In a damning revelation about how personal finance products are being pushed in India, a new research reveals that banks continue to mis-sell insurance and mutual fund (MF) products.
A report by 1 Finance, a personal finance advisory form, has found that banks earned Rs 1,773 crore in commissions in FY24 from selling financial products, largely insurance and mutual funds, many of which never serve their intended purpose for customers.
The report, based on an investigation into the top 15 banks by market cap, raises sharp questions about whose interests are really being served. It finds that banks are not just pushing insurance, they are profiting even when these policies lapse, get surrendered, or are discontinued.
Nearly 43.3 per cent of all benefits paid by the top 10 life insurers fall into this “SWDL” category (surrendered, withdrawn, discontinued, or lapsed). In such cases, policyholders often walk away with little or nothing, while the intermediaries walk away with hefty commissions.
The Problem Runs Deeper
The research also highlights that a significant portion of these insurance products are sold by banks from their own group companies.
Now this raises some critical red flags when it comes to transparency and conflicts of interest for policy buyers. “Lapsation profits have become the business model of life insurers,” the report notes, suggesting that banks are monetising customer trust and data under the guise of offering financial advice.
The problem runs deeper when you look at persistency ratios, a measure of how long customers continue paying premiums. The average 61st-month persistency for the top 10 life insurers stands at a dismal 51 per cent, which means almost half of the policies are discontinued within five years. In most of these cases, the customer loses value, either through penalties, reduced returns, or total capital erosion.
Kanan Bahl, Chief Editor of 1 Finance Magazine, explains the trend: “Banks’ share in premium underwritten has nearly doubled in a decade, from 15.6 per cent in FY14 to 33.1 per cent in FY24. This is not just about distribution, it’s about using intimate knowledge of a customer’s finances to push unsuitable financial products.”
Experts say this calls for a structural overhaul. Manju Dhake, SVP, Insurance Advisory at 1 Finance, believes the solution lies in enforcing fiduciary standards. “Distributors and intermediaries must recommend products that suit a customer’s risk profile, not just what pays the most commission. Mandatory financial suitability checks and need-based selling, as envisioned in the Bose Committee, could shift the needle,” she said.
Currently, Insurance Regulatory and Development Authority of India’s 2024 regulation allows up to 80 per cent of expenses of management, including commissions, to be paid from the first-year premium of traditional policies. Some experts say this is a big part of the problem as it leaves too much room for high front-loaded commissions and creates perverse incentives to mis-sell.
The report essentially underscores a disturbing trend in India’s personal finance landscape: insurance is often sold, not bought, and increasingly so by banks that hold a privileged position of trust with customers.
