Source: BS
Context:
Recent steps by the Ministry of Finance, Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority of India (IRDAI) aim to curb mis-selling of insurance through banks (bancassurance) and strengthen consumer protection. These reforms are important for achieving India’s goal of “Insurance for All by 2047.”
What is Bancassurance?
Bancassurance is a partnership where banks sell insurance products of insurance companies to their customers through bank branches.
Advantages:
- Wider distribution of insurance products
- Easy access for customers
- Additional revenue for banks.
However, the model has faced serious concerns about mis-selling.
Rising Complaints of Mis-selling
According to recent data:
- Over 26,000 complaints of unfair insurance practices were recorded in FY25.
- Mis-selling accounts for about one-fifth of life insurance grievances.
Mis-selling occurs when customers are pressured or misled into buying insurance policies unsuitable for their financial situation.
Examples include:
- Converting fixed deposits of senior citizens into insurance policies without proper explanation.
- Selling policies with high premiums to customers who cannot afford them.
Regulatory Gaps in Bancassurance
Historically, regulation of bancassurance has been weak due to overlapping jurisdiction:
- Insurance products are regulated by IRDAI.
- Banks are supervised by the RBI.
This created a regulatory grey area, allowing banks to sell insurance products with limited monitoring.
The Finance Minister has clarified that mis-selling is an offence, and customers should not have to approach two regulators for grievance redressal.
Recent Regulatory Measures
1. RBI Draft Conduct and Sales Norms
The RBI has proposed conduct and sales-practice rules covering third-party products sold by banks, including insurance.
2. Risk-Based Internal Audit (RBIA)
Banks will strengthen their Risk-Based Internal Audit system to examine:
- Suitability of insurance products
- Financial capacity of customers to pay premiums
- Compliance with regulatory guidelines.
3. Suitability Checks
Banks must ensure that insurance products match the customer’s:
- Financial capacity
- Investment goals
- Risk tolerance.
Importance for Financial Inclusion
If properly regulated, bancassurance can:
- Expand insurance coverage
- Improve financial security
- Support the national objective of “Insurance for All by 2047.”
However, customer trust and strong governance are essential for the model to succeed.
