Banks’ ₹25,000-crore insurance gravy train faces RBI reality check

On 11 February, the Reserve Bank of India (RBI) released draft guidelines targeting mis-selling, bundled sales, and even “dark patterns” in banking apps, redrawing the boundaries of how banks sell such products. The norms will be applicable from July.

“The responsibility on banks has increased a lot,” said Anil Gupta, senior vice-president and co-group head of financial sector ratings at Icra.

Gupta added that the onus will pass on to banks to ensure the right products are sold to customers, which will increase operational and compliance costs.

Icra estimates that the banking industry earns ₹25,000 crore annually from bancassurance, the partnership model that allows insurers to sell their products to a bank’s customers.

Savings-oriented products such as endowment plans and unit-linked investment plans (ULIPs), credit protection policies, and retail health are the most sold products through the bancassurance channel.

In 2024-25, India’s largest lender, State Bank of India (SBI), earned ₹2,766.83 crore in commissions from the sale of insurance products, while the largest private-sector lender, HDFC Bank, earned ₹6,308 crore. Their incomes from this stream were ₹2,670.5 crore and ₹3,974 crore in 2023-24, respectively.

“There could be some temporary hit in the business until banks and third-party service providers streamline their processes and ensure compliance with the circular, especially given that the last quarter of a fiscal year is a busy period for insurance and mutual fund sales,” Gupta said.

Bankers, meanwhile, are waiting for final guidelines.

“As of now, these are just draft guidelines. Secondly, assuming that banks mis-sell is also incorrect. Banks are also concerned and are ensuring that no mis-selling happens. I think it’s a long shot to say most banks will take a hit,” a senior private sector bank official said, on the condition of anonymity.

Business recalibration

The norms, which restrict bundling and introduce stricter suitability and refund obligations, are seen by experts as shifting bank distribution from a sales-driven model to a need- and advice-led approach.

“Third-party distribution forms a meaningful share of private bank fee income, with insurance being a major component,” said Shruti Ladwa, partner and insurance sector leader, EY India.

Ladwa said there is expected to be a moderate impact on fee income, alongside some increase in fee costs, for the first 12-24 months; however, this will stabilize as banks adapt by recalibrating internal processes, strengthening suitability assessments, and retraining teams.

“Bank employees need to be trained with respect to the products being offered, something that may need to be done by the third-party product providers. This will lead to an increase in costs for such providers,” Gupta said.

The greatest impact is expected in loan-linked or bundled insurance, as well as in higher-ticket savings and investment products that historically relied on branch-driven sales and incentives, experts said.

Banks currently account for 50% of premiums on average for the insurance sector, and up to 80% for certain insurers.

Even insurers will need to rethink their bancassurance models for greater transparency, stronger customer engagement, and need-based selling, Ladwa said, adding that they will also need to expand their product suite and reach underpenetrated customer segments with simpler products.

“There are likely to be more investments to accelerate the growth of agency and digital channels,” she said.

No sweat

The RBI’s proposal comes amid increasing calls for regulatory measures to curb the mis-selling of insurance products following a rise in customer complaints, including concerns around the bundling of insurance products with other bank services.

However, insurance companies expect minimal impact as banks have already been taking measures to curb mis-selling and rationalize third-party sales.

Analysts at Kotak Institutional Equities also did not find any major adverse impact of these guidelines on insurance companies under coverage.

“I don’t think insurance sales will get impacted, and we see no disruption in the insurance business of banks,” said Varun Gupta, chief distribution officer-bancassurance at IndiaFirst Life Insurance.

Insurers already provide training services to bank employees in specified branches and have their own support staff there, he said.

Gupta added that a large part of the training is now also moving towards AI-based and digital training, which means that costs shouldn’t increase materially, and less than 1% of policies sold through banks see complaints.

“At this stage, I don’t think that anyone would really want to have a conservative view on bancassurance, or say that we should become more cautious and therefore remodel our business plan,” he said.

Subhana Fakhre Alam Shaikh in Mumbai contributed to the story.