The Real Cost of Mis-selling in Banking, and What the RBI's New Rules Change
For most Indian households, a bank branch is still a place of trust. People walk in with their savings and assume that whatever is being offered across the counter has been checked, priced fairly and matched to their needs. That assumption has been quietly broken for years. Customers have been sold insurance policies they did not want, investment products they did not understand, and bonds that were presented to them as fixed deposits. The industry has a polite word for it. It is called mis-selling.
On 15 June 2026, the Reserve Bank of India moved from warnings to rules. It issued the final Responsible Business Conduct (Second Amendment) Directions, 2026, along with a separate set of directions on the advertising, marketing and sale of financial products by regulated entities. Both take effect from 1 January 2027. A draft version had been released in February 2026, and the final text was firmed up after industry feedback. Banks, non-banking financial companies and housing finance companies now have about a year to rebuild their sales systems, consent screens, contracts and agent arrangements.
This article explains what mis-selling costs the country, and what the new framework does about it.
What the RBI now treats as mis-selling
Until now, mis-selling was a widely used term with no regulatory definition. That vagueness helped the seller. A complaint could always be met with the argument that the customer had signed the form.
The new framework closes that gap. A sale is treated as mis-selling if the product was unsuitable for the customer's profile at the time of sale, if it was sold with misleading, incomplete or inaccurate information, or if it was completed without explicit customer consent.</cite> Compulsory bundling, where one product is made conditional on buying another, is also covered. The most important part is this. Even where consent exists, selling an unsuitable product can still be treated as mis-selling. Consent is no longer a defence in itself.
The definition also travels across regulators. Anything treated as mis-selling by SEBI, IRDAI or PFRDA is pulled into the RBI's definition as well. That matters because a bank selling a mutual fund, an insurance policy and a pension product sits under three different rulebooks at once.
Why banks sell the way they do
Mis-selling is not mainly a problem of dishonest individuals. It is a problem of incentives. The money in distributing a financial product is not evenly spread. A bank can earn as much as sixty five to seventy per cent of the first year premium on a traditional insurance policy, while a mutual fund may return only around one per cent. When the reward is that lopsided, the branch staff member sitting across the table has a clear reason to steer the conversation towards the costlier product, whatever the customer actually needs.
The numbers show how large this business has become. Banks earned roughly twenty one thousand seven hundred and seventy three crore rupees from third-party sales commissions. In FY24, close to fifty two per cent of the individual new business of private life insurers came through the bank channel. On the insurance side, IRDAI's FY25 annual report recorded total life insurance commissions of about sixty thousand eight hundred crore rupees, an eighteen per cent rise over the previous year, at a time when premiums themselves were growing only in single digits. Commissions were rising faster than the business they were meant to support.
Part of the reason is how the commission is paid. Agents earn the bulk of their money upfront, so the incentive sits at the moment of sale rather than in servicing the policy for the next twenty years. IRDAI's own approach has also left room. Instead of capping what an agent can earn on a single policy, it caps the overall Expense of Management for the insurer. Companies stayed within the overall limit by trimming costs elsewhere while continuing to route large commissions to aggressive sellers.
The economic cost
The first cost falls on the household. In the familiar no policy, no loan situation, a borrower who applied for two lakh rupees received only one lakh seventy thousand, because thirty thousand was deducted as an insurance premium at disbursal. He got less money, took on a product he had not asked for, and still carried the full loan on his books. There are also cases of senior citizens whose fixed deposits were moved into long-term insurance policies that they neither requested nor understood. Kumar Awasthi, a veteran of the 1962 and 1971 wars, lost savings of one crore thirty eight lakh rupees after a bank executive placed his money in what turned out to be a risky bond rather than a deposit.
