MUMBAI: The Reserve Bank, worried over the rising incidents of mis-selling of financial products by banks and non-banks, is looking at bringing in more stringent norms to curb the practice wherein gullible customers get fleeced by greedy agents.
“We are examining whether it necessitates framing of new guidelines to address mis-selling of financial products and services by banks and non-banks,” M Rajeshwar Rao, the senior most deputy governor of the central bank, said, while observing that pushing financial products, such as insurance and mutual funds, indiscriminately to unaware consumers may be detrimental to their well-being.
"There are reports of mis-selling of financial services, such as insurance products. The concern is that such mis-selling without regard to suitability and appropriateness would beget distrust in schemes aimed at providing a safety net to low-income households by creating artificial boundaries,” Rao said in a speech on financial inclusion at an event organised by HSBC last week. The speech was uploaded on the RBI website late Monday.
The deputy governor also raised concerns over the exorbitant interest rates charged by microfinance players and said these lenders should look beyond the “high-yielding business” tag, which is attached to the sector, and approach it with an empathic and developmental perspective, recognising the socioeconomic role that microfinance plays in empowering the vulnerable.
“The microfinance sector continues to suffer from the vicious cycle of over-indebtedness, high interest rates, and harsh recovery practices,” Rao said, adding some of these players, despite having access to low-cost funds, have been found to be charging significantly higher margins than the rest of the industry, which, in several instances, appear to be “excessive”.
“While some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist,” Rao said emphasising that lenders must enhance their credit appraisal frameworks to prevent overleveraging of borrowers.
“Additionally, they must also eschew any coercive or unethical recovery practices, ensuring that financial services are delivered in a manner that is both responsible and sustainable,” he said.
Calling for introspection of the business models of microfinance players, Rao said, “while the business model may be sound, the organisational structure, and the incentive schemes framed to deliver services may be flawed, resulting in perverse outcomes for customers. This calls for an introspection around the models.”
He also expressed concern over grievance redressal mechanism for MFI borrowers saying effective redressal is non-negotiable for financial sector enterprises because non-resolution of consumer complaints not only leads to erosion of customer base but also results in loss of trust in the broader financial system, and deters new consumers from entering the system.
In this context, he said complaints received at the offices of the RBI ombudsmen as well as at centralised receipt and processing centres saw a sharp 33% increase in FY24 over the previous fiscal.
“This raises questions on the products, practices, and handling of grievances at the level of these lenders who therefore, need to analyse the gaps and strengthen their processes to reverse the trend of increasing grievances,” Rao said.
On the current scenario of financial inclusion, he said the launch of Jan Dhan Yojana was a watershed moment in the journey. “As of May 21, 2025, 55.44 crore Jan Dhan accounts, 56% of which belong to women, have over Rs 2.5 trillion in deposits, which speaks volumes about the impact of the scheme,” he said.
Rao said the plan is to make all the districts 100% digitally enabled. “All state-level bankers committees have been advised to identify districts and assign them to designated banks, with an endeavour to make these districts fully digitally enabled. The objective is to provide every eligible individual in the identified district at least one mode of digital payments.”
As on March 31, 2025, 514 districts spanning 15 states and six Union territories are 100% digitally enabled. “This marks a significant milestone in our journey towards a digitally inclusive economy,” Rao added.