Among these is the distribution of third-party financial products, including insurance, mutual funds and other investment products.
Image: A simplified illustration of how banks act as corporate agents, earning fee/ commission from distributing insurance products while the insurance company underwrites the risk.
Image: Five-year trend in third-party financial products sold by Public Sector Banks (FY2020–21 to FY2024–25).
He added, “The primary reason banks are moving towards third-party products is that they generate revenue through commissions.
According to the SBI officer, financial incentives rather than explicit coercion often play a larger role in influencing behaviour.
For decades, Indian banks have relied primarily on one simple business model: mobilising deposits and lending money. The difference between the interest earned on loans and the interest paid on deposits has traditionally formed the backbone of banking profitability. Advertisement
But the business of banking is no longer confined to the spread between deposits and loans.
As banks look for additional avenues to strengthen revenues, fees and commissions from non-lending activities have assumed greater importance. Among these is the distribution of third-party financial products, including insurance, mutual funds and other investment products. Advertisement
A Union Bank officer posted in the Eastern Region, who spoke on the condition of anonymity, sees this shift as part of a broader commercial recalibration within banking.
He said, “Non-interest income means the income that we make from commissions. When a customer buys an insurance policy through the bank, the bank acts as the agent and earns the commission. Banks are trying to increase this non-interest income and gradually reduce their dependence on core lending.”
His observation reflects a broader trend: banks are expanding insurance, mutual funds, pensions and other third-party products, making fee-based income increasingly important.
A Different Kind of Revenue
Unlike loans, where banks deploy their own capital and bear credit risk, distributing insurance products requires no lending capital. The insurance company underwrites the risk, while the bank earns commission for facilitating the sale under the corporate agency framework.
Image: A simplified illustration of how banks act as corporate agents, earning fee/ commission from distributing insurance products while the insurance company underwrites the risk.
For banks, this creates an attractive commercial proposition.
Explaining the economics, the Union Bank officer said, “Suppose a customer places ₹1 lakh in a fixed deposit. The bank pays interest on that deposit. But if the same amount goes into a third-party insurance or investment product, the bank doesn’t have to pay interest on it, nor does it guarantee returns. Instead, it earns commission from selling the product.”
While commission structures vary across products and are governed by regulatory norms, the broader principle, according to the officer, is that fee income can improve profitability without increasing the bank’s lending exposure.
Third Party Products: The Revenue Engine
Besides, first hand experiences of bank employees, the financial data underscore how rapidly third-party product distribution has grown across India’s Public Sector Banks. Combined income from insurance, mutual funds, credit cards and demat products more than doubled from ₹3,724.50 crore in FY2020–21 to ₹7,703.92 crore in FY2024–25, reflecting a 106.82% increase in just five years.
Image: Five-year trend in third-party financial products sold by Public Sector Banks (FY2020–21 to FY2024–25).
State Bank of India remained the largest contributor throughout the period, while several other PSBs including Union Bank of India, Punjab National Bank, Canara Bank and Bank of Baroda also recorded substantial growth, highlighting the increasing strategic importance of fee-based income alongside traditional lending.
Image: Bank-wise comparison showing growth in third-party financial product distribution between FY2020–21 and FY2024–25.
Shift Beyond Core banking
The growing importance of insurance distribution has gradually changed the role of bank branches. Once primarily associated with deposits and loans, branches are increasingly becoming sales points for a wider range of financial products, creating new avenues of fee-based income for banks.
The Union Bank officer believes this commercial logic has fundamentally altered the business priorities of many institutions. He added, “The primary reason banks are moving towards third-party products is that they generate revenue through commissions. That has become an increasingly important business.”
Commercial Goal Reaches The Branch
The expansion of third-party products does not stop at the management level; according to a State Bank of India officer in the Southern Region, business priorities eventually reach individual branches as targets. He told Kanal, “Management wants growth in these businesses. Once those objectives come down to the branch level, targets begin to emerge whether for insurance, mutual funds or SIPs.”
“The pressure can differ by employee category, with officers facing greater performance expectations because of their managerial responsibilities and transfer-related considerations. For workmen staff, there may be incentives but generally much less pressure. For officers, transfers and career progression can sometimes become a significant consideration.”, said the officer.
The Incentive At Play
Perhaps the most sensitive aspect of insurance distribution concerns incentives. According to the SBI officer, financial incentives rather than explicit coercion often play a larger role in influencing behaviour.
He explained, “Mis-selling can happen in two ways. One is coercive, where pressure is applied. The other is through incentives, where people are attracted because of the financial rewards. Employees who qualify under applicable certification processes may become eligible for commissions or campaign-linked recognition for policies sourced through them.”
He also claimed that incentive programmes in parts of the industry have, at times, included high-value rewards such as smartphones and sponsored trips.
As third-party products become an increasingly important source of fee income, Public Sector Banks appear to be placing greater emphasis on cross-selling alongside and potentially at the expense of their core banking business. As targets reach branches and incentives influence sales, the larger question is: where does legitimate cross-selling end and commercially driven selling begin and who ultimately benefits?
