Sitharaman Tells Banks To Stick To Core Banking, Raises Red Flag Over Mis-Selling

Finance Minister Nirmala Sitharaman has told banks to refocus on bread-and-butter banking — deposits and lending — while cautioning them against pushing financial products customers may not actually need, according to a recent report by the "New Indian Express." The remarks suggest increasing concern in policy circles that aggressive cross-selling is beginning to overshadow traditional banking priorities, even as lenders branch out into multiple financial services.

While banks today function as broad financial supermarkets, distributing insurance, mutual funds, and other products, the government appears keen that this diversification does not blur their primary responsibilities. Deposit mobilisation, prudent lending, and customer confidence remain central to financial stability, officials have repeatedly emphasised.

Deposits, Lending Still The Backbone

Speaking at a recent interaction, Sitharaman made it clear that, despite all the talk of fintech tie-ups and new product lines, banking still runs on the same old engine, deposits and loans. Without steady savings and current account deposits coming in, she indicated, the ability of banks to lend comfortably and protect their margins becomes far more difficult.

The reminder comes after a decade during which sections of the banking sector faced asset-quality stress, requiring significant government capital support. Public sector banks alone received recapitalisation amounting to several lakh crore rupees over multiple years. Policymakers now expect stronger internal controls, improved credit appraisal, and commercially sustainable operations.

There is also recognition that competition for household savings has intensified. Small savings schemes, capital markets, and new-age investment platforms are all competing for the same pool of money. In this kind of climate, trust isn’t just a regulatory checkbox — it can actually set one bank apart from another. Clear communication, fair dealing, and dependable service often matter as much as interest rates. Officials also point out that, despite the surge in digital banking, the human side of banking still counts. How branches handle queries, resolve complaints, and explain products continues to influence how people judge their bank.

Insurance Sales Draw Policy Attention

Mis-selling of insurance products emerged as another concern flagged by the finance minister. Banks are allowed to sell insurance as corporate agents, but there have been recurring complaints that customers are sometimes steered towards policies they neither asked for nor really need.

Some loan applicants say they are given the impression that taking an insurance policy will make the loan process smoother, or even necessary, though that isn’t always the case. For example, someone taking a home loan of about Rs 40 lakh might still be persuaded to buy another insurance policy even if they already have sufficient cover in place.

Such add-ons can increase overall borrowing costs and create confusion about what is optional versus compulsory.

Regulatory oversight in this space involves both banking and insurance authorities, which occasionally leads to blurred accountability. Stronger coordination between regulators is widely expected to reduce gaps and ensure clearer disclosure standards.

The Reserve Bank of India has, in earlier communications, highlighted the importance of fair sales practices and explicit customer consent. There seems to be a clear push from policymakers to make sure the sector keeps expanding without leaving customer safeguards behind.

For customers, the immediate takeaway is caution: read loan documents carefully, question bundled products, and understand costs fully before signing. For banks, the government’s message is more strategic; long-term credibility, stable deposits, and responsible lending will matter far more than short-term gains from aggressive product sales as India’s financial system continues to deepen.