Nirmala Sitharaman Slams Banks for Mis-Selling Insurance, Urges Focus on Core Banking

Finance Minister Flags Regulatory Gaps and Customer Harm​

Finance Minister Nirmala Sitharaman on Monday sharply criticized banks for mis-selling financial products, particularly insurance, and urged them to concentrate on their core banking functions.

Nirmala Sitharaman said banks are devoting excessive time to selling insurance products that customers may not require, highlighting how such practices have fallen between regulatory jurisdictions.

“Banks should concentrate on their core business. My main concern has always been that you are spending more time on selling insurance when it is not required, and conveniently, it fell between the RBI and Irdai,” she told reporters after her customary post-Budget address to the Central Board of the Reserve Bank of India.

She pointed out that customers have often been compelled to purchase insurance products even when adequate coverage already exists, especially in cases where property is already pledged as collateral for home loans.

RBI Draft Guidelines Tighten Norms on Mis-Selling​

Earlier this month, the RBI issued draft guidelines aimed at curbing mis-selling. Under the proposed norms, banks will be required to refund the full amount paid by customers for mis-sold products and compensate them for any losses arising from such transactions, in accordance with an approved policy.

The draft guidelines were released on February 11, and public feedback has been invited until March 4. The stricter norms are scheduled to come into effect from July 1.

Sitharaman welcomed the move, stating that the message must go out clearly that mis-selling will not be tolerated.

She noted that regulatory ambiguity between the RBI and the Insurance Regulatory and Development Authority of India allowed such practices to continue, with customers ultimately bearing the burden.

Return to Core Banking: Deposits and Lending​

Reiterating her stance, the Finance Minister emphasized that banks must refocus on mobilizing deposits and extending loans responsibly rather than prioritizing the sale of non-bank products.

She said banks should concentrate on strengthening their low-cost deposit base, particularly Current Account Savings Account deposits, and invest time in understanding customer needs, strengths, and business cycles.

According to her, the shift toward cross-selling has led to an impersonal approach in banking, resulting in customer dissatisfaction. She called for renewed customer-centricity and tailored financial services.

RBI Governor on Growth, Rates and Liquidity​

Sanjay Malhotra, Governor of the Reserve Bank of India, said deposit growth in the banking system currently stands at around 12.5 percent, while advances are expanding at 14.5 percent.

He added that the Monetary Policy Committee will take decisions on any further policy rate cuts based on evolving growth and inflation dynamics.

Since February 2025, the RBI has reduced the benchmark repo rate by 125 basis points to 5.25 percent to support growth amid benign inflation. However, in the latest policy earlier this month, the MPC maintained status quo with a neutral stance due to global uncertainty.

The next bi-monthly policy announcement, which will be the first for the 2026 to 27 fiscal year, is scheduled for April 6.

Malhotra assured markets of comfortable liquidity conditions and said the central bank would take necessary measures to ensure durable liquidity across all segments.

Government Borrowing and Gilt Switch Operations​

Addressing reports about higher gross borrowing in 2026 to 27, Malhotra clarified that bilateral switches of government bonds between the RBI and the Centre are tools for debt management rather than liquidity management.

The Union Budget for FY27 has pegged the government’s gross borrowing at a record Rs 17.21 lakh crore, up from a revised Rs 14.61 lakh crore in the current financial year.

In FY26, the government conducted two tranches of bilateral gilt switches totaling Rs 1.13 lakh crore, including Rs 75,504 crore of four FY27 gilts switched on February 12.

A switch operation involves replacing near-term maturing securities with longer-maturity papers, effectively deferring repayment obligations.

Malhotra said these measures form part of the RBI’s operational toolkit and do not signal any change in its broader strategy.

RBI on Central Bank Digital Currency Rollout​

On the nationwide rollout of Central Bank Digital Currency, the RBI Governor clarified that the digital currency is not intended as a substitute for cash or fast payment systems.

He said the central bank would consider large-scale implementation only after evaluating the full range of features offered by the CBDC.

Launched in 2022, the retail CBDC has been positioned by the RBI as a digital version of currency notes, designed to augment existing payment systems rather than replace platforms such as the Unified Payment Interface.

As regulatory oversight tightens and the debate around customer-centric banking intensifies, both the Finance Ministry and the RBI have signaled a coordinated push to reinforce accountability, strengthen core banking operations, and protect depositors from unfair sales practices.