A LOAN ARRIVES bundled with insurance, a deposit morphs into a market-linked product, and a ULIP is pitched as a superior mutual fund. When questioned, the defence is disarmingly simple, ‘you signed the form’.
SIGNATURE IS NO LONGER CONSENT
The Reserve Bank of India’s 11 February draft directions on responsible business conduct could dismantle a long-standing shield in retail banking. In a move that strikes at a key revenue engine, the RBI has proposed that products deemed unsuitable for a customer’s profile will qualify as mis-selling, even if the customer has given explicit consent. If mis-selling is established, banks must refund the full amount collected and compensate for losses. Consent for multiple products cannot be clubbed, compulsory bundling of loans with insurance or market-linked investments is flagged, digital dark patterns are prohibited and third-party agents must be clearly identified. The regulator is not merely tightening compliance; it is questioning the incentive architecture of retail banking. Banks have long tied employee incentives and performance targets to selling third-party products like insurance policies, mutual funds, pension instruments… Having previously worked in a public sector bank, I have seen how cross-selling performance is institutionally rewarded. Insurers and asset managers, in turn, depend on banks for access to customers. It was a win-win for all, except to the retail customer who did not fully understand what they bought.
THERE HAVE BEEN BENEFICIARIES TOO
The draft defines mis-selling as offering products that do not align with a customer’s age, income, risk appetite or financial literacy. This matters because India’s financial literacy remains fragile. A 2023 S&P Global survey found only 27 per cent of Indian adults understand basic money concepts. In such a context, a signature often signals trust, not comprehension. There is, however, an uncomfortable nuance. Aggressive distribution has sometimes accelerated financial participation—customers gained insurance cover alongside loans, and first-time investors nudged into SIPs have built long-term wealth. Yet beneficial outcomes do not justify opaque processes. Inclusion built on obscurity is inherently fragile and ultimately erodes trust—the core currency of banking.
The RBI’s draft recognises this shift. This will not be painless. Private sector banks, with greater reliance on insurance commissions, could face sharper revenue adjustments than public sector peers. Sales incentives may need recalibration. Digital journeys must be redesigned and compliance costs will rise. There may even be a short-term dip in retail product penetration. But the alternative, preserving fee income at the cost of consumer confidence, is costlier in the long run. The larger question is whether enforcement will match intent. If implemented rigorously from July 1, these rules could mark a turning point.
