party products with core banking services. Customers must not be compelled to purchase insurance or investment products as a pre-condition for availing loans or other facilities, and they should be free to choose providers.

RBI has also proposed a ban on the use of dark patterns, which are deceptive digital design practices that manipulate customers into making unintended choices. Banks will be required to review their websites and mobile applications to ensure that such practices are not used.

The draft norms further seek to regulate the conduct of direct selling agents. Banks will have to clearly identify authorised agents and ensure that sales interactions follow defined standards, including restrictions on unsolicited calls outside prescribed hours.

Under the guidelines, if mis-selling is established, regulated entities must refund the amount collected and compensate customers for any financial loss suffered. Banks will also be expected to put in place internal systems to assess product suitability and strengthen post-sale grievance redress mechanisms.