The second cost falls on the financial system. Many mis-sold policies are abandoned within a few years. When persistency is poor, the premium already paid is lost, household savings sit in the wrong asset, and the insurance pool stays thin instead of deepening. Compulsory bundling also raises the effective cost of borrowing, since the customer pays for something extra to get the loan sanctioned. And it pulls banks away from their core function, which is mobilising low-cost deposits and lending them productively. A branch that runs on insurance targets is not running on credit appraisal.
The social cost
Trust is the harder loss to measure. People keep money in banks because they believe the institution will not act against them. When that belief is used to earn a commission, the damage does not stop with one customer. It spreads outward as a general suspicion of the formal financial system, which is exactly what a country trying to deepen financial inclusion cannot afford.
The burden also falls unevenly. Retired people, small borrowers and first-time customers with limited financial understanding are the easiest to persuade and the least able to recover. Bank staff are not free of this either. In one survey, 57.6 per cent of relationship managers said they had been told to sell particular products at any cost, even when a better option existed for the customer. The pressure begins at the top of the sales chain and lands on the person at the counter.
There is a policy cost as well. Mis-selling works directly against the goal of Insurance for All by 2047. A person cheated once does not return, and the protection gap stays where it is. In FY25, more than twenty six thousand complaints of unfair insurance practices were recorded, and mis-selling accounted for roughly one-fifth of all life insurance grievances.
What changes from January 2027
The centrepiece is the ban on compulsory bundling. A bank cannot make one product conditional on another. Where a third-party product is genuinely needed as a risk mitigant, such as term cover against a home loan, the customer must be free to buy it from any provider rather than the one the lender prefers.
Consent has been made harder to manufacture. Physical sales need a separate application form for each product. Digital journeys must display each product in its own section with its own explicit consent. Product documents must be available in a regional language or a language the customer understands, which matters most in semi-urban and rural branches where language gaps have long been part of the problem.
Digital design is now regulated too. Dark patterns are prohibited, including drip pricing where charges appear only late in the transaction, subscription traps that are difficult to exit, and forced actions that require an unrelated purchase to complete a journey.
Before selling a complex product, the bank must run a suitability assessment covering the customer's age, income, financial literacy and risk appetite, and weigh these against the product's risk, charges, tenure and complexity. After the sale, within thirty days, the bank must seek feedback through a call-back or survey conducted by a team that had no role in the original sale, with findings feeding into half-yearly reviews.
The incentive structure has been touched as well. Third-party product providers cannot pay incentives directly to employees of banks or NBFCs, though the institutions may continue rewarding their own employees through internal programmes. The framework also stretches beyond the branch. Influencers, affiliates, lending service providers and other digital marketing intermediaries are now treated as part of the wider category of direct selling and direct marketing agents, with the regulated entity carrying responsibility for what is said on its behalf.
Where mis-selling is established, the bank must refund the entire amount paid for the product and compensate the customer for any resulting loss under its approved policy. Complaints can be filed within thirty days of receiving a signed copy of the agreement.
Where the framework may still fall short
The rules are a real advance, but they will not end the problem by themselves. Mis-selling is not only a banking issue. Insurance agents, distributors and other intermediaries push unsuitable products too, and the RBI's writ does not run over all of them. The case of a ninety-year-old sold a ninety-nine year policy with a two lakh rupee annual premium shows the limit of consent as a safeguard. Someone signed. It still happened.
The remedies have gaps as well. Post-sale feedback surveys assume the customer reads them, which many will not. The thirty-day complaint window assumes the customer can judge a product quickly, when the unsuitability of a long-term policy often becomes clear only years later, or at the moment of a claim.
The deeper fix lies in simpler contract language, prominent display of the terms that actually matter, refunds when a customer complains rather than a defence built on their signature, and coordinated action across the RBI, SEBI, IRDAI and PFRDA. Above all, it needs financial literacy treated as core policy rather than an outreach activity, so that buyers ask better questions and sellers behave as advisers. The stated goal has to move from financial inclusion to financial well-being. Until it does, mis-selling will simply reappear in a newer form.
