How long does it take for a regulator in India to respond to bad practices? The answer: A staggering two decades of responding to alarms with pointless tinkering and directions.
On 11 February 2026, the Reserve Bank of India (RBI), finally, released the Commercial Banks – Responsible Business Conduct) Amendment Directions, a comprehensive framework designed to dismantle the predatory ‘mis-selling machine’ that has dominated the banking and finance industry practices.
On the face of it, there is no connection between the long-ignored mis-selling by banks and digital arrest. But a series of blistering indictments by the Supreme Court over multiple hearings of the suo moto case on ‘digital arrest’ fraud certainly appears to have played a role.
On 9th February, an angry Supreme Court, led by chief justice of India (CJI) Surya Kant, had confronted the government and RBI over the ₹58,000 crore looted from hapless individuals through ‘digital arrests’. It noted that banks have become platforms for crime transmission and that bank officials are ‘hand in glove with the accused’. The Court directed the Union government to formally adopt and implement RBI’s standard operating procedures (SOPs), laying down a time-bound, inter-agency framework to prevent and respond to cyber-enabled financial crimes. It further emphasised that RBI must move beyond advisories to enforceable measures, with potential incentives/penalties for compliance.
This may have prompted RBI to finally consider binding regulations with punitive consequences on another vexed issue – the rampant mis-selling of financial products that goes back at least 20 years.
The Long War: Two Decades of Mis-selling
Banks have long earned fat fees and commissions from hard-selling toxic unit linked insurance products (ULIPs), encouraged leveraged speculation, pushed dodgy art, unnecessary credit cards and encouraged churning of mutual fund schemes to ‘wealth management’ customers. RBI invariably responded with warnings, advisories and fiery speeches by its top brass; but it did nothing to hold banks truly accountable for the damage inflicted.
In 2010, when we started Moneylife Foundation, an advocacy and financial literacy initiative, we warned members that their friendly ‘relationship manager’ would destroy their savings to meet perverse incentive targets. In 2013, we submitted a comprehensive memorandum to RBI detailing mis-selling with examples and asking it to issue binding regulations to protect investors. There was no significant action.
Rampant mis-selling continues today and the rare case that gets escalated to the governor or the finance ministry is quickly reversed. RBI’s top brass has been fully aware of the extent of the problem. Successive governors and deputy governors have issued empty threats and warnings against ‘aggressive target-driven mis-selling’ in their public speeches, but regulatory action did not go beyond tinkering with the banking ombudsman provisions to issuing small penalties or compensation.
In 2011, RBI constituted the Damodaran committee on customer services and, as I had pointed out then, it simply ignored mis-selling by banks. In 2023, the Kanungo committee did address many customer pain points, but many of its recommendation were either ignored, or diluted or are being implemented in dribs and drabs.
This reluctance of regulators to act emboldened banks to convert their employees into ‘banksters’. But, by 2017, bankers themselves had had enough. In August 2017, DT Franco, then-general secretary of All India Bank Officers Confederation (AIBOC), wrote a scathing letter to the chairman of insurance regulatory and development authority of India (IRDAI) warning of a ‘vicious cycle’ of foul practices. In 2018, AIBOC noted that bank staff was being ‘incentivised’ with everything—from cash rewards to foreign junkets—leading to ‘forced bundling’ (where loans are sanctioned only if a customer bought an expensive insurance policy). It noted with ‘utter dismay’ that regulators remained mute spectators to the cheating of customers. Even this elicited no response.
From Mis-selling to Digital Dacoity
Given the regulatory inertia, it was to be expected that banks would do nothing to protect customers from what the Court has called ‘digital dacoity’. RBI quickly prescribed SOPs, including the ability to place temporary debit holds on accounts when suspicious transactions are detected, particularly in cases linked to cyber-enabled fraud such as digital arrests. (‘Banks Are Becoming a Liability’: Supreme Court Orders Pan-India Rollout of RBI SOP on Digital Arrest Scams)
RBI claimed in Court that it has now begun to detect ‘mule’ accounts using artificial intelligence (AI); but we know that they were aware of the seriousness of such accounts a decade ago. In 2016, RBI deputy governor, SS Mundra, had warned that ‘primitive’ monitoring allowed criminals to recruit ‘money mules’ to launder the proceeds of phishing and identity theft—a warning that went largely unheeded, as banks remained focused on ‘fee-income’ growth.
The proliferation of mule accounts is a necessary ingredient for digital fraud, since money is rapidly moved through scores of accounts to hide its trail. This has also raised serious questions about the know-your-customer (KYC) processes which have been a tool to harass honest customers by freezing accounts without warning.
The Supreme Court has correctly asked, “If a pensioner who usually withdraws ₹10,000 or ₹20,000 suddenly transfers ₹50 lakh, ₹70 lakh or ₹1 crore, why did your artificial intelligence (AI)-operated tools not deem it fit to raise an alarm?” The Court has made it clear that banks are trustees of customer funds and the buck stops with them. The pressure appears to be working as is evident from the draft mandates on mis-selling in general.
A Game-changer or More of the Same?
RBI’s draft rules, for the first time, go beyond advisories and directions to ‘prohibitory’ mandates. However, they will work only if RBI is able to enforce its four key initiatives.
