In FY23–24, India’s top 15 banks earned a staggering ₹21,773 crore in commissions from selling life insurance, mutual funds, and other third-party financial products, with much of the revenue flowing from group-owned insurers and asset management companies (AMCs). These revelations, highlighted in a recent report, shed light on the systemic nature of mis-selling and conflict of interest in the Indian financial sector.
The report raises serious red flags about how life insurance policies, often unsuitable for the consumer, are aggressively sold to bank customers to maximize commissions—raising questions about fiduciary responsibility and regulatory oversight.
Commissions Over Customers: How Sales Targets Are Fueling Mis-selling
The most alarming takeaway from the report is the degree of vertical integration and lack of consumer-first practices within the banking sector. For instance, 100% of Kotak Mahindra Bank’s life insurance commissions came from Kotak Life Insurance, and 99.1% of Canara Bank’s mutual fund commissions originated from selling schemes of Canara Robeco AMC. This trend was echoed across major players, with 7 out of the top 10 banks earning over half their insurance commissions from related-party insurers, and 6 doing the same for mutual funds.
This cross-selling model allows banks to earn up to 25.4% of their total income from commission, exchange, and broking fees, incentivizing aggressive product promotion. The report cites instances where bank staff sold traditional insurance policies as fixed deposits, ULIPs as tax-saving instruments, and long-term plans to senior citizens with limited investment horizons.
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Relationship managers (RMs), who are often the first point of contact for customers, reported significant pressure to meet sales targets. Alarmingly, 57% of RMs surveyed admitted they were instructed by supervisors to prioritize product sales over suitability or consumer needs.
Policy Lapses and Consumer Losses: Signs of a Broken System
A crucial metric highlighting the impact of this aggressive sales culture is the persistency ratio, which measures how many policies remain active over time. The report notes that only 51% of life insurance policies survive beyond 61 months, suggesting that a majority of buyers either stop paying premiums or surrender their policies—leading to a loss in value for the consumer, while banks and insurers retain the hefty commissions earned upfront.
This trend is mirrored in the 43.3% of benefit payouts from top insurers that are linked to surrendered, lapsed, or withdrawn (SWDL) policies, highlighting consumer regret and misalignment with financial needs.
The report strongly argues that this isn’t simply the result of poor financial literacy but is instead a systemic issue embedded within the financial distribution ecosystem. Insurance products are regularly bundled with bank services such as loan disbursals, locker facilities, or senior citizen savings accounts, exploiting the customer’s trust in institutional credibility.
Regulatory Imbalance: SEBI’s Success vs IRDAI’s Struggles
A comparison of regulatory regimes reveals stark contrasts. The mutual fund industry, regulated by SEBI, implemented reforms in 2018 that banned upfront commissions and introduced direct plans with transparent pricing. This has helped reduce mis-selling and align distributor incentives with investor interests.
By contrast, life insurance continues to operate under a high-commission model, where distributors can earn up to 65% of the first-year premium, especially on traditional plans. While IRDAI has rolled out initiatives like Bima Bharosa portal, Pre-Issuance Verification Calls (PIVC), and expense caps, enforcement remains weak, and grievance redressal mechanisms are fragmented.
The report argues for a re-evaluation of corporate structures, questioning whether banks should be allowed to act as both product creators and distributors—a model that fosters deep conflicts of interest and erodes consumer trust.
