FM Sitharaman Issues Stern Warning to Banks Over Mis-selling Practices

The Indian banking sector is facing a significant regulatory reckoning as Finance Minister Nirmala Sitharaman issued a direct mandate for institutions to cease the "mis-selling" of financial products. This directive, delivered during a high-level review of banking performance, signals a shift in the government's expectations for the industry. For years, Indian banks—both in the public and private sectors—have increasingly relied on "para-banking" activities, such as selling insurance policies, mutual funds, and other third-party wealth management products, to bolster their non-interest income. While this has diversified revenue streams, it has also led to a surge in consumer grievances regarding products sold under pressure or through obfuscation.

The Finance Minister’s call to return to "core business" is a strategic push to realign the banking sector with the broader goals of national economic growth. Core banking—the fundamental cycle of accepting deposits and extending credit—is the engine of industrial and infrastructure development. When banks become overly focused on commission-based sales, there is a risk that the primary function of financial intermediation becomes secondary. This is particularly concerning at a time when the Indian economy requires robust credit growth to sustain its momentum. By refocusing on deposits, banks can address the widening gap between credit demand and deposit growth, which has recently pressured liquidity across the system.

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The Indian banking sector is facing a significant regulatory reckoning as Finance Minister Nirmala Sitharaman issued a direct mandate for institutions to cease the "mis-selling" of financial products.

From a regulatory perspective, this intervention by the Finance Ministry likely foreshadows stricter oversight from the Reserve Bank of India (RBI). The RBI has previously expressed concerns about the "incentive structures" within banks that reward employees for hitting sales targets on third-party products rather than for maintaining healthy loan portfolios or providing quality customer service. We can expect a tightening of the "Bancassurance" model, where the relationship between banks and insurance providers will come under the microscope. Banks may be forced to decouple staff performance metrics from the sale of non-banking products to ensure that customer interests are prioritized.