Finance Minister Tackles Bank Mis-Selling, Urges Core Focus – February 2026 Analysis

Breaking: Finance Minister Tackles Bank Mis-Selling, Urges Core Focus – February 2026 Analysis

In a pivotal move for the Indian banking sector, Union Finance Minister Nirmala Sitharaman has intensified her call for banks to address pervasive mis-selling practices and emphatically urged them to refocus on their fundamental core banking operations. This directive, delivered amidst ongoing concerns regarding customer protection and financial stability, comes as the Reserve Bank of India (RBI) introduces stringent draft regulations designed to curb aggressive sales tactics and safeguard depositor interests across the nation. The Finance Minister's stance underscores a critical period for financial institutions, signaling a paradigm shift towards greater accountability and ethical conduct.

The Catalyst

The Finance Minister's recent statements echo long-standing concerns regarding the mis-selling of financial products, particularly insurance policies and mutual funds, by commercial banks in India. For years, customers have reported being coerced into buying unsuitable products, often without full disclosure of risks or terms, leading to significant financial losses and erosion of trust. In November 2025, she specifically urged banks to curb mis-selling and protect public confidence in the banking system. This issue has now reached a critical juncture, with the Finance Minister confirming that these mis-selling practices will be a key agenda item at the upcoming Financial Stability and Development Council (FSDC) meeting.

The gravity of the situation prompted the Reserve Bank of India (RBI) to issue the "Reserve Bank of India (Commercial Banks – Responsible Business Conduct) Amendment Directions, 2026" draft rules on February 12, 2026, slated to be effective from July 1, 2026. These comprehensive regulations directly address concerns highlighted by the government, aiming to overhaul how banks advertise, market, and sell financial products, including those from third parties.

Financial Forensics

The rampant mis-selling has not only inflicted losses on individual investors but also posed a significant reputational risk to the banking sector as a whole. Driven by unrealistic sales targets and high commission incentives, particularly for insurance and wealth products, bank relationship managers (RMs) have often prioritized institutional profits over customer suitability. Data suggests that in FY24, the top 15 banks by market capitalization generated a substantial ₹21,773 crore from selling insurance, mutual funds, and other third-party financial products.

The new RBI draft guidelines introduce a formal definition of "mis-selling," encompassing sales of unsuitable products, misleading information, lack of explicit consent, and compulsory product bundling. Crucially, these rules mandate a full refund and compensation for losses if mis-selling is proven, a move expected to drastically increase accountability.

Comparative Analysis: Banking Sales Practices

Feature	Pre-RBI Draft (February 2026)	Post-RBI Draft (Effective July 2026)
Product Suitability	Often overlooked; sales targets dominant.	Mandatory assessment of customer's profile (age, income, risk).
Consent	Implied, clubbed, or sometimes coerced.	Explicit, recorded, individual consent for each product.
Bundling of Products	Common practice (e.g., loan with insurance).	Strictly prohibited without explicit, separate consent.
Third-Party Incentives	Direct/indirect incentives to bank staff common.	Ban on incentives from third parties to bank employees.
Grievance Redressal	Challenging for customers; burden of proof often on customer.	Full refund and compensation if mis-selling is proven.
Digital Practices	Vulnerable to "dark patterns" and deceptive UIs.	Prohibition of "dark patterns"; UI audits mandated.
Customer Feedback	Limited formal mechanisms.	Mandated within 30 days of sale, half-yearly reports required.
Source: FinScann Analysis based on RBI Draft Guidelines, February 2026

Beyond mis-selling, the Finance Minister and RBI Governor Sanjay Malhotra have repeatedly emphasized the critical need for banks to return to their core operations: collecting deposits and lending. This focus is crucial for maintaining financial stability, especially given the rising gap between deposit collection and lending observed in recent times. A robust core banking system (CBS) is the backbone of efficient operations, enabling banks to manage transactions, payments, and financial records effectively while providing centralized, real-time access to customer accounts. Major banks like State Bank of India (SBI) are actively modernizing their core banking infrastructure to enhance agility and scalability, ensuring uninterrupted service continuity.

Market Impact

The implementation of these stringent guidelines by the RBI is poised to have a significant, albeit necessary, impact on the Indian banking sector. In the near term, banks may experience an increase in compliance costs and a moderation in fee income generated from distributing third-party products. This could particularly affect banks heavily reliant on bancassurance models, where insurance policy sales accounted for a ₹22,000-₹25,000 crore-a-year business for lenders.

However, in the long run, these measures are expected to reduce complaint volumes, minimize regulatory penalties, and mitigate reputational damage, ultimately strengthening customer trust and leading to more sustainable business models. Investors will likely favor banks that proactively adapt to the new regulatory environment, focusing on transparency and customer-centricity. The shift towards core banking solutions and ethical sales practices could also enhance asset quality and operational efficiency for public sector banks (PSBs) and private banks alike.

Key Takeaways for Investors

• Increased Scrutiny on Fee Income: Be aware that banks' non-interest income from selling third-party products may see a moderation. Evaluate bank earnings reports for shifts in revenue composition.
• Focus on Banks with Strong Governance: Prioritize banks demonstrating robust internal controls, transparent sales practices, and a clear commitment to customer protection.
• Customer-Centricity as a Moat: Financial institutions genuinely prioritizing customer needs and building trust will likely develop a stronger competitive advantage over time.
• Due Diligence is Paramount: Always conduct thorough research before purchasing any financial product from a bank. Understand the product's suitability for your profile, its risks, and associated fees.
• Impact on Banking Stocks: While short-term adjustments are expected, the long-term outlook for a cleaner, more trustworthy banking system is positive. Look for banks that are investing in strengthening their core operations and compliance frameworks.

FinScann Verdict

The Finance Minister’s directive to curb mis-selling and the RBI’s proactive regulatory framework represent a decisive step towards fostering a more transparent and customer-centric Indian financial sector. This move will force banks to recalibrate their sales strategies, prioritizing ethical conduct and core banking functions. While this transition may entail initial operational adjustments and potentially impact certain revenue streams, FinScann believes it will ultimately build a stronger, more resilient, and trustworthy banking ecosystem, benefiting both customers and financially sound institutions in the long term.

Q: What exactly is "mis-selling" in banking? A: Mis-selling in banking refers to the practice where a financial product or service is sold to a customer without adequately assessing their needs, risk profile, or financial literacy, or by providing incomplete, misleading, or false information. It can also involve forcing customers to buy products they don't want through coercive tactics or bundling.

Q: How will the new RBI rules protect me as a customer? A: The new RBI draft rules, effective July 1, 2026, mandate explicit consent for each product, prohibit bundling of products, ban third-party incentives to bank staff for sales, and require banks to assess a product's suitability for your profile. Crucially, if mis-selling is proven, banks will have to refund the entire amount and compensate for any losses.

Q: What are "core banking operations"? A: Core banking operations primarily refer to the fundamental services provided by banks, such as accepting deposits, lending money (loans), and managing customer accounts. It emphasizes the traditional functions that are central to a bank's existence, distinct from non-core activities like selling third-party insurance or mutual funds.

Q: Why is the government pushing banks to refocus on core operations? A: The government and RBI are urging banks to refocus on core operations to enhance financial stability, address the growing gap between deposit collection and lending, and ensure that banks prioritize their fundamental role in the economy. This is also seen as a way to improve customer trust and reduce the aggressive pursuit of non-core revenues that can lead to mis-selling.

Disclaimer: For information only; not investment advice. Stock market investments carry risks. Please consult a SEBI-registered advisor before investing. FinScann assumes no liability for decisions made based on this report.