Finance Minister Nirmala Sitharaman has expressed worry about the inappropriate selling of financial products, particularly insurance, noting that such practices create financial difficulties for individuals and raise borrowing expenses.
The Finance Minister has highlighted concerns regarding widespread improper sales of financial products through banking channels, emphasizing how these practices negatively affect consumers. She pointed out that such sales tactics result in both personal financial challenges and increased costs of borrowing.
The Insurance Regulatory and Development Development Authority of India (Irdai) Chairperson Debasis Panda advised banks to concentrate on their primary banking functions rather than focusing solely on insurance sales. He acknowledged that bank-based insurance distribution remains valuable for expanding insurance coverage nationwide.
Recent statistics show insurance distribution through banks varies significantly: HDFC Life (65%), SBI Life (60%), Max Life (52%), ICICI Prudential (29%), and LIC (4%).
Understanding Improper Sales Practices
Improper selling happens when financial products, including insurance policies, mutual funds, or loans, are marketed without adequate disclosure or consideration of customer suitability. This includes:
Recommending products incompatible with customers’ financial objectives or risk tolerance
Providing inaccurate information about product returns, advantages, or risks
Compelling customers to buy unnecessary products
These approaches take advantage of customers’ limited financial knowledge and weaken confidence in financial institutions.
Government’s Areas of Concern and Consumer Impact
1. Consumer Financial Difficulties
Inappropriately sold products often create monetary challenges. Customers who purchase unsuitable insurance policies may find premium payments difficult, leading to debt or policy termination.
2. Higher Borrowing Expenses
When consumers acquire inappropriate financial products, they often need additional loans to manage expenses or losses, increasing their financial obligations and overall borrowing costs.
3. Reduced Financial Market Confidence
Improper selling practices diminish public trust in financial services, discouraging investment and insurance participation, which are crucial for economic development and personal financial stability.
4. Focus on Consumer Protection
With India’s expanding middle class and broader financial inclusion, the government aims to ensure financial products serve consumer interests rather than becoming burdensome.
At the State Bank of India Economist Conclave, Sitharaman urged bankers to prioritize core banking activities and avoid improper insurance sales, noting that these practices often indirectly raise borrowing costs for bank customers.
The following day, Irdai Chairman Panda made similar observations, emphasizing that bankers should focus on their primary responsibilities rather than solely promoting insurance.
“The system has value, but requires careful implementation to maintain focus on primary banking activities while offering insurance as a supplementary service,” Panda stated at SBI’s annual banking and economy conclave.
He noted that insurance providers need cost-effective distribution networks like banks, which offer extensive coverage across populated areas nationwide.