Ethical Practices and Long-Term Trust Over Short-Term Gains
Key Highlights:
- Curbing Product Mis-Selling: RBI Governor calls on banks to prioritize ethical practices, emphasizing the risks of mis-selling products and improper account openings.
- Impact on Insurance Sector: Rising concerns over mis-selling contribute to a slight decline in India’s insurance penetration, as highlighted by the IRDAI.
- Call for Strong Governance: Urges banks and insurers to align incentives and processes to build long-term trust.
Governor’s Address: A Call for Stronger Governance
Speaking at the Conference of Directors of Private Sector Banks in Mumbai, RBI Governor Shaktikanta Das highlighted the need for robust internal governance. He cautioned banks against prioritizing short-term gains over long-term trust, particularly through unethical practices such as mis-selling products or opening accounts without proper KYC verification.
Das emphasized, “Staff incentives should be structured to avoid encouraging mis-selling or unethical practices.” He warned that such practices could result in significant long-term risks, including reputational damage, financial penalties, and supervisory scrutiny.
Rising Concerns in the Insurance Sector
Mis-selling has become a pressing issue in the financial sector, particularly in insurance. According to the Economic Survey 2023-24, mis-selling is too widespread to be dismissed as isolated incidents. It recommended that financial institutions acknowledge instances of misrepresentation, compensate for consequential losses, and adopt customer-centric business practices.
The Insurance Regulatory and Development Authority of India (IRDAI) flagged a decline in India’s overall insurance penetration in its Annual Report 2022-23:
- Life Insurance: Dropped from 3.2% in FY22 to 3% in FY23.
- Non-Life Insurance: Remained steady at 1%.
The report urged insurers to:
1. Conduct root cause analyses of customer complaints.
2. Implement stronger controls across sales channels.
3. Ensure products are better matched to customer needs.
Building Trust Through Ethical Practices
The RBI Governor’s remarks underline the importance of addressing unethical practices to enhance financial stability and consumer trust. Prominent takeaways include:
- Ethical Sales Practices: Banks and insurers must realign staff incentives to discourage mis-selling.
- Insurance Claim Management: Improving claim settlement rates and reducing rejections are vital to increasing insurance penetration.
- Governance Frameworks: Banks should strengthen internal processes to identify and mitigate risks associated with mis-selling.
The Path Forward
The financial and insurance sectors must take proactive steps to address customer grievances and focus on delivering value. As trust remains the cornerstone of long-term success, institutions that prioritize ethical practices and transparency are likely to thrive in an increasingly scrutinized environment.
The call for stronger governance frameworks and ethical practices across banking and insurance sectors is more than a regulatory requirement—it’s a business imperative.
