A structural look at how commission-driven incentives inside bank branches are reshaping consumer outcomes and what a measured, reform-oriented framework could do to restore balance without disrupting the institutions that underpin India’s financial system.
India’s banking sector has, by most measures, matured remarkably over the last two decades. Capital adequacy is healthier, digital infrastructure is world-class, and financial inclusion has reached geographies that seemed unreachable a generation ago. Yet underneath these headline achievements, a quieter and less flattering story has been developing, one that touches not the bank’s balance sheet, but its relationship with the ordinary depositor who walks through its branch door.
The issue of mis-selling which is a practice of recommending financial products, most commonly insurance policies, credit cards, and investment instruments to the customers for whom they are either unsuitable, unnecessary, or actively harmful to their financial goals. It is a problem that cuts across institutions and geographies, and its root causes lie not in individual dishonesty but in a structural incentive architecture that has quietly grown alongside India’s banking sector itself.
Why Non- Core Income Has Become So Important?
To appreciate the incentive, one must first understand the economics at play. A bank’s core income is Net Interest Margin, or NIM that is the spread between what it earns on loans and what it pays on deposits. In a stable rate environment, this spread is largely constrained. For large private-sector banks, NIM typically ranges between 3.5% and 4.2%, and meaningful movement requires either significant expansion of the loan book or a favourable shift in the interest-rate cycle. Neither is always within a bank’s control.
| 3.5–4.2%
Typical NIM range Large private banks |
18–25%
Fee & commission share of net revenue (industry avg.) |
↑ YoY
Bancassurance commission growth — 3-year trend |
Non-interest income which includes processing fees, credit-card charges, and most significantly, commissions from distributing insurance and investment products has therefore become a strategically important lever for profitability. Several large private banks have seen their fee and commission income grow at rates that noticeably outpace their interest income growth. This is not inherently problematic. Banks as distribution channels for financial products can serve genuine customer needs. The problem arises when the imperative to grow this income line begins to shape how front-line staff interact with customers, specifically, when product sales become a primary performance metric rather than a secondary outcome of good financial advice.
| “The moment a branch manager’s quarterly appraisal weights insurance policies sold above deposit volumes retained, the incentive to serve the customer quietly loses to the incentive to sell to the customer.” |
The Mechanics of Mis-selling
The manner in which unsuitable products find their way to consumers is rarely dramatic. It typically begins with a routine interaction like a fixed deposit maturing, a loan being processed, or a savings account review and it involves language carefully calibrated to blur meaningful distinctions. A ULIP or endowment plan may be presented with vocabulary borrowed from fixed-income products: phrases like “assured returns,” “better than FD rates,” or “capital-protected” are deployed in verbal conversations, even when the written documents contain no such guarantee.
The customer most frequently targeted is one who brings three things to the interaction: a sizeable lump sum, a low appetite for complexity, and a high degree of institutional trust. Retirees, defence personnel, government employees, and first-generation investors fall disproportionately into this category. They rarely read the fine print not because they are careless, but because they have been conditioned, quite reasonably, to trust the institution that has held their savings for decades.
| Consumer courts and the Banking Ombudsman have seen a consistent pattern: the complaint is almost never about a product that performed poorly in hindsight. It is about a product that was never suitable in the first place — whose lock-in period, surrender charges, or risk profile were never disclosed to a customer who believed they were placing money in something equivalent to a fixed deposit. |
The credit card parallel is equally instructive. The pressure on branch staff to acquire new credit card accounts which is a metric that feeds directly into interchange income and revolving credit revenue has led to practices that range from the merely aggressive to the genuinely coercive: unsolicited dispatches, persistent telemarketing, and the bundling of card activations with loan disbursals in ways that leave the customer uncertain whether refusal will affect their application.
The Mutual Fund Parallel: A Template That Already Exists
What makes this situation particularly striking is that India’s financial regulatory ecosystem has already navigated and largely solved an almost identical problem in the mutual fund space. Prior to 2013, mutual fund distributors operated on upfront commission structures that incentivised churn and the sale of high-commission products irrespective of investor suitability. The regulator stepped in with a suite of measures that were structural, not merely advisory.
| Before Reform · Mutual Funds
Large upfront commissions paid to distributors. Investors unaware of cost structures. Churn incentivised. No standardised suitability check. Complaints common, redressal slow. |
After Reform · Mutual Funds
Direct Plans introduced (2013) — zero commission, lower TER. Upfront commissions banned (2018), trail-only model adopted. Assets in Direct Plans crossed ₹30 lakh crore by 2024. Investor outcomes measurably improved. |
The lesson is clear: when incentive structures are reformed at the systemic level and not merely addressed through consumer awareness campaigns, the outcomes improve durably. The mutual fund industry did not collapse under the weight of these reforms. It grew, gained trust, and deepened retail participation. There is no structural reason why analogous reform in bancassurance distribution would produce a different outcome.
