Focus on consumers: RBI's draft proposals to make banking experience better

The Reserve Bank of India’s (RBI’s) recent draft-amendment directions for “Advertising, Marketing and Sales of Financial Products and Services by Regulated Entities” and “Conduct of Regulated Entities in Recovery of Loans and Engagement of Recovery Agents”, expected to come into effect on July 1 this year, mark another push toward consumer-centric banking. By systematically targeting mis-selling, inappropriate incentive structures, and coercive recovery practices, the RBI is seeking to address deep-seated conduct risks, which have been prevalent in India’s financial system for years.

 

On mis-selling, the draft proposes banning incentives for bank employees on third-party sales, prohibiting product bundling done forcibly, restricting the funding of product purchases through sanctioned loans, and forbidding “dark patterns” in digital interfaces. The importance of these measures is underscored by persistent evidence of mis-selling. According to the Insurance Regulatory and Development Authority of India’s 2024-25 Annual Report, 26,667 grievances were reported for unfair business practices, up 14 per cent year-on-year and accounting for over 22 per cent of all complaints in insurance, which is a major source of bank-product mis-selling. A study of bank branches has found that products with high commission are preferentially pushed, and complex features are rarely explained fully to customers. The market data shows banks annually earn almost ₹25,000 crore from insurance commission.

 

The RBI’s draft seeks to correct this incentive distortion by assessments of customer suitability based on age, income, and risk tolerance, which is a major step toward aligning product recommendations with customer needs rather than commission potential. Banks will also be required to obtain explicit consent for each product, seek customer feedback within 30 days, and prepare half-yearly feedback reports to identify recurring issues and update policies. Crucially, where mis-selling is established, banks must fully refund the amount paid and compensate customers for associated losses. The draft also significantly tightens the definition of mis-selling, which now includes unsuitable sales even when consent is formally given and customers offered the option to buy third-party products from the provider of their choice rather than being tied to a bank’s preferred partner. These provisions matter because India’s drive for financial inclusion through Jan Dhan accounts, digital payments, and expanding credit has brought millions into the formal system.

 

The draft for “Conduct of Regulated Entities in Recovery of Loans and Engagement of Recovery Agents” aims to curb coercive recoveries of loans, another longstanding issue undermining trust in India’s financial system. Borrowers across the country have repeatedly complained of harassment, threats, and social pressure used by recovery agents. The proposed rules prohibit abusive calls, public humiliation, anonymous or excessive contact, outreach to relatives, and recovery attempts outside permitted hours. Those also require banks to record recovery calls, train agents in proper conduct, and establish clear mechanisms for grievance redress. Thus, taken together, the RBI guidelines must be taken forward because they target the root of the incentive problem among banks and other lending institutions. By embedding mandatory audits, clear accountability for direct selling agents, and definitional clarity around deceptive digital interfaces, the proposals can apply brakes on structural drivers of mis-selling and reshape how banks engage customers. Strong enforcement, transparent disclosures, and stronger grievance redress can rebuild trust in the financial system.