First, strict implementation of the absolute ban on incentives to bankers from third parties and sister entities, as mandated by the draft rules. This is supposed to end cash, gifts, or trips provided by insurers and mutual fund houses to bankers. It finally addresses AIBOC’s decade-old demand to stop ‘incentive mongering’ which is the primary motivation for mis-selling. The ban on individual incentives will work only if banks are also stopped from setting aggressive fee-income targets with promotions and bonuses linked to their fulfilment.
Second is the recognition that banks have used deceptive user interfaces to trick customers through ‘dark patterns’, ‘basket sneaking’ (which pre-select or bundle specific insurance policies with home and auto loans, based on commissions earned by the bank). RBI’s draft specifically identifies and bans these, in line with global consumer protection standards.
The third key reform is to move to a 100% refund and compensation model, if a customer establishes mis-selling through forced bundling or misleading information. This shifts the financial risk of a bad sale from the victim to the institution.
Fourth, a 30-day cooling-off period where the bank is required to reach out to the customer, via an independent channel, to verify if she has understood the risks and the nature of a product sold. If the customer is confused or dissatisfied, the sale must be reversed immediately without penalty.
RBI’s draft rules, if converted into binding mandates, are, indeed, a huge move forward. Banks, mutual funds and insurers are sure to lobby hard against their implementation because it will have a direct impact on their business. It must be noted that banks have ensured that their relationship managers, who hard-sell financial products without any accountability, have remained outside the purview of the Securities and Exchange Board of India’s (SEBI) onerous rules for investment advisers.
Another issue is: Who will enforce the new rules? RBI’s ombudsman system, even after the 2017 amendment, has a pecuniary jurisdiction of ₹20 lakh and compensation of only ₹1 lakh. This too has a poor record with complaints being arbitrarily closed without listening to consumers. RBI’s own reports show that even this meagre compensation is awarded in less than 1% of hundreds of thousand complaints.
RBI’s 2026 draft guidelines are more like an admission of a decade-plus of regulatory lapses. The difference now is the unmistakable impatience of the Supreme Court with regard to at least one aspect of their functioning. If courts are clear that banks must be held accountable for failure to prevent digital fraud, why should they not be held equally liable for losses caused by deliberate mis-selling of financial products?
Countless individuals have seen their hard-earned savings eroded by mis-selling—if not with the sudden brutality of so-called ‘digital arrest’ frauds, then through a slower, but equally damaging, process. In both instances, banks cannot evade responsibility; they are trustees of their customers’ money and must be held to that standard.
If the shocking nature of digital arrest scams has stirred the Supreme Court into demanding stricter action, one hopes it will yield broader reform: a clear articulation of the duties and accountability of banks and regulators alike, culminating at last in enforceable mandates for mis-selling, rather than pious directives that do not work.
Same wine, different bottle. Tomorrow, it'll be something else. It's always problematic when new rules or "frameworks" (sic) are introduced because loopholes and workarounds will always be there. Just put everything under BNS and be done with it. Make it stringent like Singapore.
Just as banks, we need similar regulation to monitor and control mis- selling by Wealth management cos.
While, it is good to have many distributors to grow the market, there is no way to capture mis- selling.
There appears to be a kind of conflict of interest with the Regulator whose wards are by and large, employed in these Blade Private Sector Banks. We need to probe and expose these Rascals who are hoodwinking us.
At the risk of inviting opprobrium I would stick my neck out and say that the entire Financial Services Induastry has gone rogue and the metastasis is most evident in banking industry, specially the private sector banks. It leads to the next logical conclusion which is that the regulators have been asleep at the wheels. One wonders if there was a tacit understanding that nothing shoudl derail the "growth" story of the Financial Sector. The primary beneficiaries of this dereliction of duty, despite regular alerts and complaints from consumers and public spirited journalists like your goodselves, have been banks and insurance companies. As always, customers have paid the price and continue to do so. The sole beneficiaries of this chicanery have been the principal sharholders and senior execs with stock options.
ttfYou have raised it a number of times since 2010 and yet no responsefrom the regulator till now. Hope they will implement the four essentials you pointed out.
I have worked for almost three decades in Regional rural bank and every point raised is true and there are almost in all cases the insurance is sold to hapless rural & urban customers in lieu of giving loans. First of all the incentives including cocktail parties at Five Star Hotels should be stopped at all levels from branches /Regional offices and that 90% of problem will be solved.
The banks both private and government have lost all sense of shame and guilt. Inspite of several cases pending in the Consumer Forums and various Civil Courts, nobody in the Government nor in the Offices of the Regulator are bothered about the hapless citizens, especially the Seniors. The crux of the issue is in the Courts which give judgements wherein the compensation payable is hardly 10% of the claims made. The compensation should be so heavy (like in the US) that these Rascals do not even think of mis-selling their decadent Products even in their dreams. But the million dollar question is whether the Government, the Courts or the Regulators have balls made of steel to give such judgements.
Those born after the turn of the millennium are largely unaware that India once possessed a vibrant, fierce consumer movement. In the 1960s and 1970s, a time that was defined by scarcity, black-marketing and a dysfunctional public...
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
While, it is good to have many distributors to grow the market, there is no way to capture mis- selling.