Government in discussion with RBI over banks selling insurance policies

The government is in discussions with the Reserve Bank of India (RBI) on scrutinising the practice of banks selling insurance products, commonly called bancassurance.

The move follows fresh complaints of customers being forced to buy insurance policies when they apply for loans or seek other banking services.

"The issue was flagged by the central vigilance commission," said a government official with knowledge of the matter. "This review cannot be limited to state-run banks, and needs to be done for the entire sector, including private banks." The government also wants a review of existing incentive structures at banks for selling insurance products, because of concerns that giving over-importance to bancassurance could affect core banking functions.

As per industry estimates, insurance business through bancassurance accounts for just about 7.5% of total insurance premiums. About 15,000 of India's 100,000 bank branches are engaged in selling insurance policies.

The vigilance authority, in its communication to the government, had pointed out that sale of insurance products usually form a part of the bank's appraisal system. "This impacts the core function of the banks, which is not conducive for the system," the official cited earlier said.

The RBI had previously highlighted the need to revisit the marketing and sales strategies used by banks in pushing insurance products, especially since insurance is considered as a more complex financial product.

Several issues have risen in the bancassurance structure, such as misselling and also using unfair practices such as linking purchase of insurance products to provide locker facilities, the central bank had said in its financial stability report.

Under the previous Congress-led government, the finance ministry was pushing for banks to be permitted to act as insurance brokers and use their entire network, as part of its efforts to bring more people under insurance cover. The Insurance Regulatory and Development Authority has already allowed banks to act as brokers and sell products of more than one insurer.

As per latest data, just 3.96% of the population had insurance in 2012-13, a drop from 5.2% in 2009-10. General insurance penetration in the country stands at just 0.78%. Both bank officials and insurers say questioning the basic premise of the bancassurance model will be a retrograde step.