Last Updated:November 20, 2024, 11:01 IST

Finance Minister Nirmala Sitharaman says mis-selling of financial products, especially insurance, not only leads to financial distress for individuals but also increases borrowing costs.

Finance Minister Nirmala Sitharaman says mis-selling not only leads to financial distress for individuals but also increases borrowing costs.

Finance Minister Nirmala Sitharaman has expressed concern over the rampant mis-selling of financial products, especially insurance, through banks, and highlighted its adverse impact on consumers. She said mis-selling not only leads to financial distress for individuals but also increases borrowing costs.

Insurance industry regulator Irdai’s Chairman Debasis Panda also urged bankers to focus on their core job and not pedal insurance alone. He, however, added that the bancassurance channel is very useful in deepening the reach of insurance in the country.

According to the latest data, HDFC Life distributes 65 per cent of its insurance policies through banking channels, followed by SBI Life (60 per cent), Max Life (52 per cent), ICICI Prudential (29 per cent), and LIC (4 per cent).

What is Mis-Selling?

Mis-selling occurs when financial products, such as insurance policies, mutual funds, or loans, are sold to customers without proper disclosure of terms or suitability. This could include:

– Selling products that do not align with a customer’s financial goals or risk appetite.

– Misrepresenting returns, benefits, or risks associated with the product.

– Pressuring customers into purchasing products they don’t need.

Such practices exploit the lack of financial literacy among customers and undermine trust in the financial system.

Why is the Government Concerned? Its Impact On Customers

1. Financial Stress on Consumers

Mis-sold products often lead to financial strain. For instance, customers who are misled into buying unsuitable insurance policies may struggle to pay premiums, forcing them into debt or policy lapses.

2. Rising Borrowing Costs

When consumers buy inappropriate financial products, they often resort to additional borrowing to cover their expenses or losses. This adds to their financial burden and inflates borrowing costs across the economy.

3. Erosion of Trust in Financial Markets

Mis-selling damages consumer confidence in the financial sector, deterring them from investing or securing insurance, both of which are essential for economic growth and personal financial security.

4. Consumer Protection as a Policy Priority

With India’s growing middle class and increased financial inclusion, the government wants to ensure that financial products genuinely benefit consumers rather than becoming a liability.

“The government’s push to address mis-selling reflects its commitment to safeguarding consumer interests and enhancing financial system integrity,” said a financial sector analyst.

On Monday, speaking at the State Bank of India Economist Conclave, Sitharaman had asked bankers to focus on their core jobs and avoid mis-selling of insurance policies, pointing that many a time, this also indirectly leads to increasing the cost of borrowing for a bank customer.

A day after, on Tuesday, Irdai Chairman Debasis Panda also made similar remark. He said bankers should focus on their core job and not pedal insurance alone.

“There is merit in the system but we have to do it with care and caution so that you don’t forget your activity and only start selling insurance. It should be incidental,” Panda said, speaking at the annual banking and economy conclave organised by SBI here.

Insurance companies definitely need low-cost distribution solutions like the ones offered by the banks, which have a massive spread across the country and cover nearly all the inhabited places, he said.