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RBI zooms in on mis-selling by banks, insurance firms

From insurance sold without clarity to microloans burdened with high interest—India’s financial watchdog signals it may step in to protect vulnerable consumers.

Dhanam News Desk

The Reserve Bank of India (RBI) is considering introducing new rules to curb the mis-selling of financial products by banks and non-banking financial companies (NBFCs), amid growing concerns that consumers—especially those unfamiliar with financial jargon—are being sold products they neither need nor understand.

RBI Deputy Governor M Rajeshwar Rao, in a recent speech at an HSBC event, called out how some regulated entities are pushing insurance and other financial products indiscriminately, often ignoring whether they are suitable for the customer. “Such mis-selling could erode trust and even harm the very groups these schemes aim to protect,” Rao warned.

The speech, uploaded on the RBI’s website on June 10, indicates that the central bank is actively examining whether guidelines are required to deal with this issue.

Insurance, but at what cost?

One of the key concerns raised was the sale of insurance products to low-income households without explaining their relevance or terms. When banks or agents push a product just to meet targets—regardless of whether it's actually useful—it not only confuses the buyer but also chips away at confidence in the system.

The problem, as Rao hinted, isn’t just about overselling—it's about creating a false sense of security with products that may not deliver what consumers believe they’re buying. That’s a dangerous space, especially when the target group involves vulnerable communities.

Microfinance: from helping hand to burden?

The RBI didn’t stop at product mis-selling. Another major red flag was raised over microfinance institutions (MFIs) and their interest rates. While the sector is meant to serve as a support system for low-income borrowers, some players seem to be using it more as a profit engine.

Rao noted that despite access to cheap funds—especially for banks that can use public deposits—there are institutions charging significantly higher interest margins than the industry average. Some of these margins, he hinted, look excessive and raise eyebrows.

Microfinance was once championed as a tool for financial inclusion. But the combination of high interest rates, borrower over-indebtedness, and harsh recovery practices is now threatening to turn the model upside down. Rao made it clear that this cycle has to break.

Rethink the model, not just the numbers

While the RBI isn't naming names just yet, the tone is clear: institutions need to take a hard look at their operating model. Rao said that even if the business model looks good on paper, if the way it is delivered—through incentive schemes or organisational structures—ends up hurting the very people it's supposed to help, it’s time for introspection.

He reportedly emphasised that lenders should not only strengthen their credit assessment processes to avoid over-lending but also steer clear of aggressive recovery practices. The message? Lending must be responsible, fair, and sustainable.

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