Finance Minister Issues Stern Warning to Banks Over Mis-Selling Practices
Finance Minister Nirmala Sitharaman delivered a strong message to the banking sector on Monday, cautioning financial institutions against the mis-selling of products and emphasizing that such practices now constitute a criminal offence under the newly implemented Bharatiya Nyaya Sanhita (BNS).
Regulatory Crackdown on Mis-Selling
Speaking to reporters after her customary post-Budget meeting with the Reserve Bank of India's Central Board, Sitharaman welcomed the RBI's recent initiative to introduce stricter norms targeting mis-selling activities. The minister expressed approval of the regulator's draft guidelines, which she described as sending an unequivocal signal that such conduct will no longer be tolerated within the banking system.
"I am pleased that the RBI is developing comprehensive guidance clarifying why mis-selling will not be entertained," Sitharaman stated. "The message must reach all banks clearly: you cannot afford to engage in mis-selling. This practice now constitutes an offence under the provisions of the Bharatiya Nyaya Sanhita."
New RBI Guidelines and Customer Protection
The Reserve Bank of India issued draft directions on February 11 that establish a robust framework for addressing mis-selling incidents. These proposed regulations mandate that banks must refund the entire amount paid by customers for any products sold through deceptive practices. Additionally, financial institutions will be required to compensate customers for any losses incurred, following an approved policy framework.
The RBI has invited public feedback on these draft guidelines until March 4, with the new norms scheduled to take effect from July 1, 2025. This timeline provides banks with a clear window to adjust their practices and implement necessary compliance measures.
Addressing Regulatory Gaps and Customer Vulnerabilities
Sitharaman highlighted significant regulatory gaps that previously enabled mis-selling practices to flourish. The minister explained that such activities often fell between the jurisdictional boundaries of the RBI and the Insurance Regulatory and Development Authority of India (IRDAI), leaving customers without adequate protection.
"Banks should concentrate on their core banking functions," Sitharaman emphasized. "My persistent concern has always been that financial institutions spend excessive time selling insurance products when such sales are unnecessary. Previously, these practices conveniently fell between two regulatory stools—those of the RBI and IRDAI."
Specific Examples of Mis-Selling Practices
The finance minister provided concrete examples of problematic practices, particularly noting instances where customers were pressured to purchase insurance products despite already having sufficient coverage. This frequently occurred during loan application processes, where borrowers faced additional, unnecessary insurance requirements.
"Consider the individual deposit holder, the ordinary citizen who repeatedly asks why they're being pressured to purchase insurance when they're already providing property as collateral for a home loan," Sitharaman explained. "The property itself serves as security, so why should borrowers be asked to purchase additional insurance? What exactly are they being asked to de-risk?"
Focus on Core Banking and Customer Needs
Sitharaman reiterated that banks should prioritize understanding customers' genuine financial requirements and strengthening their deposit franchises. The minister specifically highlighted the importance of low-cost CASA (Current Account Savings Account) deposits, urging banks to focus on these fundamental banking activities rather than aggressively cross-selling non-bank products.
RBI Governor Provides Banking Sector Update
Meanwhile, RBI Governor Sanjay Malhotra provided updates on the banking sector's performance during the same briefing. Malhotra reported that deposit growth within the banking system currently stands at approximately 12.5 percent, while advances are expanding at a slightly higher rate of about 14.5 percent.
The governor clarified that future monetary policy decisions would depend on evolving growth and inflation dynamics. Since February 2025, the RBI has reduced the benchmark repo rate by 125 basis points to 5.25 percent to support economic growth amid manageable inflation levels. However, the Monetary Policy Committee maintained a neutral stance earlier this month due to ongoing global uncertainties.
The next bi-monthly monetary policy announcement—the first for fiscal year 2027—is scheduled for April 6. Malhotra assured markets that the central bank would continue implementing measures to ensure durable liquidity across all market segments, maintaining stability within the financial system.
This comprehensive regulatory approach represents a significant shift in how financial product sales will be monitored and regulated in India, with clear consequences for institutions that fail to comply with the new standards.
