RBI chief says not to curb bancassurance, calls for firm guardrails

| Mumbai: The Reserve Bank of India (RBI) has ruled out any ban or curbs on bancassurance, even as concerns mount over rampant misselling of insurance products by bank staff. Addressing a post-policy conference on Wednesday, Governor Sanjay Malhotra backed the insurance regulator’s stance that the distribution of insurance products through banks should not be restricted. 

While acknowledging rising complaints of misselling, Malhotra said the central bank would focus on strengthening safeguards, rather than disrupting bancassurance, a key channel for financial inclusion. The governor’s remarks come amid growing pressure on banks to boost fee-based income and recent government directives to delink insurance sales from employee incentives.

Malhotra said that the RBI had warned and made banks aware about rising cases of misselling of financial products, but there is room for more on this. As such, the RBI expects such instances to continue to fall, as the insurance regulator takes more such measures to curb fraud and misselling.

Underscoring the benefits of the bancassurance—the partnership between a bank and an insurance firm that allows the insurer to sell its products to the bank’s customers—the governor said the tie-up works, given that an extensive bank network has already been set up in the country and allowing for the sale of other financial products through this network enables lower cost of selling and aids financial inclusion, especially in the rural areas. 

Several other countries, globally, follow a similar distribution model, he said.

Encouraging the industry to undertake a need analysis for bancassurance, Malhotra said the regulator would work to ensure there is no misselling, and that such products are sold only to the right customers.

Focus on customer awareness

Last month, on the sidelines of an event, Swaminathan S. Iyer, member, Insurance Regulatory and Development Authority of India (life) (IRDAI), said the regulator did not want to manage distribution channels and would focus on customer awareness to check malpractices, Mint had reported on 2 July.

“It’s not necessary that every misselling is misselling, it’s also about the customers’ understanding of the product. Once you drive home that your understanding is different from what the product is…then I think the absolute number on misselling will definitely reduce,” Iyer had said.

The regulator has facilitated an open architecture for banks and insurance companies, and it is now up to the individual entities to decide how they sell products, Iyer had added. As per the open architecture, a bank can partner with three life, general (non-life) and health insurance companies each, allowing for a total of nine insurance partners. However, some major banks such as State Bank of India and ICICI Bank only sell products of insurance companies promoted by them.

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The officials’ comments come amid increased calls for curbs on forced or misselling of third-party insurance products by bank representatives to meet their sales targets, as banks are increasingly relying on other income to boost profitability amid muted growth in their core business income.

In September 2024, IRDAI member Satyajit Tripathy had said complaints about insurance misselling in life insurance have hit an alarming level and caught the attention of policy-makers. He said grievances in life insurance are often related to the product, while non-life grievances usually pertain to claim payments and exclusions. In November 2024, finance minister Nirmala Sitharaman and Irdai’s former chairman Debasish Panda had also separately flagged rising instances of insurance misselling.

Bar on incentives

The finance ministry asked banks and non-banks to stop offering incentives on insurance sales to eliminate this malpractice, Mint had reported on 3 June. The department of financial services issued specific instructions, asking lenders to immediately review their marketing practices, sell insurance products only as per customers’ requirements, and not link sales targets to incentives.

Later in June 2025, RBI deputy governor Rajeshwar Rao said misselling without regard to suitability and appropriateness would beget distrust in schemes that aim to provide a safety net to low-income households. “We are examining whether it necessitates framing of guidelines to address mis-selling of financial products and services by regulated entities,” Rao had said at a conference.

Insurance companies, especially those backed by bank promoters, have vouched for the bancassurance channel, arguing that banks have 6-7 times more reach than life insurance companies, and that there was no data to prove that misselling by banks was higher than what was seen across the industry in general. 

Other distribution channels for insurers include direct sales by insurers and agency channel that includes selling through a network of agents and through digital partner tie-ups.