FM Sitharaman: Banks Must Prioritize Core Lending, Curb Insurance Mis-selling
Finance Minister Nirmala Sitharaman has urged Indian banks to refocus on their core functions of deposit mobilization and lending, expressing strong concerns over the mis-selling of insurance products. She highlighted that such practices burden customers with unnecessary costs and erode trust, prompting calls for greater transparency and ethical conduct. Regulatory bodies like RBI and IRDAI are also addressing these issues.
Key Highlights
- FM Sitharaman emphasizes banks' core function: deposits and lending.
- Strong concerns raised over widespread mis-selling of insurance by banks.
- Mis-selling increases customer borrowing costs and erodes public trust.
- RBI has proposed guidelines to hold banks accountable for mis-selling.
- IRDAI and legal frameworks also address unethical bancassurance practices.
- Banks urged to prioritize transparency and ethical conduct in all operations.
Finance Minister Nirmala Sitharaman has repeatedly called upon Indian banks to realign their focus towards core banking activities, primarily deposit mobilization and prudent lending, while expressing significant concern over the prevalent issue of mis-selling insurance products. Her remarks underscore a critical challenge within India's financial sector, where the pursuit of ancillary revenue streams through bancassurance has, at times, led to practices detrimental to customer interests and the foundational role of banks.
Speaking at various forums, including a recent press interaction in New Delhi following her post-Budget address to the Central Board of the RBI on February 23, 2026, Sitharaman explicitly stated that banks are 'spending more time on selling insurance when it is not required.' She highlighted that this diversion from their core business not only burdens customers with unnecessary insurance products but also indirectly contributes to an increased cost of borrowing. The Finance Minister stressed the importance of transparency, ethical practices, and clear communication strategies to maintain and build public trust in the banking system.
The bancassurance model, which allows banks to distribute insurance products, has indeed played a role in enhancing insurance penetration across the country. However, Sitharaman, along with other financial regulators, has pointed out that 'a lot of ills have crept into the system.' These 'ills' primarily refer to instances where bank relationship managers, often under pressure to meet sales targets, push insurance products on customers without adequately assessing their needs or providing full disclosure, sometimes even making it a prerequisite for availing other banking services like loans.
The implications of such mis-selling are far-reaching. Customers end up paying for insurance they do not need, leading to financial strain and a sense of betrayal. The focus on commission-driven sales can overshadow the bank's fundamental responsibility to offer suitable financial advice and services, potentially weakening the bank's balance sheet through aggressive lending practices that are not adequately backed by assets. Furthermore, it creates a regulatory grey area, as insurance sales by banks can sometimes fall between the oversight domains of banking and insurance regulators, historically making accountability challenging.
Regulatory bodies have taken cognizance of these concerns. The Reserve Bank of India (RBI) recently issued draft guidelines aimed at curbing mis-selling, proposing that banks would be liable to refund the entire amount paid by the customer for a mis-sold product and compensate them for any resulting loss. These stricter norms are expected to come into effect from July 1, 2026, emphasizing that mis-selling is an offense under the Bharatiya Nyaya Sanhita (BNS). Similarly, Debasish Panda, Chairman of the Insurance Regulatory and Development Authority of India (IRDAI), has echoed Sitharaman's sentiments, urging bankers to treat insurance sales as 'incidental' to their core job and address the flaws in the bancassurance model.
Interestingly, while the Finance Minister and RBI have advocated for banks to concentrate on core activities, there has also been a nuanced policy shift. A June 2025 directive from the Department of Financial Services (DFS) instructed Public Sector Banks (PSBs) to actively promote insurance products, especially in Tier-2 and Tier-3 cities, to achieve the national goal of 'Insurance for All by 2027.' This directive acknowledges insurance as a vital financial product and leverages the widespread network and trusted relationship of PSBs to improve insurance access. However, this strategic integration must be executed with utmost care to avoid the very mis-selling issues highlighted by the Finance Minister, ensuring customer protection remains paramount.
In essence, the news highlights an ongoing governmental push to instill greater discipline, transparency, and customer-centricity in the Indian banking sector. It calls for banks to strengthen their governance and performance standards, ensure ethical sales practices, and uphold their primary role as financial intermediaries for deposit mobilization and credit dissemination, without unduly pressuring customers into acquiring unneeded insurance.
Frequently Asked Questions
Why is FM Sitharaman concerned about banks selling insurance products?
FM Sitharaman is concerned because banks are allegedly spending excessive time selling insurance, often leading to mis-selling of products that customers do not need. This practice can increase customer borrowing costs, reduce focus on core banking activities like deposit mobilization and lending, and erode public trust in the financial system.
What are the core functions of banks that FM Sitharaman wants them to prioritize?
The Finance Minister wants banks to prioritize their core functions of mobilizing deposits from the public and prudently lending money. These are considered the fundamental activities that banks are primarily established to perform.
What is 'bancassurance' and why is it a concern?
Bancassurance is a model where banks partner with insurance companies to distribute insurance products to their customers. While it helps increase insurance penetration, it has become a concern due to instances of mis-selling, lack of transparency, and pressure tactics used by bank staff, which can indirectly raise customer costs and undermine ethical practices.
What actions are regulators taking to address insurance mis-selling by banks?
The Reserve Bank of India (RBI) has issued draft guidelines proposing that banks be held accountable for mis-selling, requiring them to refund amounts and compensate customers for losses. The Insurance Regulatory and Development Authority of India (IRDAI) Chairman has also urged banks to focus on their core job and ensure ethical practices in insurance sales.
Is mis-selling insurance a legal offense in India?
Yes, Finance Minister Nirmala Sitharaman has stated that mis-selling of financial products, including insurance, is an offense under the Bharatiya Nyaya Sanhita (BNS), indicating serious legal ramifications for such practices.
