Insurance and mutual fund firms are set to feel the squeeze of a recent Reserve Bank of India (RBI) directive to banks.
Most insurance companies and mutual funds companies have distribution tie-ups with banks, whose branches play a crucial role in the sale of insurance and mutual fund products.
Now, RBI has directed that banks and their employees should not receive incentives directly from insurance and mutual fund companies.
"If the incentive given to employees at bank branches for selling insurance and mutual funds comes down, the sale of these products may see some moderation," said a distribution head of private insurance companies. "Insurance and mutual fund companies have leveraged the reach of bank branches to sell their products."
Both parties benefit. The insurers and funds save on costs, while the banks earn fees.
The central bank had in its monetary policy review on Friday stated: "It has been observed that in some cases, banks did not have clear segregation of duties of marketing personnel from other branch functions, and bank employees were directly receiving incentives from third parties such as insurance, mutual fund and other entities for selling their products. Such practices may lead to mis-selling and distortion of the staff incentive structure."
Experts feel that RBI's step may not have the desired effect.
"Mis-selling cannot be checked by reducing or regulating the incentives," said Yashish Dahiya, chief executive officer, Policybazaar.com.