India's non-banking finance company industry has pushed back against the Insurance Regulatory and Development Authority of India's proposed commission caps on credit-linked insurance, warning that the new limits could sharply disrupt a product line that is closely tied to consumer lending. In its submission to the regulator, the industry body representing NBFCs has sought a five-year transition period to reduce selling fees gradually, arguing that an abrupt shift to a 2% cap for credit life insurance and 5% for credit health insurance would make distribution commercially unviable.
The dispute goes to the heart of how credit protection is sold in India. Credit-linked insurance is typically bundled with loans and is designed to cover repayment obligations if a borrower dies, becomes disabled, or faces a health shock. For lenders, it is also a risk-management tool that can reduce defaults and protect loan books. For insurers, it is a mass-market distribution channel. But for NBFCs, which often operate on thinner margins than banks and rely heavily on fee income, the economics of selling these policies are now under pressure.
Cost Gap Widens
The NBFC industry's central argument is that the proposed caps bear little relation to the actual cost of distribution. According to the representation made to IRDAI, the cost of sourcing, explaining, underwriting support, servicing, and administering credit-linked insurance is about 32% of premium income. Against that backdrop, a 2% commission on credit life and 5% on credit health would leave little room to recover operating expenses, especially in a segment that depends on high-volume, low-ticket policies.
Industry executives say the issue is not merely about commissions, but about whether the product can be sold responsibly at scale. Credit-linked insurance requires customer outreach, documentation support, policy explanation, grievance handling, and coordination between lenders and insurers. NBFCs argue that if the compensation structure is compressed too quickly, many lenders may reduce distribution or exit the segment altogether, potentially narrowing access to protection for borrowers who are often first-time or underserved customers.
The regulator's push for lower commissions reflects a broader effort to improve transparency and curb mis-selling in insurance distribution. Over the past few years, regulators have increasingly scrutinised bundled products, especially where customers may not fully understand the terms or may be pressured into buying add-ons at the time of loan origination. Lower commissions are intended to reduce incentives for aggressive selling and align distribution more closely with customer suitability.
Transition, Not Shock
NBFCs are not rejecting the principle of lower commissions outright. Instead, they are asking for a phased glide path that would allow the industry to adjust business models, renegotiate insurer arrangements, and redesign sales processes without abruptly damaging revenues. A five-year transition, they argue, would give lenders time to absorb the change, rework technology and compliance systems, and shift toward more sustainable distribution economics.
That request also reflects the wider stress on India's lending ecosystem, where NBFCs have been balancing growth, funding costs, and regulatory compliance. Many lenders use ancillary fee income to offset the cost of serving smaller borrowers and to support branch-level operations. If credit insurance commissions are cut too sharply, some NBFCs warn, the economics of small-ticket lending could worsen, especially in semi-urban and rural markets where servicing costs are already high.
For IRDAI, the challenge is to strike a balance between consumer protection and market viability. Too lenient a regime could preserve incentives that regulators view as distortive. Too aggressive a cap could shrink distribution, reduce insurance penetration, and weaken the very credit protection that the products are meant to provide. The outcome will likely shape not just NBFC revenues, but also how insurers and lenders structure bundled offerings across the retail credit market.
The debate is also likely to draw attention from banks, fintech lenders, and insurers that rely on embedded insurance as a growth channel. If the proposed caps are finalised without significant modification, the industry may need to rethink how credit protection is priced, sold, and disclosed. If the regulator accepts a phased transition, it would signal a more gradual approach to reform, one that seeks to preserve distribution while pushing the market toward lower, more transparent commissions.
For now, the NBFC message to IRDAI is clear: the industry is willing to move, but not overnight. The regulator's next steps will determine whether credit-linked insurance remains a viable add-on to lending or becomes a sharply less attractive product for distributors.