RBI checks on mis-selling will likely fail their purpose

The central bank's regulations do not go far enough to be effective on the ground. They need to be deeply prescriptive

- Monika Halan

The stink around the mis-selling insurance products of banks has reached the corridors of power finally: The central bank, on February 11, announced the Draft Reserve Bank of India (Commercial Banks - Responsible Business Conduct) Amendment Directions, 2026. The aim is to prevent mis-selling of financial products by banks.

This, the Reserve Bank of India (RBI) intends to do through suitability assessments, explicit consent requirements, prohibition of compulsory bundling and dark patterns, customer feedback mechanisms, and compensation frameworks. The expectation is that banks put customer interest over sales targets. This is a good half-step, but unless RBI defines suitability and the robustness of the customer-feedback mechanism, it will remain ineffective to stop the haemorrhage of money.

First, some background. The anecdotal experience of bank customers feeling like chickens in front of hungry wolves has been backed by hard evidence for more than a decade. I had presented a paper published in the Journal of Comparative Economics to the then-RBI governor, based on findings from mystery-shopped banks (in which an evaluator poses as a customer for the bank), using a third-party market research firm.

The 2016 paper found that banks were giving wrong information across costs, returns, lock-in periods and exit costs. In life insurance, the “lying” was at 100% on cost disclosures and at 99% on returns disclosures. In fact, after the presentation, two vigilance officers told me that what my coauthor and I had documented is just the tip of the iceberg; it was much worse on the ground. RBI knew it. It did nothing for years.