India’s Mis-Selling Problem Can't Be Solved By Banks Alone
Solving India’s mis-selling crisis requires more than just blaming banks. It demands regulatory synergy, smarter consent, and a true shift toward financial well-being.
The Gist
Finance Minister Nirmala Sitharaman has urged banks to focus on their core business and address the issue of mis-selling financial products, particularly insurance, amidst new draft guidelines from the RBI.
- The RBI's draft guidelines aim to tackle mis-selling, which has been prevalent, especially in the insurance sector.
- Surveys proposed for post-sale feedback may not effectively identify mis-selling, particularly for less financially literate customers.
- Collaboration among regulators and financial institutions is essential to improve customer education and address mis-selling comprehensively.
Finance Minister Nirmala Sitharaman recently hogged headlines in India’s financial newspapers as she admonished banks, asking them to focus on their core business and “stop mis-selling”. The warning came on the back of India’s central bank, the Reserve Bank of India (RBI), releasing draft guidelines on its website on the mis-selling of insurance policies and other products. The guidelines received wide attention from the media, commentators and financial planners.
The issue drew greater attention also because the draft guidelines were released around the time that the case of a 90-year old customer being sold a 99-year life insurance policy with an annual premium of Rs 2 lakh was reported in the media. This may have been a sheer coincidence, but the fact of financial products being mis-sold to potential customers cannot be denied.
A close look at the data suggests that maximum mis-selling happens in insurance. As per IRDAI report of 2024-25, 22% of life insurance complaints related to mis-selling. A February 2026 Forbes India report indicated 60% of large private sector bank customers, 58% of mid-sized bank customers and over 50% of public sector bank customers reported mis-selling. The report is based on a study of LocalCircles, a community social media platform. The study, however, covers a much wider range of mis-selling, including dark patterns, which are addressed by RBI’s draft guidelines. The Annual Report of the RBI’s Banking Ombudsman, however, does not report on mis-selling, the reason for which is not quite clear.
Regulate, Don’t Restrict
While mis-selling is a legitimate concern, putting banks and banks alone in the dock is like throwing the baby out with the bathwater. Why ask banks to get out of selling financial products other than deposits?
For many years, there have been complaints about insurance being mis-sold. Bank staff have been accused of selling insurance policies to meet targets and earn hefty rewards. And we are not even talking about commissions.
In reality, it's not only the bank staff who are ‘mis-selling’. Insurance is also mis-sold by insurance agents, employees of insurance companies and such other intermediaries. Similarly, it is not just insurance products; mutual funds and such other investment schemes too are mis-sold.
Bancassurance is popular worldwide. In India, banks have built a large network, familiarity and trust over decades. Trying to duplicate such a spread to reach financial products like insurance or mutual funds would be a sheer waste of time and resources. In other words, using the bank branch network for selling these products by itself is not wrong. The service just needs to be regulated and delivered better as we move from financial inclusion to financial well-being where any seller of financial products will be an adviser to customers on her financial well-being. And banks are well-placed to be that adviser. The RBI’s draft guidelines for “advertising, marketing and selling financial products by regulated entities” are thus quite appropriate.
Comments in the media on these guidelines have largely been complimentary for rightly addressing almost all of the customer concerns. However, a couple of draft guidelines need some fine-tuning.
Mis-Selling Survey Illusion
First, the draft guidelines propose post-sales feedback surveys within 30 days of a transaction to ensure customers have understood the product and to flag potential mis-selling. While well-intentioned, this may not prove particularly effective.
First, relying on feedback surveys as a measure to identify mis-selling isn’t foolproof. The survey forms are typically sent through emails that more often than not end up in spam.
Two, even if some customers see the form, they are more likely to ignore it than fill it out.
More importantly, financial products are often mis-sold to unsuspecting customers, like the elderly and the semi-literate. How would such customers be expected to ‘evaluate’ it after ‘buying’ and that too within a period of one month? If they understood the product, they wouldn’t have bought it, to begin with. If it is a bundled product, the customer will perhaps not even know that such a product has been sold to her. In fact, the customer may take a couple of years to realise that a product sold to them is unsuitable. Worse, they may realise it when there is a claim or after paying a couple of instalments.
The Root Cause
In reality, mis-selling could happen unintentionally simply due to the lack of awareness on the part of the agents selling the product, including the employees of the mutual fund or insurance company. This could result in them explaining the product very superficially to a customer with the idea of just selling it to her.
The potential customers, too, may not ask the right questions about the product due to lack of financial literacy. And later, upon realising that the product is unsuitable, they may simply stop paying premiums or SIPs, not realising the repercussions, and end up with financial loss. That’s why the complaint of mis-selling should be taken on board whenever the customer lodges it, and all the money paid for the product, be it by way of premiums or SIP subscriptions, should be refunded to the customer.
Explicit Consent Means Nothing
Similarly, the requirement for explicit consent may not carry much weight. In the now-infamous case of a 90-year-old being sold a 99-year policy, consent of the customer must have been obtained at some stage. After all, a fixed deposit could not have been liquidated to purchase an insurance policy without consent.
It is common knowledge that even educated customers sign on dotted lines without reading the documents written in legalese, which is complex to read and understand. This is especially true of insurance policies.
Terms and conditions need to be presented in simple language that a common customer can understand. Can we also make insurance companies and mutual funds appropriately highlight ‘most important conditions’ in the document that goes to the customer in all investment and insurance products? Some years ago, this was prescribed by the RBI for credit cards and that played an important role in reducing complaints of mis-selling credit cards. In short, customer consent should not be held against them while refunding money upon cancellation of the product.
The Right Questions And Answers
Mis-selling is an issue that permeates across regulators and players. Other entities like insurance companies, mutual funds and financial planners, along with the regulators, need to collaborate to serve the customer, including for refunds.
More importantly, financial education among sellers and buyers of financial products is a must so that buyers will ask the right questions and be empowered to make the right decisions about investing their own money, and sellers of financial products will be well-equipped to better guide the investors in their quest for financial well-being. And all regulators, including the RBI, can start listing the customer complaints on account of mis-selling as a separate category in their annual reports. Hopefully, that would act as a deterrent.
