On a day when India’s financial system was taking stock of the Union Budget and the economic road ahead, Union Finance Minister Nirmala Sitharaman delivered a pointed message to banks: return to your core business.
Speaking to reporters after her post-Budget meeting with the Central Board of the Reserve Bank of India (RBI), Sitharaman raised serious concerns over the rising instances of mis-selling of financial products — particularly insurance — by banks. Her remarks underline a growing discomfort within policy circles about how aggressively banks are pushing non-banking products to customers.
The Finance Minister said banks should focus on what they are fundamentally meant to do — mobilise deposits and extend loans — instead of spending disproportionate time and energy selling insurance and other third-party products.
Mis-Selling: A Growing Concern
Sitharaman pointed out that in many cases, customers are being asked to purchase insurance policies even when they may not need them. According to her, such practices had earlier fallen into a regulatory grey area.
The RBI treated insurance as a non-banking activity, while the insurance regulator did not directly regulate banks. This created a gap where customers often found themselves confused — and in some cases, unprotected.
She acknowledged that she is not fully certain whether mis-selling clearly qualifies as an offence under the Bharatiya Nyaya Sanhita (BNS). However, she stressed that banks cannot afford to engage in such behaviour. The message to lenders, she said, must be “strong and clear.”
Home Loan Borrowers Flagged as Key Victims
The Finance Minister highlighted complaints from home loan borrowers who were allegedly asked to buy insurance policies despite already pledging their property as collateral.
She questioned the logic behind forcing additional insurance when borrowers may already have life, health, or fire insurance coverage. If a property has been pledged and risks are already covered, she implied, compelling customers to buy more policies raises serious concerns.
The issue of “compulsory bundling” — where one product is effectively tied to another — has particularly drawn attention from regulators.
RBI’s Draft Guidelines: A Regulatory Tightening
Earlier this month, the RBI issued draft guidelines aimed at strengthening norms around advertising, marketing, and selling financial products. These proposed rules will apply not only to banks but also to non-banking financial companies (NBFCs), including the sale of third-party products.
Under the draft framework, the consequences for mis-selling are clear and strict. If a bank is found guilty, it will have to:
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Refund the full amount paid by the customer
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Compensate for any additional losses incurred
The draft also explicitly bans compulsory bundling practices.
The RBI has invited public feedback on the guidelines until March 4. The new rules are expected to come into effect from July 1, marking a significant shift in how financial products are marketed and sold in India.
Deposit Growth vs Loan Growth: A System Under Pressure
Beyond the issue of mis-selling, broader banking trends were also discussed. RBI Governor Sanjay Malhotra said deposit growth in the banking system currently stands at around 12.5 percent, while loan growth is approximately 14.5 percent.
The faster pace of loan growth compared to deposits highlights a structural challenge for banks. Strengthening the deposit base, especially low-cost CASA (Current Account Savings Account) deposits, has become increasingly important.
Sitharaman reiterated that banks must better understand customer needs and focus on building stable, low-cost deposits instead of depending heavily on revenue from cross-selling additional financial products.
Taken together, the Finance Minister’s remarks and the RBI’s draft guidelines send a clear policy signal. As India’s banking sector expands and competition intensifies, growth cannot come at the cost of customer trust.
The government’s message is not about restricting innovation or diversification. It is about reinforcing fundamentals — transparency, suitability, and responsible selling.
At a time when credit demand remains strong and financial inclusion continues to deepen, the reminder from the top is unmistakable: banking, at its heart, is built on trust. And that trust must not be compromised.
