How RBI's new framework seeks to protect you from mis-selling by banks

It seeks to change how banks sell insurance, loans, investment products, both through branches, digital platforms

- Aprajita Sharma

Ahmedabad-based Ashok Parekh lost his 32-year-old daughter to cardiorespiratory arrest aggravated by covid pneumonitis. She had taken a home loan of ₹32 lakh from a private sector bank.

“As far as I know, she was told to mandatorily buy an insurance policy that would take care of the outstanding loan amount if something happened to her. She paid ₹75,000 as premium for it,” Parekh said.

After her death, Parekh approached the insurer only to discover that the policy was a critical illness cover and not a life insurance policy. Since cardiorespiratory arrest was not covered under the policy, the claim was rejected.

“We were told that had it been a heart attack, it would have been covered. Cardiorespiratory arrest is not the same as a heart attack. Most importantly, we were under the impression that the policy covered a death scenario. Why were we sold a policy by a health insurer rather than a life insurer?” he said.

The suitability of insurance has been the biggest casualty of the way banks sell it. Data from the Irdai Annual Report 2024-25 show that grievances related to Unfair Business Practices continued to rise, increasing by nearly 14% year-on-year to 26,667 in FY25, up from 23,335 in the previous year. That said, the Reserve Bank of India (Commercial Banks—Responsible Business Conduct) Second Amendment Directions, 2026—issued this month—is important. It seeks to reshape how banks sell insurance, loans and investment products, via branches and digital platforms.

What the RBI framework says

One of the most significant provisions is a crackdown on sales-linked incentives. Banks must ensure that their internal policies and compensation structures do not encourage employees to push unsuitable products. RBI has also asked banks to bar their employees from receiving any direct or indirect incentive from third-party product providers, such as insurers or mutual fund firms, for selling or marketing their products.