India's non-banking finance companies have asked the insurance regulator for a five-year transition period to reduce selling fees on credit-linked insurance, arguing that the proposed commission caps would sharply undermine the economics of a product that is often bundled with loans and consumer finance. The appeal, made by the industry body representing NBFCs to the Insurance Regulatory and Development Authority of India, comes as the regulator examines tighter limits on commissions for credit life and credit health policies.
The proposal under discussion would cap commissions at 2% for credit life insurance and 5% for credit health insurance. Industry participants say those levels are too low to support the operational costs involved in sourcing, explaining, onboarding and servicing such policies, especially when distribution expenses are estimated at about 32% of the premium. In the NBFC view, an abrupt shift to the proposed caps would not merely compress margins; it could make the business line commercially unviable for lenders that rely on embedded insurance as part of their credit offerings.
Cost Gap Widens
The dispute highlights a familiar tension in India's financial services market: regulators want lower mis-selling risk and more transparent pricing, while lenders and distributors argue that insurance sold alongside loans requires a different cost structure from mass-market retail products. Credit-linked insurance is typically sold at the point of loan origination, often to borrowers who may have limited time to compare alternatives. That makes the channel efficient for insurers and convenient for lenders, but also more expensive to operate than a standard direct-sale policy.
NBFCs say the proposed caps do not reflect the actual cost of distribution, which includes staff training, customer communication, technology integration, compliance, and post-sale servicing. They are pressing for a phased reduction rather than an immediate reset, contending that a five-year glide path would allow firms to redesign products, renegotiate commercial arrangements with insurers, and adjust their operating models without disrupting credit flows.
The industry's argument is not only about preserving revenue. It is also about maintaining access to protection products for borrowers, particularly in segments where credit life insurance can help families meet outstanding loan obligations in the event of death or disability. NBFCs warn that if commissions are cut too sharply, lenders may reduce the promotion of these policies or exit the distribution channel altogether, potentially lowering insurance penetration among borrowers who are already underinsured.
Regulatory Trade-Offs
For IRDAI, the issue sits at the intersection of consumer protection and market structure. Commission caps are often used to curb excessive selling incentives and improve policyholder outcomes, especially where products are sold through intermediaries with strong commercial motivations. But if the cap is set too low, the regulator risks shrinking distribution capacity and reducing the availability of bundled protection products in a market where credit expansion and insurance penetration are both policy priorities.
The NBFCs' request for a five-year transition period suggests they are seeking a compromise rather than outright rejection of the regulator's direction. A phased approach would give the industry time to absorb lower economics gradually, potentially through lower acquisition costs, digital distribution, simplified underwriting and more efficient servicing. It would also allow insurers and lenders to test whether smaller-ticket policies can remain viable under a leaner commission regime.
The debate is especially relevant for the automotive and mobility finance ecosystem, where vehicle loans, EV financing and related consumer credit products are frequently paired with protection cover. As lending channels become more integrated with insurance distribution, any change in commission rules can ripple through loan pricing, customer acquisition and product design. For lenders active in vehicle finance, the concern is that tighter economics could reduce the incentive to bundle insurance at the point of sale, even if the product remains useful to borrowers.
The regulator has not yet announced a final decision, but the NBFC industry's intervention signals that the proposed caps are likely to face sustained pushback. The outcome will be closely watched by lenders, insurers and consumer advocates alike, because it could set the tone for how India balances affordability, distribution economics and borrower protection in credit-linked insurance.