Transition Over Shock
India's non-banking finance companies have asked the Insurance Regulatory and Development Authority of India for a five-year transition period to adapt to proposed caps on commissions for credit-linked insurance, arguing that an abrupt reduction would disrupt a distribution model that is already thin on margins. The request comes as the regulator considers limiting commissions to 2% for credit life insurance and 5% for credit health insurance, a move the industry says could sharply alter the economics of lending-linked protection products.
The industry body representing NBFCs has warned that the proposed ceilings would make the sale of such insurance effectively unviable because the total cost of distribution, onboarding, servicing and compliance is estimated at about 32% of premium. In its view, the gap between current operating costs and the proposed commission structure is too wide to absorb immediately, especially for lenders that rely on embedded insurance to protect loan books and offer borrowers a bundled financial product.
Credit-linked insurance is commonly sold alongside retail loans, vehicle finance and other consumer credit products. For lenders, it serves a dual purpose: it can reduce default risk in the event of death or illness, and it can also deepen customer relationships by offering a one-stop financing package. For insurers, NBFCs and other lending intermediaries are a key distribution channel, particularly in semi-urban and smaller-ticket lending segments where branch-led insurance sales are limited.
Economics Under Pressure
The NBFC industry's concern is not simply about lower earnings on commissions. It is about whether the product can continue to be distributed at scale without forcing lenders to absorb losses or pass on higher costs to borrowers. A steep cut in commissions, if implemented quickly, could prompt lenders to reduce promotion of credit insurance, narrow product availability or redesign loan-linked offerings in ways that may not be immediately beneficial to customers.
The industry body has argued that a phased transition would allow lenders to rework systems, renegotiate insurer arrangements, retrain frontline staff and recalibrate customer communication. It also wants time to align technology, disclosures and servicing processes with a lower-commission regime. Without such a runway, it says, the market could see abrupt dislocation in a segment that is still developing in India.
The regulator's proposal reflects a broader policy push to curb mis-selling and ensure that insurance sold through lending channels is not priced or incentivised in a way that disadvantages consumers. Credit-linked products have often drawn scrutiny because borrowers may not always fully understand the optional nature of the cover, the premium charged, or the extent to which the policy benefits the lender as much as the customer. Lower commissions are typically intended to reduce distribution-led distortions and bring pricing closer to the actual cost of protection.
Balancing Access And Conduct
The challenge for policymakers is to strike a balance between consumer protection and product viability. If commissions are set too high, the risk is that lenders prioritise sales over suitability. If they are set too low too quickly, the risk is that distribution channels retreat, leaving borrowers with less access to affordable protection at the point of loan origination.
That tension is especially relevant in India's automotive and mobility finance market, where credit life and credit health insurance are often bundled with vehicle loans, including for two-wheelers and passenger vehicles. In these segments, loan protection can be important for both lenders and customers, particularly in households with limited financial buffers. A sudden contraction in distribution could therefore have knock-on effects beyond the insurance market itself.
For IRDAI, the issue is likely to be whether the proposed caps can be introduced in stages, or whether any exemptions, glide paths or product-specific adjustments are warranted. The NBFC industry's five-year request signals that it expects a structural reset rather than a short-term repricing. It also suggests that lenders are preparing for a more tightly regulated insurance distribution environment, one in which commission income may no longer subsidise the operational costs of selling protection products.
The debate now moves to whether the regulator will prioritise immediate reform or gradual adjustment. For NBFCs, the answer will determine not just revenue, but the future shape of credit-linked insurance distribution across India's consumer lending market.