India's non-banking finance companies are pressing for a long glide path as the insurance regulator moves to tighten commissions on credit-linked products, warning that abrupt cuts could disrupt a business line deeply embedded in vehicle finance, consumer lending and other mobility-linked credit. In representations to the Insurance Regulatory and Development Authority of India, the industry body for NBFCs has sought a five-year transition period to reduce selling fees, arguing that the proposed caps of 2% for credit life insurance and 5% for credit health insurance would not cover the real cost of distribution.
The dispute goes to the heart of how lenders sell protection products alongside loans. Credit life and credit health policies are typically offered at the point of origination, often bundled with vehicle loans, two-wheeler financing and other retail credit. For lenders, these products are not only a source of fee income but also a risk-management tool that helps protect loan books in the event of borrower death, illness or default. For insurers, the lender network provides access to a large customer base at relatively low acquisition cost. The NBFCs' argument is that the economics of this channel are more complex than a simple commission ceiling suggests.
Costly Distribution Model
Industry sources say the cost of distributing credit-linked insurance can be as high as 32% of premium once sales staff, branch infrastructure, onboarding, documentation, servicing and compliance are included. NBFCs contend that a sharp reduction in commissions would leave lenders unable to recover these expenses, especially in segments where ticket sizes are small and margins are already thin. The concern is particularly acute in vehicle finance, where lenders often operate through large retail networks and depend on ancillary income to sustain profitability.
The proposed caps, if implemented without a transition, could also alter customer behaviour. Lenders warn that lower commissions may reduce the incentive to offer insurance at the point of sale, potentially lowering penetration of protection products among borrowers. That could leave more households exposed to repayment stress after a borrower's death or illness, while also increasing credit risk for lenders. The industry's position is that a sudden reset in compensation could weaken a channel that has helped expand insurance coverage among first-time borrowers and mass-market customers.
Regulatory Balancing Act
IRDAI's push to rein in commissions reflects a broader regulatory effort to improve transparency, curb mis-selling and ensure that insurance products are sold for customer value rather than distributor incentives. Commission structures have long been a sensitive issue in India's insurance market, where regulators have sought to balance product affordability with fair remuneration for intermediaries. In the credit insurance segment, that balance is especially delicate because the product is often sold in conjunction with a loan, where customers may have limited room to compare alternatives or negotiate terms.
The NBFC industry's request for a five-year transition period is effectively a plea for gradual adjustment rather than immediate compression. Such a timeline would allow lenders and insurers to redesign distribution models, renegotiate commercial arrangements and potentially shift toward more digital, lower-cost sales processes. It would also give the market time to test whether lower commissions can be offset by higher volumes, better underwriting or more efficient servicing.
For the automotive finance ecosystem, the outcome matters beyond insurance alone. Vehicle lenders rely on a mix of interest income, processing fees and ancillary products to manage risk and maintain returns. If credit-linked insurance becomes less viable, NBFCs may need to rethink how they package loans, how they price risk and how they protect against delinquency in a market where mobility financing remains a key growth engine.
The regulator has not publicly indicated whether it will accept the industry's proposed timeline. But the debate underscores a familiar tension in India's financial sector: the effort to make products cleaner and more customer-friendly can collide with the commercial realities of distribution. In this case, NBFCs are warning that a commission cap set too low, too quickly, could shrink a product that has become integral to lending across automotive and consumer finance.