Is the bank trying to scam you? How to protect yourself

Walk into any bank branch, and you will likely find a bank relationship manager (bank RM) trying to push you into something more lucrative, maybe a “market-linked” or “high-returns mutual fund plan”. Everything looks good on the paper, but the fine print often reveals something else entirely. In broader terms, this practice is known as mis-selling, and this is just one example of rampant mis-selling in banks in India.

Many customers fall victim to these mis-selling tactics, unknowingly setting themselves up for financial ruin, which they realize very late.

So, let’s address crucial questions for you: what mis-selling tactics do banks use, why do banks even do this in the first place, and most importantly, how do we protect ourselves from them? Read all about the mis-selling in banks in this blog.

What is mis-selling in banking?

Mis-selling in banks is the act of persuading or coercing a customer into buying a product or service irrelevant to their needs. Just imagine that the very institution you considered “safe” quietly works against your best interest. And it can occur at various instances when you are:

• Disbursing loans
• Opening a locker account
• Seeking bank services like bank balances, etc.
• Applying for savings scheme, especially senior citizens schemes

Some banks even derived 100% of their profits through such commissions (we will explore this later in this blog), raising an important question: how widespread is mis-selling in banks?

Mis-selling practices as per various banking segments

Source: 1 Finance Magazine

• Large (61.74%) and medium (58.42%) private sector banks likely reflect greater sales pressure and aggressive targets.
• Public sector banks (51.85%) and small finance banks (52.27%) also suggest that mis-selling is not limited to just private institutions.

The numbers make it clear. Mis-selling is common across all bank segments, which naturally brings us to the next question: how exactly do banks mis-sell a product?

What are the most common mis-selling tactics used by banks?

Bank relationship managers can be very persuasive and deploy tactics that seem natural on the surface for an unsuspecting, unaware customer.

1. Promising fixed or high returns

The most-used mis-selling tactic is that of guaranteeing returns on their investments. The problem here isn’t intellectual but emotional. They tempt you with the illusion of fixed or high returns. Remember: no insurance or investment product can guarantee returns. Anyone claiming otherwise is bluffing.

2. Pushing unsuitable products aggressively

Customers are often pressured into policies that don’t align with their financial goals or risk appetite. This tactic puts customers into discomfort, and instead of saying no, they end up buying that policy. For example, a 30-year old professional who wanted to invest in the national pension scheme (NPS) for retirement was instead given a ULIP.

3. Bundling products

Framed as “part of the process”, bundling is a form of mis-selling when you are given unrelated services together, making one conditional on the purchase of another. Many times, banks put pressure on customers, telling them to buy an insurance policy to avail the required service.

4. Concealing or falsifying details about the product

Bank RMs purposely conceal/falsify some (if not all) details to make customers fit for the product they are pitching. For example, many clauses of life insurance policies aren’t mentioned beforehand. This concealed data may include the risks associated with the product, hidden costs, optimal holding period, and sometimes, even the returns are tampered with to trap customers.

5. Creating a sense of urgency

Bank RMs try to overwhelm customers with a sense of urgency to coerce them into buying a product. Phrases like “last chance” or “limited-time benefits” are used to induce fear of missing out.

6. Offering freebies or commissions from their incentives

Why would an agent or a RM want to share a portion of their profits? It’s a fair question to ask. That generosity is intentional, as it’s meant to appear helpful while serving their interests. As a result, free gifts or shared commissions distract customers from asking the right questions.

Why do banks push insurance products so aggressively?

From the bank RM’s perspective

Insurance and mutual fund products yield far higher incentives than traditional banking services. Also, in banking, the overall pressure is immense, at least that’s what the survey by 1 Finance Magazine found when they talked to many bank RMs.

Source: 1 Finance Magazine

Scroll right to view full table –>

This data highlights a deeper problem about the systemic pressure, along with higher commissions, pushing RMs into unethical practices and encouraging mis-selling.

