The end of forced sales at banks?

In today’s Finshots, we explain why the RBI wants banks to stop mis-selling.

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The Story

If you want to apply for a home loan today, you walk into a bank or, if you’re online savvy, you simply apply through an app. A bank representative calls you. Credit scores are checked, income statements verified, property documents uploaded. Everything seems routine. Then you get to the paperwork. Dozens of pages filled with legal and financial jargon that only a lawyer could decode. Buried somewhere in that pile is an insurance policy you didn’t realize you agreed to. But your signature says you did. This is the reality of what is happening in Indian banking right now. And it’s not just us saying that.

Versions of this play out every day across bank branches and applications. And it’s widespread enough for the government and even regulators to start paying attention.

For context, take the insurance that banks or NBFCs (Non Banking Financial Companies) often describe as “good to have” when applying for a home loan. You are told this will protect the loan in case of default, disability or untimely death. But a home loan already comes with built-in protection for the borrower – the property itself is pledged as collateral. In the event of default or even the borrower’s death, the bank has a legal claim on the house. So what exactly does this extra insurance protect, and for whom?

Well, here is the logic that banks usually give. They will say this extra insurance policy protects the family. If the borrower dies and the home loan is still outstanding, the bank can legally claim the home. And it can leave the rest of the household without a roof over their heads. So the insurance kicks in. This pays off the outstanding loan. The bank gets its money back. And the family can continue to live in the same house. On paper it sounds reasonable.

But this explanation only really works in one situation – when the borrower doesn’t already have life insurance. Or when the policy they do have is not large enough to cover the loan amount. Because I think about it. If someone already has a life insurance policy that comfortably covers all their obligations, including the home loan, why should they be forced to buy another one?

In that case, the bank can simply ask for an undertaking. Something that says: if the borrower dies, the bank has the first right to the insurance proceeds to recover the loan. It is clean and logical.

But that rarely happens. In most cases, whether you already have insurance or not, the bank pushes or sometimes practically forces you to sign up for their insurance policy if you want the loan approved. And it is quietly becoming part of the package.

This is exactly the kind of thing the government has started calling out. In fact, recently the Minister of Finance A simple point made: if a home loan is already backed by the home itself, why slide an extra insurance policy alongside it? His argument was not that insurance is useless. It was that when such products are sold as an almost default part of the loan process, without clearly explaining what extra protection they actually provide, it ceases to be advised and begins to look like mis-selling.

This is the background against which the RBI stepped in — not to limit insurance or income, but to change how products are sold and who bears responsibility when customers don’t fully understand what they signed up for.

And the changes are significant.

For starters, banks can no longer engage in compulsory bundling – where taking one product tacitly means buying another. When you walk in for a home loan, the conversation should stay about the loan. Insurance or investment products may still be offered, but they cannot be positioned as mandatory or necessary for approval.

Even when a product is actually needed as part of a larger service, customers do not need to purchase it from the bank itself. The new rules make it clear that people should have the option to buy such products elsewhere, not just from the bank’s preferred partner.

Then comes the biggest shift of all. It used to be that once you signed a consent form, the bank could simply point to it and say, “Hey, you agreed.” That defense no longer carries the same weight. Signing a form or clicking “I agree” will not automatically protect the bank. Even if consent exists, a product may still be considered mis-sold if it was not suitable for the customer. The question changes from “Did you sign?” to “Why was it sold at all?”

This is where eligibility comes in. Before selling a product, banks are now required to determine whether it really suits the customer – looking at income, age, risk appetite, financial literacy and the product’s complexity. Sales are expected to move away from pure targets and closer to relevance.

The change does not stop at the point of sale. Banks will also be required to check in with customers within 30 days of a sale – to confirm they understood what they bought.

And it’s not just what happens in branches. Think about how often you’ve clicked through a banking app without really reading what’s on the screen. The RBI has formally called out “dark patterns” – hidden checkboxes, pre-selected options, fake urgent messages – and wants banks to redesign digital journeys so consent is clear and deliberate. After all, financial products are not buyout sales.

Many of these techniques are not new. Casinos use it to keep people playing. Shopping apps use this to increase cart sizes. But banking is not entertainment or promoting retail. It deals with long-term financial obligations. And when design aids begin to shape decisions about debt and savings, regulators start to worry.

There is also a change in tempo. Products cannot be quietly sold and closed in a single sitting. Banks are expected to give customers time to understand what they are buying, instead of folding add-ons into routine paperwork or fast digital flows.

And if something goes wrong, explanations will not be enough. If mis-selling is established, banks must refund the full amount paid and compensate customers for any losses. Liability is no longer optional.

For anyone tired of endless spam calls, there is relief here as well. Cold calls and follow-ups can no longer waste at odd hours. Banks and their partners are expected to stick to defined call windows (between 09:00 and 18:00), closer to normal business hours. And customers should be clearly told whether they are talking to a bank employee or an outside sales agent. No more blurred identities where every caller sounds “official”.

Finally, banks cannot hide behind intermediaries. Whether a product is sold by a relationship manager, a call center manager or a third-party agent, the responsibility remains with the bank. Sales agents must be clearly identified, properly trained and visibly separate from core banking staff. “It was our partner” is no longer an escape route.

As these are draft directions, the RBI is still inviting public comments before finalizing the rules. But if the framework goes through broadly in its current form, the immediate change will be felt not only by customers, but even by banks.

For customers, of course, there will be fewer surprise additions, fewer confusing phone calls and fewer complaints that pop up years after a product has been sold.

For banks, especially those that have posted record results, the shift may not seem big on the surface, but it runs deeper.

To put things in perspective, income from bancassurance (business that comes from banks acting as agents for insurance companies) does not make up a large part of total income. For SBI, the largest public sector bank, it contributes less than 0.5% of overall revenue. That sounds insignificant until you look at the growth in numbers. Over the past decade, for example, SBI’s bancassurance income has grown nearly sixfold to ₹2,766 crore. In comparison, its total interest income only doubled to ₹4.9 lakh crore over the same period.

HDFC Bank, the largest private bank, tells a similar story. Revenue from third-party business, which includes insurance commissions, mutual fund commissions and marketing fees from the promotion of third-party products in branches and ATMs, has grown eightfold in ten years to ₹6,600 crore. Its interest income, meanwhile, rose nearly five times to ₹3.3 lakh crore. And while that gap may not seem dramatic at first glance, HDFC Bank’s annual report notes that a decade ago this third-party income accounted for just 14% of total fee income. But today it accounts for 25% (as of FY25).

So yes, the RBI’s directive may slow down sales and banks will have to find more deliberate ways to grow this stream meaningfully.

But the bigger impact could be on insurance companies as bancassurance contributes around half of the sector’s premiums and as much as 80% for some insurers. This tells you how critical banks are as a distribution channel.

Which means conversations that once ended in quick signatures will now require clarifications, follow-ups and checks. The numbers may still grow. But maintaining them will require more time, more effort, and much more self-control than before.

Until then…

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The silent crisis in India’s public sector banks

And since you have already read about how banks are being accused of mis-selling, and how the RBI and the government have warned them to stop, here is a Finshots TV video that you must watch to understand what really prompts banks to push these third-party products.

A little tip: firm targets and relentless work pressure.

Click here to watch the full video.