RBI's proposed mis-selling norms may hit credit life business of insurers

RBI's draft rules on bundling and consent could dent credit life insurance and bancassurance income, though insurers say overall impact will be limited

The proposed regulations by the Reserve Bank of India (RBI) on the mis-selling of financial products by banks could potentially have a sizeable impact on life insurance companies’ credit life business, which is typically bundled with credit products such as home loans and microfinance loans.

 

Consequently, banks may face a decline in their bancassurance income as a result. Bancassurance income contributes 7–12 per cent to the overall fee income for banks. Bancassurance income has grown at 31 per cent CAGR over the last three years for banks, including top private, public and foreign banks.

 

While the exact impact on the credit life business of life insurers cannot be immediately quantified, industry insiders estimate that 15–20 per cent of the credit life segment could be affected.

 

RBI, this week, released draft regulations on “Advertising, Marketing and Sales of Financial Products and Services by Regulated Entities”, wherein, among other things, it said banks cannot bundle the sale of any third-party product with any of their own products.

 

In circumstances where the sale of the bank’s own product is contingent on the purchase of a third-party product, the customer has to be provided the option to purchase the same from any other company/agent and cannot be forced to purchase it through the third-party product/service provider with whom the bank has entered into an agreement.

 

According to industry insiders, most major banks already follow these practices. The new regulations are expected to curb instances where such practices are not implemented comprehensively.

 

Credit life insurance is a special type of life insurance that kicks in to pay off any outstanding debt in the event that the borrower dies before the loan is paid in full. Credit life insurance is bought when an individual takes a loan, with the policy’s death benefit directly tied to the loan balance.

 

The proposed norms are broadly customer-centric. However, they may have an impact on banca business, with around a 10–20 per cent impact on its credit life business, said an industry insider, adding that credit life is important for banks and insurers as it insulates both banks and customers from risk.

 

Credit life is wrapped with the mortgage business and both cannot be clubbed in a single process. Banks will have to separate the process. This and the discussion on commissions will reduce the overdependence on the bancassurance channel and put stress on the same, he further said.

 

There could be some impact on the credit life segment, said the chief executive officer of a life insurance company, adding that the overall implications for the broader life insurance sector are likely to remain manageable.

 

“Product suitability and explicit customer consent are already integral to our processes. Credit life insurance remains a useful and relevant product, offering protection to both borrowers and lenders. Customer consent and suitability checks are already being strictly followed. Therefore, while the regulatory framework is appreciable and strengthens compliance and adherence standards, most major banks already operate within these norms,” said the MD and CEO of a private sector life insurance company, adding that there will not be a material impact on life insurance companies as a result of the proposed regulations.

 

Among other measures, the RBI has proposed banning incentives paid by insurance companies to bank staff for selling their products and services. Additionally, the banking regulator has stated that banks must ensure that both in-house and third-party products are sold only with the customer’s explicit consent. It has also clarified that consent for multiple products or purposes cannot be clubbed together and must be obtained separately for each product or service.

 

“The proposed guidelines have customers’ interest at their core as they will curb mis-selling. They will reduce push-based selling. Most banks and insurers have taken steps to reduce mis-selling and these guidelines will set the direction for their ongoing efforts. Now, banks cannot bundle products without proper customer understanding; the processes will be separate and more transparent. There will be a short-term impact for the companies. However, by and large there will not be much adverse impact; it is a step in the right direction,” said Aniruddha Marathe, MD and partner, BCG.

 

Mis-selling by banks, especially related to insurance products, has been a key focus area for the insurance regulator (Irdai), RBI, and the government.

 

In November last year, Union Finance Minister Nirmala Sitharaman highlighted the need to retain public confidence in the country’s banking system while asking lenders to curb mis-selling. The RBI has also repeatedly flagged the issue, emphasising that banks should focus on their core activities.

 

Irdai has also flagged concerns over mis-selling in India’s insurance sector and asked insurers to address the issue by conducting a root cause analysis to identify underlying causes. It has also advised insurance companies to implement measures such as assessing product suitability, introducing distribution channel-specific controls, and putting in place a structured plan to address mis-selling complaints, including periodic root cause analyses.

 

Grievances registered against life insurers due to mis-selling rose 14.3 per cent year-on-year to 26,667 in FY25 from 23,335 a year earlier, according to Irdai data.

 

The most common mis-selling of insurance offerings by banks include compulsory bundling of insurance with housing/other loan products; insisting on making insurance a condition while availing of locker facilities; insurance issued without customer consent; insurance policies issued in lieu of fixed deposits; and unit-linked policies sold to senior citizens as alternatives to fixed deposits.