Mis-selling by banks is a well-known problem. There are umpteen examples of customers visiting bank branches for one-time bank fixed deposits and walking out with ill-suited insurance policies. Insurance policies that many of them could hardly afford. They went to the bank to grow their wealth or save for their retirement but only ended up destroying their wealth and portfolios.
Only the most egregious examples of mis-selling came out in the open, while most of the aggrieved silently suffered. The grievance redressal process at the banks and the insurance companies is hard to navigate. Most simply give up after trying for some time due to lack of time, resources, and knowledge, or simply frustration.
The senior management of the banks know about this but do nothing. Insurance plans fetched the banks quick and easy income that straightaway went to the bottom line. All at the expense of hapless and less aware bank customers.
RBI, the banking regulator, and IRDA, the insurance regulator, know about this mis-selling but have done nothing. Even if they did, it did not deter banks (regulated by RBI) and the insurance companies (regulated by IRDA) from indulging in this malpractice
While it is difficult to expect anything from IRDA, the Reserve Bank of India (RBI) may finally be trying to address this issue. It has released a draft circular and proposed strict guidelines to protect consumers.
Released recently, it mandates full refunds and compensation for proven mis-selling, effective July 1, 2026.
Note: This is a draft circular and was open for comments until March 4, 2026. Expect a lot of push-back from the banks on this circular.
In this post, let’s look at the hits and misses of this circular.
Defining Mis-selling Clearly
This is quite important. An easy defence for the banks and insurance companies in any instance of mis-selling has been – “You signed the dotted line”.
In other words, you signed the proposal form and made the payment. You are expected to sign anything after understanding the document. Fair enough.
While I do not intend to absolve bank customers, all of us know the ground reality. Financial literacy levels are low in our country. Many trust bank employees to offer them prudent financial advice. They know little about how incentives and sales targets at the banks can override customer interest. The result: Ill-suited financial product.
For the first time, the RBI defines what mis-selling is. I reproduce an excerpt from the draft circular.
Mis-selling refers to sale of a financial product / service, whether own or third party, by a bank, illustratively, in the following cases:
- Sale of a product / service, which is neither suitable nor appropriate in view of the customer’s profile even if with his / her explicit consent;
- Sale of a product / service without providing correct or complete information or by giving misleading information;
- Sale of a product / service without customer’s explicit consent;
- With the sale of a requested product / service compulsory bundling of another product / service;
- Sale of a product / service involving any other element defined by the financial sector regulator concerned as mis-selling.”
The most pertinent is that even explicit consent of the customer is not sufficient defence, if he/she has been sold a product which is not suitable or appropriate.
Far too often, we see banks making loan approval contingent upon your purchase of an insurance product. For instance, “your home loan application will not get approved if you do not buy XYZ insurance plan from us.” This is an example of compulsory bundling. It was disallowed earlier too. However, RBI has now explicitly defined compulsory bundling and added this to the definition of mis-selling.
“Compulsory bundling’ shall mean the practice by a bank of making availment of one product / service by a customer conditional upon availment of another product / service, whether own or third-party, offered by the bank”
Compensation to Customers
Customers can lodge a complaint regarding mis-selling of any financial product with the bank within the timeline specified by the respective financial services regulator. If there is no timeline mentioned, you have 30 days from receiving the signed copy of the product/agreement.
If mis-selling is proven, the bank must refund the full purchase amount, cancel the sale, and even compensate for losses.
It is all about deterrence
Rules are fine. However, if the enforcement lacks teeth, the policy is useless. There are a few concerns that I can foresee.
How do you prove mis-selling? And who do you prove it to? What if the bank is not willing to acknowledge mistakes, and forces you to take recourse beyond banks?
“Suitable”, “Appropriate”, “customer profile” are all fine words. Who decides on these? How do you prove that the complete or accurate information was not given?
Who decides whether a particular case is a case of mis-selling? At the initial stages, this decision is left to the banks, and we cannot expect much relief there. Only those who have influence and can garner support on social media will get relief. And this happens even now. The banks quietly acknowledge their mistake and refund money to the aggrieved customer. Not many have such influence.
Yes, there is recourse beyond banks (ombudsman, consumer courts), but how many take that recourse? Most simply give up.
Hence, we also need a way to make banks act fair to customers. RBI circular is silent on this.
Moreover, if it is just about refunds, the banks won’t stop this practice. Out of 100 cases, if only 5 have the time, resources, knowledge, and persistence to fight and get a favourable ruling, the banks still win. They will refund money for those 5 customers. 95 will still suffer. And the bank will continue with their current merry ways.
We need a deterrent, and that deterrent can only be punitive penalties/damages (say 100X the amount paid by the customer). In absence of any heavy penalties, the banks will happily refund to select few aggrieved customers who choose to fight against all odds.
The RBI circular makes no mention of heavy penalties. And this, I think, is the biggest shortcoming of the RBI circular.