The Reserve Bank of India’s draft framework on mis-selling in financial services marks a significant and much-needed intervention at a time when bancassurance has become one of the fastest-growing distribution channels in India. Over the past few years, the share of insurance sourced through banks has risen sharply. While this expansion has improved reach and penetration, it has also raised uncomfortable questions about suitability, transparency, and consumer protection.
For many borrowers today, purchasing insurance alongside a loan has become almost routine-if not subtly mandatory. Credit-linked life policies, property covers, and bundled products are frequently offered at the point of loan disbursal. The core concern, however, lies not merely in the sale, but in the structure of coverage. In most cases, insurance is issued only to the extent of the loan amount. If a borrower has a property worth ₹1 crore but has availed a loan of ₹60 lakh, the insurance cover is often restricted to ₹60 lakh. In the event of a total loss, the borrower remains severely underinsured-and if the asset itself was inadequately valued or subject to underinsurance clauses, the claim payout may be proportionately reduced, potentially leaving even the bank exposed to recovery risk.
This practice raises a critical question: Are we unknowingly creating a system of gross underinsurance under the guise of financial protection? In life insurance too, credit-linked policies are designed to cover the outstanding loan balance. While this secures the lender’s interest, it does not necessarily protect the family’s broader financial needs. The fundamental purpose of insurance-to restore economic stability after loss-gets diluted.
Another pressing issue is the knowledge and training levels of personnel selling insurance at bank branches. Insurance is a specialised product requiring under-standing of risk assessment, coverage terms, exclusions, and long-term implications. Yet, in many cases, frontline banking staff operate under sales targets rather than advisory mandates. The risk of mis-selling, incomplete disclosure, or suitability mismatch becomes real and significant.
The RBI’s draft norms emphasise suitability checks, transparency, and accountability. This is a welcome step. However, regulatory intent must translate into operational discipline. Clear disclosures, mandatory needs analysis, and separation of loan processing from insurance advisory are essential. Customers must be explicitly informed that they have the right to choose insurers and coverage amounts beyond the loan value.
The growth of bancassurance should not come at the cost of consumer protection or systemic risk. If widespread underinsurance persists, the economic consequences of a catastrophe could be devastating-not just for individuals, but for the broader financial system.
As the RBI moves forward with these draft regulations, the larger question for the insurance industry is this: Are we building penetration, or merely pushing products? The answer will determine whether bancassurance becomes a pillar of financial security-or a source of future disputes and disillusionment.
Authored by:
Dr. Rakesh Agarwal
Editor, The Insurance Times