A Suggestive Way Forward
The path to correction does not require adversarial regulation or institutional disruption. It requires a thoughtful, graduated framework that aligns the bank’s commercial interests with the customer’s financial well-being. The following steps represent a practical architecture for reform:
| 01 | Mandate Point-of-Sale Commission Disclosure
At the time of recommending any third-party product, branch staff should be required to inform the customer either verbally or in a standardised written format of the commission the bank earns from the sale. This single measure, analogous to the cost disclosure requirements in mutual funds, fundamentally shifts the nature of the conversation from a sales pitch to an advisory interaction. |
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| 02 | Introduce a Structured Suitability Framework
Before any insurance or investment product is sold through a bank branch, a brief documented suitability assessment which covers the customer’s liquidity needs, risk tolerance, investment horizon, and financial goals should be completed and retained. If a customer presents for FD renewal, the burden of demonstrating why an insurance product is suitable should rest with the bank, not the customer. |
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| 03 | Decouple Branch-Staff Incentives from Third-Party Product Sales
RBI should require banks to file summary structures of their front-line staff incentive frameworks annually. No appraisal metric for a relationship manager or branch manager should weight third-party product sales more heavily than core banking performance indicators such as deposit retention, customer satisfaction scores, or NPA management. This does not prohibit commission income but it simply prevents it from being the dominant driver of consumer-facing behaviour. |
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| 04 | Establish a Meaningful Cooling-Off and Cancellation Right
Insurance products sold through bank branches should carry a minimum 14-day free-look period and must be clearly explained at the time of sale, not buried in the policy document, during which the customer may cancel with a full or near-full premium refund. The current free-look provisions exist on paper; their practical exercise is made difficult by institutional friction. A standardised, branch-executed cancellation process would address this. |
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| 05 | Fast-Track the Mis-Selling Redressal Mechanism
The Banking Ombudsman process, while valuable, is too slow and opaque to serve as an effective deterrent. A dedicated mis-selling window with mandated resolution timelines of 30 days and a clear presumption in favour of refund where documented mis-representation is established would both compensate affected customers and create a credible deterrent for institutional actors. |
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| 06 | Invest in Consumer Financial Literacy at the Branch Level
Regulatory reform and consumer education are complements, not substitutes. Banks should be encouraged and if necessary, required to maintain simple, readable product comparison materials at branches: materials that explain the difference between a fixed deposit, a ULIP, an endowment policy, and a term plan in plain language, without sales framing. An informed customer is the most durable form of protection. |
A note on balance
It bears stating clearly: the issue examined here is structural, not moral. Branch managers operating under intense quarterly targets are responding rationally to the incentives placed before them by institutional design. The insurance companies whose products are sold through bank networks are operating within the bounds of their regulatory licences. The banks themselves are pursuing a legitimate commercial strategy of diversifying revenue. The problem is not that any individual actor is behaving illegally it is that the system, as currently constructed, routinely produces outcomes that are harmful to the very customers it is meant to serve.
Reform framed in that spirit as a structural correction rather than a punitive exercise is far more likely to find regulatory adoption and institutional cooperation. India’s financial sector has demonstrated, through the mutual fund transformation of the last decade, that it is capable of absorbing such reforms without disruption to its growth trajectory. The banking sector deserves the same opportunity to course-correct.
Author’s View
There is something worth preserving about the Indian bank branch its role as a site of financial inclusion, of first-contact with formal finance for millions of families across the country. That role is not well served by a commercial architecture that turns the branch manager into a commissioned salesperson operating behind the facade of institutional trust. The reforms suggested here are not punitive. They are, in the long run, in the interest of the banks themselves: trust, once eroded at scale, is far more expensive to rebuild than any quarterly commission target is worth.
India’s regulators have shown be it with the mutual funds, be it with the UPI, be it with the Insolvency Code that they are capable of bold, well-designed systemic intervention. Consumer protection in bank-based product distribution is the next frontier. The framework already exists. What remains is the will to apply it.
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Disclaimer: This article is for educational and informational purposes only and does not constitute legal, financial, or regulatory advice. It is not intended to defame or harm the reputation of any individual or entity.All references to industry practices and data are illustrative, based on publicly available sources, and do not allege wrongdoing. Figures mentioned are approximate and should not be relied upon for investment or legal decisions. Views expressed are personal to the author and do not represent any institution or authority. Readers should seek independent advice from qualified professionals (e.g., SEBI-registered or IRDAI-licensed advisors) before making decisions. Published in good faith for public awareness, the author and publisher accept no liability for actions taken based on this content.
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