Loan Insurance Forced Selling Banned: The game of forcibly selling insurance along with loan is over! IRDAI issues strict draft rules, mis-selling will stop

The biggest problem faced by customers while taking home loan, car loan or personal loan from banks or non-banking financial companies (NBFCs) is ‘Forced Bundling of Insurance’. Often, bank officials force the customer to take an expensive single-premium term life or credit shield insurance policy as a pre-condition for sanctioning the loan, the premium of which runs into lakhs of rupees is added to the loan amount itself.

Insurance Regulatory and Development Authority of India (IRDAI) has issued a new and stringent draft regulation (IRDAI Draft Norms on Bancassurance & Loan-Linked Insurance) to put a complete stop to this decades-old unethical practice and mis-selling. The insurance regulator has given clear instructions that now no lending institution or insurance intermediary (Bancassurance Partner) will be able to pressure any customer to buy insurance in exchange for issuing a loan.

The draft made public by the regulator contains the following stringent provisions to provide financial relief and complete freedom of choice to customers:

1. Insurance is not mandatory for loan (Not Mandatory for Loan Sanction): Banks or housing finance companies will not be able to link loan approval or disbursement with the purchase of an insurance policy. Even if the customer refuses to take insurance, the bank cannot reject his loan application on this basis.

2. Freedom of Choice for the customer to choose the insurance company of his choice: Even if a customer voluntarily wants to take life insurance or property insurance to safeguard his loan, the bank cannot force him to take the policy of only its tie-up insurance partner. The customer can get a cheaper and better policy from any insurance company from the open market and assign it to the bank.

3. Burden of single premium is over, option of regular premium: Banks often charge a lump sum single premium of Rs 1.5 lakh to Rs 3 lakh for a home loan of 15-20 years, on which the customer also has to pay the loan interest for years. Under the new rules, insurance companies and banks Annual/Regular Premium Option will have to be given compulsorily.

4. Explicit Written Consent: Hiding the insurance clause in small print among the numerous pages of the loan agreement has been banned. A separate clear and written/digital consent form will have to be filled by the customer for insurance.

5. Easy Cancellation and Refund: If a policy has been sold to a customer by misleading him, he will be entitled to get his full premium back by canceling the policy without any deduction during the free-look period.

Loan-linked insurance has been the biggest source of huge commission and fee-based income for banks and loan agents. This can be understood with a simple example:

This strict step of IRDAI will provide direct savings of lakhs of rupees to middle class home loan and personal loan customers:

• Reduction in loan EMI: When the single premium of ₹2 lakh is not added to the loan, the customer’s principal loan amount will be less and there will be a direct difference of Rs 1,500 to Rs 2,500 in the monthly EMI.

• Cheap pure term plan option: Group credit life policies sold by banks are 30% to 50% more expensive than normal pure term insurance plans. Now customers will be able to choose cheap and high coverage term plan from the market as per their budget.

• Less pressure on bank employees due to target mis-selling: Following this guideline of the regulator, accountability will be fixed for the huge internal pressure on branch managers and relationship managers (RMs) of banks to sell insurance.

IRDAI has sought suggestions on this draft from stakeholders and the general public, after which it will be formally implemented.

If a bank or financial institution pressures a customer to take insurance against the loan despite the new rules, the consumer can lodge a direct complaint through the following means:

• Written complaint to the Principal Nodal Officer of the bank and the Internal Ombudsman.

• Integrated Ombudsman Portal of RBI (cms.rbi.org.in) Complaint about unfair banking practices.

• of irdai Bima Bharosa Portal (bimabharosa.irdai.gov.in) or toll-free number 155255 / 1800 4254 732 But reports of mis-selling.

This historic decision of IRDAI will bring transparency in the financial sector of the country and will protect the common citizens taking loans from undue financial burden.