Why incentive given to Bank Employees for selling Insurance? RBI Fines Bank of Baroda

Hellobanker Team

3 days ago

➡️ Get instant news updates on Whatsapp. Click here to join our Whatsapp Group.

The controversy of insurance selling in Banks is not over yet. The RBI Governor and even the Union Finance Minister had urged Banks to focus on banking activities and not to be involved in other insurance mis-selling activities. But still it seems the Banks have not stopped selling insurance.

The Reserve Bank of India (RBI), in an order dated April 29, 2025, has fined Bank of Baroda ₹61.40 lakh (sixty-one lakh forty thousand rupees) for not following certain rules and guidelines issued by RBI. These rules were related to how banks should provide financial services, how they should treat customers, and how they should manage interest rates on deposits.

This fine was imposed using the powers given to RBI under the Banking Regulation Act, 1949 — specifically under Sections 47A(1)(c), 46(4)(i), and 51(1).

What led to this penalty?

RBI regularly checks banks to see if they are following the rules. This process is called Inspection for Supervisory Evaluation (ISE). In this case, RBI conducted such an inspection of Bank of Baroda in the year 2023, looking at the bank’s condition as of March 31, 2023.

During this inspection, RBI found that the bank had not complied with some important guidelines. Because of this, RBI sent a notice to the bank, asking it to explain why it should not be fined for failing to follow the rules.

What were the issues found with Bank of Baroda?

After reviewing the bank’s written and oral responses, RBI confirmed that the bank had committed the following mistakes:

Improper Incentives to Employees: The bank allowed an insurance company to give non-cash incentives (such as gifts or other benefits) to bank employees who were involved in selling insurance. This is not allowed under RBI guidelines, as it may influence employees to push insurance products unnecessarily to customers.
Failure to Credit Interest: The bank did not credit interest regularly to certain savings accounts that were inactive (called inoperative, dormant, or frozen accounts). According to RBI rules, even these accounts are supposed to receive interest at regular intervals.

Insurance in Banks

As you can understand from this penalty, Bank Officers should not be paid any incentive for selling insurance products in branches. The RBI has clearly said that staff of government banks should not be given any incentive for insurance selling as this incentive can motivate Employees to mis-selling the insurance products.

Why Banks do selling of insurance products?

You must be thinking – Why Banks do selling of insurance products? Selling insurance is the work of insurance companies then why Banks do this. Actually, Banks get commission for selling insurance to their customers. Insurance Companies enter into partnership with Banks to sell insurance to their customers and provide huge commissions to Banks. This income adds to extra profit for Banks. But it has been observed that due to selling insurance, Banks are losing deposits and some Employees often engage in mis-selling of insurance products.

Bank customer who visits bank for making a FD, is persuaded into buying insurance or invest money in other schemes of insurance companies. Due to these activities only, today the Banking sector is suffering from huge liquidity crisis. As per reports, there is Rs.2 trillion liquidity deficit in Indian Banking System. The RBI is investing money into Indian Banking Sector to boost liquidity. The RBI Governor, IRDAI and the Union Finance Minister finally broke silence on this and asked Banks to focus on core banking activities.

Earlier, Banks including public sector banks used to organize lavish parties to celebrate the achievements of selling insurance to bank customers. Soon the government intervened and all Banks were asked to stop such parties.

What you think of this, do let us know in the comment section below. Also Read related news below: