Banks and small finance banks have raised concerns over proposed insurance distribution commission reforms by the Insurance Regulatory and Development Authority of India (IRDAI), seeking additional time to adjust their business models. Lenders are submitting representations individually and through industry associations, warning that reduced commission income could affect profitability and insurance distribution operations.
Banks Seek Transition Period
The Indian Banks’ Association (IBA) and Association of Small Finance Banks in India (ASFBI) are coordinating industry feedback on the proposed changes.
The consultation deadline has been extended to October 31, 2026.
Axis Bank Executive Director Subrat Mohanty said lenders could receive six to nine months to prepare for the revised framework. The bank is examining adjustments to product mix, business volumes and alternative fee income.
Why Are Commission Changes Raising Concerns?
Insurance distribution has become an important revenue source for banks following the removal of commission caps under the 2023 Expense of Management (EOM) framework. According to JM Financial, insurance distribution income increased from 3.5 per cent of banking sector profit before tax in FY23 to 5.1 per cent in FY26.
Life insurance accounts for 84 per cent of total insurance income, making proposed commission changes particularly significant.
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Which Private Banks Face Greater Exposure?
JM Financial estimates Axis Bank’s insurance income at 12.5 per cent of FY26 profit before tax, compared with 7.3 per cent for HDFC Bank and 5.8 per cent for Kotak Mahindra Bank.
Among mid-sized lenders, insurance income represents 48.8 per cent of profit before tax for IDFC First Bank, 30.8 per cent for Bandhan Bank, 28.5 per cent for RBL Bank and 21 per cent for DCB Bank.
ICICI Bank has comparatively limited exposure at 0.6 per cent.
Small Finance Banks Face Higher Risks
Small finance banks could experience greater pressure because insurance income contributes significantly to their earnings.
JM Financial estimates insurance income at 13 to 25 basis points of average assets for these lenders, compared with one to three basis points for public sector banks.
Equitas Small Finance Bank recorded insurance income equivalent to 70.7 per cent of FY26 profit before tax, followed by Ujjivan at 19.2 per cent and AU Small Finance Bank at 14.3 per cent.
Industry Seeks Recognition of Distribution Costs
Industry representatives argue that commission reforms must account for infrastructure, manpower, technology, compliance and servicing expenses.
The Finance Industry Development Council has requested a five-year transition period for non-banking financial companies.
Ujjivan Small Finance Bank Interim CEO Carol Furtado said the lender remains engaged with insurance partners and industry associations while awaiting final guidelines.
What Does This Mean?
The proposed reforms could significantly alter insurance-related earnings across India’s banking sector, particularly for smaller lenders dependent on commission income.
Banks are seeking gradual implementation to protect distribution operations while adjusting revenue models. The final regulatory framework will determine how quickly lenders must adapt to the proposed changes.
