Is your bank forcing you to take insurance through them?

We Indians traditionally trust our banks and bankers a lot when compared to other parts of the world. There is a good reason for it. As the saying goes a friend in need is friend indeed. Banks or bankers always stepped in whenever we were in financial stress in business or in our personal life; at least we felt so or the banker successfully created that obligation. We tend to forget like any other commercial establishment selling products we consume, banks too are in the business of giving out finance.

Lately, this trust has been taken for granted and we find that our friendly neighborhood banker pushing us to take products and services of bank which we never wanted or asked for; especially insurance. While taking a housing loan, the bank insist on insuring your property (damage) as well as you (death); before you know it, the banker would have deducted the premium from your account without discussing best options available to you or which product was best suited to your needs. All recommended products would be from the one insurance company with whom the bank is tied-up as a corporate agent. As there is no competition among the insurers for your risk/premium, chances are that you might end up paying more premiums through the bank than from a insurance broker.

This style of operation of the banks exists even with their business clients where the urgency of cash flow is immense in short notice. In the hour of need, the bank steps in but in the process they make sure that you would end up with a few unwanted insurance policies. In case you resist to taking these policies, they would inform you that it is the Bank’s policy. It may almost sound as if without taking the insurance, the bank won’t extend the much needed finance.

Now we know Govt. of India through RBI regulates banks in every aspect of their functioning. What is the RBI guideline to banks in this regard?

RBI in its circular (DBOD.No.FSD.BC.60/24.01.001/2009-10) prohibits banks from adopting any restrictive practice of forcing its customer to go in only for a particular insurance company in respect of assets financed by the bank. The customer of the bank should be allowed to exercise their own choice in insurance and the participation by the bank's customer in insurance product through the bank, is purely on a voluntary basis. There shouldn't be any linkage either direct or indirect between the provision of banking services offered by the bank to its customers and the insurance products offer by the bank.

This means that if the bank insists on insurance to cover their risk on the financed asset, you’re free to contact any insurance broker and discuss all options available to you at different costs and take a well informed decision. Legal implication of the above circular is that any service deficiency in insurance wouldn’t be considered as service deficiency in banking service hence no legal liability can be attached to the bank even though while taking the insurance, you dealt only with the bankers all along and met no one from the insurance company.

Even courts have upheld above view that taking and maintaining insurance on client’s life or his assets whether financed by the bank or not, is the responsibility of the client; and banks cannot be held liable for any deficiency in service with regard to insurance.