RBI Draft Norms on Mis-Selling May Hit Private Banks Harder
Bancassurance is a well-established model within the financial sector, enabling banks and insurance companies to collaborate in selling insurance products to customers.
Impact of RBI Draft Norms on Private Banks
The Reserve Bank of India’s (RBI) proposed draft norms, designed to combat mis-selling of financial products, could impose significant challenges on private sector banks due to their heavier reliance on income from insurance sales. Here are the crucial updates:
– Rising Insurance Income: Data from ET Intelligence Group reveals that the proportion of insurance income in the total non-interest income for the top five private sector banks increased from 8.2% in FY19 to 10% in FY25. It was recorded at 7.5% for FY24. In contrast, public sector banks maintained a share of under 4% during the same timeframe.
– ICICI Bank’s Performance: Notably, ICICI Bank experienced a dramatic decline of 13.9 percentage points, bringing its insurance income share down to 1.6% between FY19 and FY25. This shift reflects its emphasis on enhancing core banking efficiency over insurance sales.
– Income Growth: Overall, the income derived from insurance products sold by the 10 sampled banks surged 2.5 times, climbing to ₹16,747 crore in FY25 from ₹6,381 crore in FY19. This marks a 31% year-on-year increase from ₹12,783 crore in FY24.
New Responsibilities for Banks
The RBI’s draft norms, issued on February 11, emphasize that merely obtaining customer consent will no longer suffice. Banks must ensure that the products they sell are appropriate and suitable for their customers. Insights from a private bank’s head of retail banking indicate that this shift will compel banks to be more cautious when selling third-party products like mutual funds and insurance policies.
The proposed regulations stipulate that if mis-selling occurs, banks may be obligated to refund the entire amount paid by the customer along with additional compensation for any consequent financial loss.
Future of Bancassurance
Historically, banks have linked employee incentives and sales targets to the distribution of third-party products such as insurance policies and mutual funds, driving fee income growth. However, this model may lead to the sale of unsuitable or unwanted products, further complicating the banking landscape.
As these new norms take effect, private banks may need to reevaluate their strategies in bancassurance, balancing profit motives with regulatory compliance and customer welfare.
In conclusion, the RBI’s draft norms aimed at curbing mis-selling are set to significantly impact private sector banks, as their dependency on insurance income grows amid evolving regulatory expectations. Banks must adapt swiftly to these changes to thrive in a more accountable financial environment.