RBI’s proposed norms for the sale of financial products could impact fee income for banks

A senior banker underlined that the RBI’s proposal could impact larger banks, which have a large CASA (current account, savings account) base and have built up the ability to aggressively sell third-party products | Photo credit: REUTERS/AJAY VERMA

Fears of misselling will not only mean refunding amounts taken from customers, but also paying out compensation could curb banks’ enthusiasm to keep a lid on third-party products such as insurance, mutual funds and pensions. This could affect their other income.

“Every year, the target for selling third-party products in branches is getting higher and higher. If the corporate target is not met, officials are either denied productivity-related incentives or are transferred to faraway places, or both. So, to meet the quarterly/annual targets, the officials out of desperation sell products to customers who may not be suitable for them,” said a senior public sector bank official.

So if the RBI asks the banks to implement its instructions on advertising, marketing and sale of financial products and services in their entirety, the pressure at the industry level could ease. Other (fee) income will also decrease.

Rule for caution

Karthik Srinivasan, Senior Vice President & Group Head (Financial Sector Ratings), ICRA,noted that the RBI and other financial sector regulators in general are clearly pro-consumer.

“Every day there is some news story about the mis-selling of financial products. So if the guidelines for advertising, marketing and selling of financial products and services are implemented as they are, and it is found that a product has been mis-sold, then a bank will have to refund all the money collected and also compensate the customer. So that should, in a way, make the banks a little more careful about selling the right products to customers. So hopefully, cases of mis-selling should decrease… That will have some consequences.” impact on distribution costs,” said Karthik.

Banks earn a fair amount of compensation from the sale of third-party products. For example, revenue from “customer value enhancement” (earned through the sale of third-party products) accounted for about 18 percent of State Bank of India’s commission income of ₹8,404 crore in the third quarter.

A senior banker underlined that the RBI’s proposal could impact larger banks, which have a large CASA (current account, savings account) base and have built up the ability to aggressively sell third-party products.

The banker noted that the RBI released bancassurance guidelines last year, under which banks can become corporate agents/brokers and sell multiple insurance products. After the guidelines were issued, banks sold both general and life insurance policies to each other, even receiving a 30 percent commission on the sale.

Similarly, banks advertise and sell many mutual funds and three-in-one accounts (which bundle savings accounts, trading accounts and demat accounts) as one product. Co-branded credit cards are also aggressively advertised, although the commission is relatively lower.

“On the whole, the RBI plans to implement these consumer protection guidelines and rationalize the business operations of the banks, which are making every effort to generate higher returns from the sales commissions on third-party services,” the banker said.

To stay informed

RBI on Wednesday issued comprehensive draft instructions on advertising, marketing and sale of financial products and services for banks to prevent mis-selling and mandatory bundling of financial products, among other things.

In addition, to ensure that customers understood the financial product they purchased, banks will need to solicit customer feedback 30 days of sale, as per the Draft Reserve Bank of India (Commercial Banks – Responsible Business Conduct) Amendment Directions, 2026, which will come into effect from July 1, 2026.

If there is a mis-sell, the banks must refund the full amount paid by the customer for the purchase of the product/service. They must also compensate customers for any losses resulting from misselling.

Before a financial product/service is marketed/sold to a particular customer, its suitability for the customer must be determined by the bank.

Published on February 12, 2026