RBI Tightens Grip on Banks’ Non-Core Sales Practices

The Reserve Bank of India issued two transformative sets of directions on February 11, 2026: the Responsible Business Conduct Amendment Directions, 2026, and the Advertising, Marketing and Sales of Financial Products and Services by Regulated Entities. 

These measures, which take effect on July 1, aim to curb the widespread mis-selling of third-party financial products by banks and other regulated entities. Non-core businesses, comprising third-party products distributed under fee-based arrangements, have steadily expanded in scope and complexity.

The regulatory reset focuses on the management of non-core or third-party products, including insurance (life and general), mutual funds, portfolio management services, wealth management offerings and bundled financial products.

The objective is to restore trust in the bank-customer relationship while recalibrating long-term incentive structures.

Structural Shift
Banks were permitted to sell insurance products from August 2000, following a notification under Section 6(1)(o) of the Banking Regulation Act, 1949, formally recognising insurance as a permissible business activity. Bancassurance emerged as a significant distribution channel and later expanded to encompass other third-party wealth management products.

These developments coincided with intensified competition for fee income, particularly as net interest margins narrowed under differentiated pricing regimes.

Non-core distribution thus became an important contributor to profitability.

However, greater emphasis on non-core activities risked diluting focus on core banking services. The inherent tension between “pull” core products and “push” non-core products created operational and ethical challenges, especially where incentives were attached.

Banks increasingly assigned individual cross-selling targets linked to performance metrics. Companies distributing financial products through banks also introduced threshold-based incentives. This altered behavioural incentives at the frontline, occasionally leading to pressure-selling and the erosion of suitability standards.

Customer complaints began reflecting these distortions.

A significant share of grievances lodged with the RBI related to coercive bundling of third-party products with loans. The IRDAI annual report for 2024-25 indicated that 22.14% of complaints pertained to unfair business practices, including mis-selling. The accumulation of such instances necessitated regulatory intervention.

Regulatory Reset
The RBI’s new framework introduces stringent safeguards. Banks can no longer bundle core products, such as loans, with non-core products, such as insurance policies, as inseparable offerings.

The regulations explicitly prohibit “dark patterns” in customer communication, including misinformation, exaggeration of benefits, implied consent mechanisms, artificial deadlines or manipulative closures of offers.

In cases of proven mis-selling, banks must refund the full value of the non-core product and pay compensation, even where ostensible consent had been obtained. This marks a material shift towards outcome-based accountability.

Banks are barred from assigning individual sales targets or incentives for non-core products. Similarly, product manufacturers cannot incentivise banks or their employees.

Within 30 days of a sale, during the look-out period, an independent team not involved in the transaction must contact the customer to confirm the customer's understanding of the product, its risks, and its suitability.

Further reinforcing the framework, the Finance Ministry clarified that mis-selling may attract liability under the Bharatiya Nyaya Sanhita, introducing potential criminal consequences.

The new regime offers banks an opportunity to formalise board-approved policies governing non-core activities and associated risks. Training, oversight and grievance redress mechanisms will require recalibration to align conduct with regulatory expectations.

A structured review of complaint trends can provide insights into frontline practices and control gaps. Monitoring frameworks must be strengthened to ensure behavioural alignment.

Ultimately, the regulatory tightening seeks to rebalance banks’ business models towards sustainable growth anchored in trust, transparency and appropriate risk distribution. Once incentive structures, product architecture and compliance systems are realigned, stakeholders across the value chain stand to benefit over the long term.