From the banks’ perspective

The foremost reason is the high commissions! The commission income to total income ratio is the perfect parameter to understand how much of a bank’s overall income comes from selling third-party products like insurance, wealth management products, etc. A higher ratio indicates heavy reliance on third-party commissions to boost their profits.

Commission income to total income ratio

Source: 1 Finance Magazine; *Data from the last available financials – FY16 **Data from the last available financials – FY05

• Prominent banks show how central commission-based selling has become their earning model. For example, IDFC First Bank derived its significant income from commissions, up sharply from 5.4% to 23.6% in FY24. Whereas IndusInd Bank saw a surge to 22.1% from just 3.2% in FY24. Kotak Bank also belongs to this line.
• Older giants like SBI, HDFC Bank, ICICI Bank, and Central Bank of India have either seen flat or declining ratios. Their reliance on commissions is far lower, suggesting their business still revolves around traditional banking.

The data shown below further sheds light about where those high commissions come from.

Commissions earned by banks and NBFCs from related party life insurance companies (FY24 – ₹ Crores)

And this 1 Finance Magazine data observed a conflict of interest, i.e., pushing in-house products over customer suitability.

• Kotak (100%) and ICICI (99.9%) banks earn nearly all insurance commissions from their own group companies.
• HDFC Bank earned ₹3,059.3 Cr (54.2% from HDFC Life); SBI earned ₹2,232.2 Cr (84.5% from SBI Life). They are less dependent, but related-party commissions still form a major chunk.

When a large share of this income is linked to related party companies, the conflict of interest becomes obvious. So, customers’ goals and interests often get sidelined, as banks have the bigger agenda of boosting the performance of the group as a whole, to prioritize sales volume over the customer’s best interest.

While the numbers are staggering, the silver lining is that the Reserve Bank of India (RBI), along with the Insurance Regulatory and Development Authority of India (IRDAI), are closely monitoring this mis-selling in banks fiasco.

1 Finance has made a documentary highlighting the rampant mis-selling of financial products and its impact on our lives. Watch it here.

A 1 Finance awareness initiative

RBI rules on mis-selling by banks

RBI is reframing its guidelines to tighten the noose around this mis-selling practice. By regulation,

1. Customers must be given clear, non-misleading information, i.e., product risks, fees, expected returns, and lock-in periods.
2. Any misrepresentation or withholding of such information is a violation of RBI and IRDAI guidelines, leading to regulatory action, penalties, and compensation to affected customers.
3. Banks must ensure products sold are suitable to the customer’s needs and risk profile.
4. Banks are fully responsible for third-party products (insurance, mutual funds) sold through their branches.
5. A policy brochure/key feature document must always be shared before you buy.
6. Banks must have a Board-approved policy to prevent mis-selling and handle grievances.

What are your rights to fight against the mis-selling

1. You have the right to file a complaint with the bank’s Grievance Redressal Officer and the bank must reply within 30 days. Always ask for a Complaint Reference Number before leaving.
2. Under the Integrated Ombudsman Scheme (RBI-IOS) – 2021, you can escalate issues like sale of unsuitable products, misrepresentation of terms, unauthorised debits, or pressure selling by relationship managers. (https://cms.rbi.org.in/)
3. If the mis-sold product is an insurance policy, you can complain directly to the Insurance Regulatory and Development Authority of India (IRDAI) through their online grievance portal (Bima Bharosa system), toll-free helpline (155255 or 1800 4254 732), or emailing (complaints@irdai.gov.in) them.
4. You have the right to cancel (free-look period) within 15 days (30 days if bought online) and get your premium refunded after minor deductions.
5. You have the right to legal action If nothing else works. You can approach the Consumer Helpline under the Consumer Protection Act, 2019, to claim compensation for financial loss, mental harassment, or even legal costs.

Before you invest, connect with a Qualified Financial Advisor who can read documents with you and objectively assess whether the product fits your goals.

Conclusion

Unbiased financial advice, centered around the customer’s financial well-being, seems to be missing in this ecosystem. And unfortunately, that’s the harsh truth! The best shield is knowledge: stay alert, ask questions, and never hesitate to say “no” to a product that you don’t fully understand.