When the Reserve Bank of India, RBI, unveiled its draft Responsible Business Conduct Amendment Directions, 2026, much of the attention centred on its explicit ban on harassment in loan recovery. But the document goes far deeper. Embedded within it is a structural recalibration of how banks sell insurance, mutual funds and pension products – effectively reshaping India’s cross-selling architecture.

If implemented in its current form from July 1, 2026, the draft will not merely tweak compliance checklists. It could alter revenue models, redefine customer consent, and force banks, insurers and asset managers to rethink how financial products are distributed in India.

Beyond Recovery: A Broader Regulatory Tightening

At one level, the draft addresses long-standing concerns around aggressive loan recovery practices. At another, it challenges the revenue engine that has quietly powered bank profitability for years: bundled distribution of third-party financial products.

According to Dinesh Khara, former Chairman of State Bank of India, cross-selling income from insurance alone typically accounts for 20–30 percent of a bank’s income. The RBI’s intervention, he clarified, is not designed to prohibit distribution. It is designed to clean it up.

The message being: banks can sell third-party products but they must demonstrate suitability, transparency and explicit consent.

The Cross-Selling Reset

The draft introduces several structural obligations that move beyond cosmetic compliance.

Banks can no longer force customers to purchase insurance while taking a loan or opening an account. Consent must be product-specific. One click cannot authorise multiple add-ons. Suitability assessment becomes mandatory – meaning a conservative saver cannot be casually steered into a high-risk product.

If mis-selling is established, the consequences go beyond reputational damage. Premiums may need to be refunded, compensation could be required, and regulatory action may follow.

The draft also explicitly targets deceptive digital design practices, commonly referred to as dark patterns. Banks must conduct user testing, audit digital journeys, and eliminate interface tactics that nudge customers into unintended purchases. Accountability now extends to technology design, not just frontline sales teams.

Further, banks must define and publish lists of Direct Selling Agents and Direct Marketing Agents, increasing traceability in third-party distribution.

Taken together, these provisions represent a shift from reactive grievance handling to proactive prevention.

Impact on Insurers and Mutual Funds

For insurance companies, particularly those heavily dependent on bancassurance partnerships, the short-term impact could be visible.

Former Insurance Regulatory and Development Authority of India member Nilesh Sathe acknowledged that insurers with a high share of bank-driven business may experience an initial dip in sales.

India’s insurance penetration remains relatively low, and banks have served as a crucial distribution channel. Reduced bundling and stricter consent requirements could slow premium growth in the near term. Refund obligations in cases of mis-selling also increase operational risk.

However, Sathe described the move as a welcome step, arguing that cleaner practices will ultimately strengthen customer trust and support sustainable growth. The emphasis, he suggested, is not on restricting distribution but on ensuring that products are suitable and transparently sold.

RBI’s Alignment with Global Regulatory Trends

The RBI’s approach aligns India with tightening global norms on financial product suitability and disclosure.

The European Union’s Markets in Financial Instruments Directive II enforces strict investor protection and suitability standards. In the United States, the Financial Industry Regulatory Authority imposes transparency and conduct rules on brokers.

By incorporating digital accountability and mandating explicit product-wise consent, the RBI signals that Indian retail finance must meet similar benchmarks. The regulatory philosophy is shifting from caveat emptor to institutional accountability.

The Operational and Revenue Risks

While the draft is positioned as consumer protection reform, it carries operational consequences.

Banks will need to redesign digital interfaces, implement user testing frameworks, strengthen internal audits, train sales staff, and formalise product suitability protocols. Compliance costs will rise. Product launches could slow.

Explicit consent requirements reduce frictionless cross-selling. Banks that rely heavily on bundled distribution may see lower attachment rates and slower third-party product growth.

There are also unresolved grey areas. If a customer cancels within 30 days, who bears medical examination costs or stamp duty? In mutual funds, if markets fall post-investment and mis-selling is established, how are losses treated? These ambiguities may require regulatory clarification before full implementation.

A Parallel Overhaul in Loan Recovery

Alongside the cross-selling reset, the draft also introduces strict norms governing loan recovery conduct.

The RBI has proposed an explicit ban on harassment and abusive behaviour by recovery agents. Borrowers cannot be shamed, threatened, or contacted through anonymous or intimidating messages. Calls and visits are restricted to between 8 am and 7 pm. Sensitive occasions such as bereavements or weddings must be respected.

Banks must inform borrowers in writing when a recovery agent is assigned or changed. Empanelled agents must be publicly listed. Calls must be recorded with prior intimation. If a grievance is unresolved, recovery action cannot proceed.

To professionalise the ecosystem, recovery agents must undergo certification – including training through institutions such as the Indian Institute of Banking and Finance – and banks must conduct background checks and define clear penalties for misconduct.

This component of the draft places borrower dignity and privacy at the centre of enforcement practices, marking a cultural shift in how defaults are handled.

A Cultural Shift in Banking Conduct

Taken together, the draft directions redefine how banks interact with customers across marketing, sales, consent, compensation and recovery.

Mis-selling is no longer loosely interpreted. It now explicitly includes unsuitable product recommendations, misleading disclosures, and sales executed without informed consent. The accountability framework shifts decisively. The burden moves from the customer – “you signed the form” – to the institution – “you must prove suitability and consent.”

For a financial system expanding rapidly into rural and semi-urban India, where trust gaps remain, this recalibration is significant.

The Last Bit, Short-Term Pressure, Long-Term Trust?

Both Khara and Sathe acknowledge that some revenue pressure may emerge in the short term. But the underlying regulatory thesis is clear: sustainable financial deepening cannot rest on bundling or opaque sales tactics.

India’s banking and insurance sectors have grown rapidly over the past decade. The RBI’s draft signals that the next phase of growth must be anchored in transparency, accountability and customer protection.

Public feedback on the draft remains open until early March, with implementation scheduled for July 1, 2026. Between now and then, banks will recalibrate sales strategies, insurers may diversify distribution channels, and digital systems will undergo compliance redesign.

Cross-selling will likely survive. Loan recovery will continue. But the manner in which both are conducted could change fundamentally.

If executed effectively, the Responsible Business Conduct Amendment Directions may mark one of the most consequential shifts in Indian retail finance in over a decade – not by restricting growth, but by redefining what responsible banking truly means.