Insurance caps likely to eat into fee incomes of banks, NBFCs

Irdai has proposed product- and channel-specific caps on commissions, including tighter limits for life insurance products and credit-linked insurance. The draft norms also propose restrictions on incentives paid to employees for selling insurance and a ban on forced bundling of insurance with loans. The regulator has sought public comments on the proposals over the next month, with the changes proposed to apply prospectively.

Higher bancassurance exposure for select banks

“This will be tad negative for banks’ bancassurance fees, especially credit-protect premiums, as it’s mostly single premium with high commissions,” Jefferies said in a report. It also said that IndusInd Bank (18%) and IDFC FIRST Bank (17%) have relatively higher exposure, based on insurance commission income as a proportion of normalised FY27 profit. ICICI Bank and Public sector banks have relatively lower exposure, the global investment bank said. Post the announcement, shares of banks and NBFCs tumbled.

India’s leading private and public sector banks earned more than Rs 20,000 crore in brokerage and commission from selling insurance policies in FY26. HDFC Bank earned Rs 5,688 crore in commission and fee income from life insurance distribution and another Rs 1,239 crore from health and general insurance products during FY26. Axis Bank and Kotak Mahindra Bank reported incomes of Rs 3,700 crore and Rs 1,075 crore during the year.

SBI earned Rs 2,795 crore in insurance commission during FY26, largely from distributing products of its subsidiaries, SBI Life Insurance and SBI General Insurance. “Definitely there will some impact. It shouldn’t be too much for us,” a senior SBI official said. “However, lower commission payouts could affect business volumes, as insurers may have less flexibility to incentivise agents and other intermediaries. With payouts capped across the distribution chain, agents could increasingly look to alternative asset classes,” he said.

JM Financial estimates that insurance income across its bank coverage increased to 5.1% of profit before tax (PBT) in FY26 from 3.5% in FY23. As a proportion of average assets, the income increased to 7 basis points (bps) from 4 bps over the same period. The increase coincided with the 2023 expense-of-management (EoM) regime, which removed product-level commission caps.

“With these reforms as the base, we expect some shift in bank distribution away from ULIPs (unit linked insurance plans) towards MFs (mutual funds),” JM Financial said. “Lower distribution costs also allow insurers to enhance customer benefits and improve persistency, which supports renewal income for banks.” According to the report, insurance income accounted for 12.5% of Axis Bank’s PBT in FY26, the highest among large private banks in its coverage. At ICICI Bank, it accounted for only 0.6% of PBT. PSBs had the lowest dependence, with insurance income contributing around 1-3% of PBT.

Impact on NBFCs

For NBFCs, the impact could be more significant because of their high concentration in loan-linked group credit-life insurance. About 93% of this business was group credit-life insurance linked to loans, JM Financial said. “The combination of differentiated commission caps, restrictions on employee incentives and the proposed separation of insurance from mandatory loan approval could put pressure on insurance-led fee income for NBFCs,” Motilal Oswal Financial Services said in a report.

Among NBFCs, L&T Finance is particularly exposed, with insurance commission income accounting for around 26% of FY26 PBT and 0.80% of average assets, according to JM Financial. Poonawalla Fincorp, Cholamandalam Investment and Finance, HDB Financial Services and Mahindra & Mahindra Financial Services also have relatively high exposure.

(With inputs from Christina Titus)