RBI Governor Shaktikanta Das warns banks against long-term risks of 'product mis-selling'

Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday called on banks to strengthen their internal governance framework, urging the boards to take a hard look at issues like mis-selling of products and improper account openings. Speaking at the Conference of Directors of Private Sector Banks in Mumbai, Das stressed the importance of long-term trust over short-term profits.

"Unethical practices, such as mis-selling of products or the opening of accounts without proper KYC verification need to be curbed. Staff incentives should be carefully structured to avoid encouraging mis-selling or unethical practices," Das said.

"While such practices may yield short-term gains, they ultimately expose the bank to significant long-term risks, including reputational damage, supervisory scrutiny, and financial penalties," he cautioned.

"Prompt and reasonable settlement of insurance claims and a lower rejection rate are necessary to increase insurance penetration," the survey said.

“Acknowledgement of misselling and misrepresentation and compensating for consequential losses is a good business practice enjoined upon stockbroking, fund management, banking and insurance firms,” it added.

The Insurance Regulatory and Development Authority of India (IRDAI), in its Annual Report 2022-23, had flagged worrying signs of a slight decline in India’s overall insurance penetration -- from 4.2% in FY22 to 4% in FY23. Life insurance saw the steepest drop, falling from 3.2% to 3%, while non-life insurance held steady at 1%.

The IRDAI had urged insurers to conduct root cause analyses of complaints, implement stronger controls across sales channels, and better match products to customer needs.