India's non-banking finance companies have urged the Insurance Regulatory and Development Authority of India to phase in proposed commission caps over five years, warning that an abrupt cut would make credit-linked insurance distribution commercially unviable. The industry body representing NBFCs has argued that the regulator's suggested ceilings of 2% for credit life insurance and 5% for credit health insurance are far below the economics of selling these products, where total distribution costs are estimated at about 32% of premium.
The plea lands at a sensitive moment for lenders and insurers that rely on bundled protection products to support loan portfolios, especially in vehicle finance and other retail credit segments. Credit-linked insurance is typically sold at the point of disbursal and is designed to protect borrowers and lenders against death, disability, or health-related repayment shocks. For NBFCs, the product is not merely an add-on; it is often embedded in the broader loan journey and used to improve customer protection, reduce credit risk, and generate fee income. A sharp reduction in commissions, industry executives say, would force lenders to rethink how they distribute the cover and could weaken adoption among borrowers.
Cost Gap Widens
The core of the industry's argument is that the proposed commission structure does not reflect the actual cost of acquiring and servicing these policies. NBFCs say the economics of credit insurance involve multiple layers of expense, including sales staff, digital onboarding, compliance, customer support, and policy servicing. If the commission is capped at 2% for credit life and 5% for credit health, they contend, the margin available to cover those costs would shrink to the point where many lenders would have little incentive to continue offering the products at scale.
That concern is especially relevant in the automotive finance market, where insurance is often sold alongside loans for two-wheelers, passenger vehicles, and commercial vehicles. In these transactions, the lender's branch network and dealer relationships can be a major distribution channel. If the economics deteriorate, smaller NBFCs may be the first to pull back, potentially reducing access to bundled protection for borrowers in semi-urban and rural markets.
The industry's request for a five-year transition period is intended to soften that shock. A gradual glide path, it argues, would allow lenders to redesign distribution models, renegotiate partner arrangements, and shift toward lower-cost digital processes without abruptly disrupting sales. The proposal also reflects a broader concern that regulatory changes, if implemented too quickly, could destabilise a product category that has become important to both consumer protection and lender risk management.
Regulatory Trade-Offs
IRDAI's move to tighten commissions is part of a wider effort to curb mis-selling and align insurance distribution with customer interest rather than sales incentives. Regulators have long been wary of high upfront commissions that can encourage aggressive selling, particularly in products linked to loans where customers may feel pressured to buy cover at the point of credit approval. From the regulator's perspective, lower commissions can help improve transparency, reduce conflicts of interest, and ensure that insurance remains affordable.
But the NBFC industry is seeking a balance between consumer protection and commercial viability. Its argument is not that commissions should remain high indefinitely, but that the transition must be long enough for the market to adapt. The industry also appears to be signalling that a one-size-fits-all cap may not account for the operational realities of credit-linked insurance, where the distribution model is different from traditional agency or bancassurance channels.
For lenders in the automotive and mobility finance space, the outcome could have practical implications beyond insurance revenue. Credit-linked cover can improve borrower resilience and reduce default risk in the event of unforeseen hardship. If distribution becomes uneconomical, lenders may need to absorb more risk themselves or redesign loan products to preserve customer protection without relying on current commission structures.
The debate now turns on whether IRDAI will accept the case for a phased transition or press ahead with the proposed caps. Either way, the discussion underscores a larger policy tension in India's financial services market: how to rein in distribution costs and sales incentives without undermining the economics of products that support lending, risk management, and consumer protection at the same time.