Non-banking financial companies are lobbying the insurance regulator, IRDAI, for a five-year transition period before implementing new commission caps. The industry body, FIDC, warns that the proposed limits—2% for credit life insurance and 5% for health—are too aggressive and could force many lenders to shut down their insurance distribution business due to high operating costs.
The Finance Industry Development Council (FIDC), which represents the non-banking finance company sector, has approached the Insurance Regulatory and Development Authority of India (IRDAI) to request a gradual approach to lowering insurance commissions. This request comes as the regulator proposes significant cuts to the commissions NBFCs earn when they sell insurance products alongside loans.
The Commission Cap Conflict
Currently, many NBFCs earn commissions in the range of 45% to 49% on these products. The proposed regulations aim to sharply reduce these to 2% for credit life insurance and 5% for health insurance. For many lenders, the insurance distribution business is a key source of 'other income' or 'fee-based revenue.'
NBFCs argue that the proposed caps do not align with the actual costs of running this business. According to industry estimates, the cost to distribute these products—which includes maintaining physical branch networks, training staff, and complying with complex regulations—is roughly 32% of the insurance premium. If commissions are cut immediately to the proposed levels, lenders claim they would not be able to cover their expenses, potentially leading to the closure of their insurance distribution divisions.
Impact on Financial Models
For investors, this situation highlights a potential risk to the non-interest income of several NBFCs. Many lenders have built their business models on 'cross-selling' insurance to loan customers to boost their bottom line. A shift in these commission structures could force a change in how these companies earn revenue. The industry is specifically asking for a 'glide path,' or a phased-in approach, that would see commissions settle at a 25% target over five years, rather than the current proposals.
This strategy is similar to how the regulator previously allowed insurance manufacturers to align their expense management over time. NBFCs are also requesting the authority to collect insurance premiums directly from borrowers, which they believe would help them streamline their operations.
What Investors Should Monitor
Investors should keep a close watch on the upcoming quarterly results of NBFCs that are heavily involved in insurance distribution. The key monitorable is not just the loan book growth, but the sustainability of fee-based income streams. If the regulator holds firm on the current proposal, the profitability of the distribution arms of these lenders may come under pressure. Any final order from the IRDAI will dictate whether these companies need to pivot their revenue strategies or adjust their cost structures to survive in a lower-commission environment.