Misconduct in Bancassurance Also in Indian Market, But Regulator Did Not Impose Ban Like Nepal

Kathmandu. After banks and financial institutions in India were found forcing loan customers to buy life insurance policies under the guise of loan protection due to commission greed, the insurance regulator is preparing to impose policy restrictions.

Indian banks had been imposing business targets on employees, promising higher commissions and incentives for selling more insurance policies. Due to such targets, bank employees were forcing any customer—new or old—coming for a loan to purchase large life insurance policies.

To stop such misconduct by bank employees, the Insurance Regulatory and Development Authority of India (IRDAI) did not choose the path of banning insurance policy sales through banks. Instead, it has proposed continuing bancassurance by cutting the commission rates banks receive from life insurers or other types of insurers and banning the distribution of incentives to bank employees.

In the consultation paper published by the regulator, it has been proposed to completely ban foreign trips, expensive gifts, and gift-based incentives given to bank employees or institutions for increasing insurance sales. All payments made by insurers to banks will be counted as commission. Any direct or indirect amount given by an insurance company to a bank must be kept within the commission's scope and limited to the prescribed limit. Previously, besides commission, insurers had been providing facilities such as luxury gifts and foreign trips separately to bank employees.

A rule is also being introduced to prevent banks from forcing customers to buy insurance policies by threatening not to approve loans for home, vehicle, or other personal loans unless insurance is purchased. Now, after the proposed provisions come into effect, loan customers will have the freedom to purchase insurance policies from any insurance company or channel and submit them to the bank.

This proposal has reduced the high and opaque commissions banks have been receiving to a range of 15 to 25 percent. It is expected to significantly curb the tendency of bank employees to sell unnecessary or inappropriate insurance policies to loan customers lured by high commissions.

The regulator's objective is to control the practice of selling insurance policies only according to the customer's needs and capacity, and to prevent banks or financial institutions from forcing insurance or selling policies through undue pressure or confusion when providing loans linked to insurance. There is also an objective to bring more transparency for the protection of policyholders' interests.

The regulator has issued a consultation paper aimed at bringing widespread changes in India's insurance sector, proposing new provisions regarding commission limits and management expenses. This draft proposal has invited suggestions and feedback from stakeholders until October 25, 2026.

It is expected that by reducing operational expenses and commission costs, insurance companies can increase their operational efficiency, and the direct benefit will be received by policyholders in the form of cheaper premiums and higher returns. For Nepal's insurance market as well, this policyholder-friendly policy reform and transparency-related step proposed by the Indian regulator can be worth studying and emulating.

The Government of India had already announced two years ago the ambitious goal of insurance for all by 2045. For this, it has been utilizing every possible means of insurance policy distribution. Since bancassurance—the channel of distributing insurance schemes through banks—is also an important means for expanding insurance access, despite extreme misconduct, the regulatory body has attempted to strike at the root of the misconduct instead of banning it. In contrast, in Nepal, Nepal Rastra Bank banned bancassurance services altogether instead of controlling the misconduct, which has prevented adequate expansion of life insurance in Nepal's insurance market.