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RBI and IRDAI warn Banks against mis-selling of insurance products


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In an effort to combat the issue of mis-selling insurance products, the banking and insurance regulators are now questioning the practice of forcefully bundling life insurance products with loans provided by small finance banks (SFBs).

Recently, it has come to the attention of the Reserve Bank of India that SFBs are making it mandatory for individual borrowers to purchase life insurance products, with the loan amount disbursed to borrowers being reduced by the premium amount. While selling insurance products alongside loans is allowed for joint liability group loans, it is not permitted for loans sold to individuals. This has led to a situation where banks threaten to cancel the sanctioned loan if the borrower declines to buy insurance products.

Microfinance (MFI) loans, which are typically small unsecured loans, are at the center of this issue. Both the Reserve Bank of India and the Insurance Regulatory and Development Authority of India (IRDAI) are investigating SFBs and insurance companies to understand the reasoning behind making life insurance products mandatory with such loans.

The regulators have been cautioning SFBs for the past two years to review these bundled products, as they may not be beneficial to anyone involved – whether it’s the borrower, the bank, or the insurance company. However, with malpractices persisting, the regulators are now taking stricter actions against a few banks.

Another concern for the IRDAI is the persistency of these bundled life insurance products. After the first year’s premium is deducted when the loan is extended by the bank, customers often fail to pay the premium on these policies, resulting in weak persistency ratios. This means that these bundled products only contribute to the volume of policies sold and offer little to no value for insurance companies.

The regulators are also scrutinizing the income assessment process for borrowers. In many cases where loans and life insurance products are bundled, it has been discovered that the assessed income for life insurance and for availing the loan differ greatly. For example, the annual household income for MFI loans is capped at ₹3 lakh, while the sum insured for the life insurance policies can be ₹5 – 8 lakhs or even higher. These discrepancies are quite significant.

Although bundling life insurance products with loans is a widespread issue in the banking industry, the current focus of the regulator is mainly on MFI loans due to the economic implications of such practices. It is anticipated that the Reserve Bank of India may issue a directive or circular addressing the mis-selling of insurance products in the near future.

5 Comments

  1. Why should Banks sell insurance? As they have their own marketing team?

    Why not insurance companies sell Banking products as Banks sell Insurance products?

  2. from the very day of launching the concept of cross selling, the misselling also start because need not to mention that portfolio of cross selling business increased with the distribution of commission and opportunity to visit foreign or own country’s educational tour.
    The main pressure behind this is also from the higher officials who declare every day as Login Day.

  3. Senior Level officials sitting at RO/HO are earning hefty commissions and Foreign trips for selling the 3rd products. So they are hell bent on pressurising Branch staff to sell more and more insurance products. The Health insurance scheme is a Scam.

  4. Nobody can stop the insurance products selling in Banks …Top officials earning good commission and foreign trips ..this type of mis selling never ends …The govt is also giving ery least importance on this subject…I think it never ends but it is on paper inly

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