Banks and non-banking financial companies could see a significant reduction in insurance-related fee income if the Insurance Regulatory and Development Authority of India implements its proposed overhaul of commission and distribution rules.
The regulator is considering sharply lower commissions on loan-linked products such as credit-life insurance, along with restrictions on making insurance a compulsory condition for obtaining a loan. The proposed framework is still under consultation and could change before final regulations are issued.
The impact would not be uniform. Analysts say lenders that rely more heavily on insurance distribution, particularly NBFCs with large credit-life businesses, could face a greater hit to earnings.
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Credit-life commission could fall sharply
Credit-life insurance covers a borrower’s outstanding loan if the insured person dies during the policy period.
The product is commonly sold alongside home, personal, vehicle and other loans, giving lenders an additional source of commission income at the time of disbursement.
IRDAI’s consultation paper proposes reducing commission on credit-life products to about 2%, compared with an industry level of around 28% currently. When other payouts are included, the effective payout had reached roughly 45%, according to regulatory data cited by analysts.
The regulator has questioned whether such high payouts are justified for a product that generally requires limited additional distribution effort because it is sold alongside an existing loan.
It has also proposed that lenders should not force borrowers to purchase an insurance policy as a condition for sanctioning credit, except where an appropriate bundled arrangement can be justified in the policyholder’s interest.
IndusInd and IDFC First among more exposed banks
Among banks, the potential impact varies significantly.
Jefferies estimates that insurance distribution income is equivalent to around 18% of FY27 normalised profit before tax for IndusInd Bank and 17% for IDFC First Bank.
The corresponding exposure is estimated at 11% for AU Small Finance Bank, 9% for Axis Bank and 7% for HDFC Bank. Kotak Mahindra Bank is estimated at around 5%.
The dependence is considerably lower at several large lenders.
State Bank of India, Punjab National Bank and Bank of Baroda are each estimated at around 2%, while ICICI Bank is at roughly 1%, according to the same analysis.
These figures measure insurance distribution income against estimated normalised profit and should not be read as a forecast that profits will fall by the same percentage.
The eventual effect will depend on final commission caps, product mix and how banks restructure their distribution businesses.
NBFCs face greater credit-life exposure
The issue could be more significant for NBFCs because credit-life products make up a much larger share of the insurance business they distribute.
IRDAI data cited by Business Standard shows that around 93% of life-insurance business sourced through NBFCs is loan-linked group credit life.
New business premium through NBFCs increased from around ₹3,600 crore in FY23 to ₹10,300 crore in FY25, while payouts rose to approximately ₹4,300 crore.
JM Financial estimates that insurance distribution income accounted for around 26% of L&T Finance’s FY26 profit before tax.
Poonawalla Fincorp’s exposure is estimated at 17.8%, Cholamandalam Investment and Finance at 15.5%, and HDB Financial Services and Mahindra & Mahindra Financial Services at about 13.4% each.
Business Standard separately noted that Piramal Finance had insurance commission income equivalent to 38.4% of profit before tax in FY25, underlining how exposure can differ depending on the financial year and methodology used.
Bancassurance incentives also under scrutiny
IRDAI is also examining the wider bancassurance model, under which banks distribute insurance products on behalf of insurers.
The regulator found that banks with multiple insurer partnerships received average payouts of around 33%, with some arrangements reaching as high as 72%. Banks tied to a single insurer received average payouts of around 13%.
IRDAI has raised concerns that some payouts may reflect competition for access to distribution networks rather than the actual effort required to sell the product.
The proposal also seeks to restrict volume-linked or reward-linked incentives for employees of banks and NBFCs who sell insurance. The aim is partly to reduce incentives that could encourage mis-selling.
L&T Finance could face larger earnings impact
IIFL Capital’s Viral Shah said the proposed reduction in credit-life commission could amount to nearly 90% compared with prevailing industry payouts, while the reduction in motor insurance commissions could be around 70%.
He estimated that L&T Finance could face one of the largest impacts because insurance commission income represents around 26% of its pre-tax profit.
If lenders can offset roughly half of the pressure through lower employee incentives, cost changes or better monetisation of other products, L&T Finance could still see an estimated impact of around 12% on profit after tax.
For most other NBFCs, the effect could fall in the 3% to 5% range under the same assumption.
Those estimates remain analyst scenarios rather than company guidance.
Final rules could still change
IRDAI’s proposals form part of a broader consultation on the economics of insurance distribution.
The regulator is also considering lower expense limits for insurers, product-specific commission ceilings and changes designed to reduce the overall cost of insurance.
The draft has already affected market sentiment, with bank, NBFC and insurance stocks coming under pressure after the proposals became public.
The final impact will depend on whether IRDAI retains the proposed commission caps, how quickly they are implemented and whether lenders are able to replace lost distribution income through other fee businesses.
What this means for you: Borrowers could benefit if lenders are no longer able to automatically bundle high-commission insurance products with loans. Investors, meanwhile, will need to watch lenders whose profits depend heavily on credit-life and other insurance distribution income.
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