Many non-banking financial companies(NBFC) are focusing on the distribution of insurance products in a bid to diversify their sources of revenue and increase fee income.
Many lenders like Capri Global Capital, Grihum Housing Finance and HomeFirst Finance have received the Insurance Regulatory and Development Authority of India’s (Irdai’s) approval for a corporate agency licence. The licence will allow these companies to distribute insurance products to customers and earn a fee.
Additionally, Mahindra and Mahindra Financial Services (Mahindra Finance) announced in December that it plans to approach Irdai for a corporate agency licence for life, general, and health insurance.
The net fee income from these new segments is expected to be around 0.1-0.2% of the company’s standalone average assets over the next three years.
“Having a large customer base and distribution reach provides an opportunity for cross-selling insurance products, boosting brand recall and customer engagement,” says Rajesh Sharma, managing director of Capri Global Capital.
He added that the key changes in insurance guidelines in recent years like allowing corporate agents to collaborate with life, general & health partners and the amendment to expenses of management regulations, have further motivated NBFCs to pursue the corporate agency licence.
Capri Global will capitalise on its branch network in West and North India to cross-sell insurance products to its customers. The company expects to generate a net insurance income of `20 crore from the distribution of insurance in 2024-25(April-March). Nevertheless, the company expects an increase in variable cost in the range of `2-3 crore on an annual basis.
Many lenders are focusing on offering tailored insurance products to customers. While the quantum of fee income will vary among lenders, experts feel that 50-75 basis points on each loan disbursal would be reasonable benchmark for the industry.
“We will explore our entire repertoire of options in life, non-life, health and medical insurance to create customised products for our customers,” a senior official at an affordable housing finance company said on condition of anonymity.
“For example, most of our customers do not have health insurance. So, we can explore low-cost sachet health insurance for these customers,” the official added.
The foray into the insurance distribution segment will help these entities diversify their sources of income, and mitigate the impact of credit risk.
“Most of these entities are standalone players and they are trying to leverage on the database that they have. Also, providing insurance to the underlying loans protects them from credit risk,” says Karthik Srinivasan, senior vice president, group head – financial sector ratings, Icra.
He added many of these NBFCs provide long-tenor loans like home loans and loan against property, and do not cater to prime borrowers who typically have an insurance cover. Hence, the prospect of cross-selling insurance products to their customers has prompted these entities to seek a corporate agency licence from the insurance regulator.
With new companies looking to enter the NBFC segment, experts feel that more entities will land-up at the Irdai’s doorstep for a corporate agency license in a bid to provide a differentiated product suite.
“I think some of the NBFCs will have to recalibrate how much they can earn via fees versus interest from income because with the cost of funds going up significantly, competing with banks and well-capitalised NBFCs will be difficult,” says Raul Rebello, managing director and chief executive officer- designate, Mahindra Finance.
He added that unless lenders operate in segments where the yield is above 15-16%, it is going to be difficult to generate a return on equity that investors will invest in and lenders will lend to. In such a scenario, smaller NBFCs will capitalise on opportunities to earn a fee.
