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* IRDAI’s Sep’26 consultation paper on “Recalibrating Economics of Insurance Distribution” is not merely an Expenses of Management (EOM)/commission-cap exercise but is instead an attempt to structurally reset the economics of insurance distribution. The impact could be particularly significant for NBFCs that have built a high-margin insurance distribution business around group credit life insurance, which is sold alongside loans.

* From the perspective of NBFCs, which have a corporate agency license and consequently report insurance distribution income, the consultation paper focuses on five major changes:

1) Hard caps on insurance commissions, replacing the relatively flexible commission regime introduced in 2023

2) Sharp reduction in commissions on loan-linked insurance, particularly group credit life

3) Lower commission caps for open-architecture distributors, which directly affects banks/NBFCs operating as corporate agents/IDEs

4) Prohibition of compulsory insurance bundling with loans, although customer-beneficial package offers remain permitted

5) Digital/direct distribution infrastructure through Bima Sugam and Public Insurance Registry (PIR), which could structurally reduce the dependence on physical/intermediated distribution.

* IRDAI explicitly noted that if a lending institution wants to protect its own loan portfolio against adverse events affecting borrowers, it can take a group policy itself and pay the premium as an expense of the institution. This is different from selling insurance to the borrower and earning a large distribution commission.

* End of mandatory loan-linked insurance: In addition to the commission caps, IRDAI proposes to prohibit compulsory bundling of insurance with products/services of banks and NBFCs registered as IDEs. However, IRDAI does not propose to eliminate the loan + insurance product altogether. IRDAI proposes to permit customer-beneficial package offers. NBFCs could offer loans + insurance at a lower rate compared to loans without insurance.

However, IRDAI has proposed three critical conditions:

1) Customer must know the interest rate with and without insurance

2) Customer cannot be forced to buy insurance from that NBFC

3) Insurance premium must be paid separately and directly by the customer, rather than being funded out of the loan.

* More differentiated commission framework: Commissions would be determined based on product complexity, effort involved, line of business and distribution channel, replacing the relatively uniform approach currently prevalent. The framework could also allow higher remuneration for distribution in underserved markets, including rural areas, small towns and smaller cities, thereby incentivizing distribution where customer access is limited.

* Bank/NBFC employee incentives could change materially: The proposal would prohibit volume-linked or reward-linked incentives for employees of banks and NBFCs involved in insurance distribution. This could require lenders to rethink the current incentive structures used across branches and sales channels to drive insurance penetration, potentially impacting the pace of cross-selling and the economics of insurance distribution.

* Potential pressure on NBFC insurance fee income: The combination of differentiated commission caps, restrictions on employee incentives and the proposed separation of insurance from mandatory loan approval could put pressure on insurance-led fee income for NBFCs. The impact, however, is likely to vary materially across lenders depending on the proportion of fee income derived from insurance, the mix of credit-linked products, current commission rates and the extent to which insurance penetration is driven by branch-level incentives.

Our view

* For NBFCs, there could be three headwinds:

1) ~42-45% current effective payout declining to the proposed ~2% for single-premium group pure term sold by lending entity

2) Compulsory insurance bundling with a loan to be prohibited

3) Insurance premium must move directly from customer to insurer rather than being routed/funded through the lending process.

* The historical economics of NBFC insurance distribution appear unlikely to persist if the proposed caps are implemented substantially as drafted. Diversification of NBFC distribution income will become very important. The ability to distribute other financial/non-financial products could potentially provide a meaningful offset. These proposals, if implemented, will not merely result in a commission-rate compression but will also likely impact insurance attachment itself.

* This is still a public consultation paper, not final regulation. The final commission ceilings, implementation mechanics and transition provisions could change following the consultation. The paper invites comments until 25th Oct’26. However, if the proposals were to be implemented in their current form, then this could be a potential structural headwind to fee income/RoA for insuranceheavy NBFCs, rather than simply a regulatory-compliance change.

* In Exhibit 4, where we have highlighted the contribution of insurance distribution income to PBT and as % of the average assets for the MOFSL NBFC coverage universe. NBFCs like LTF, CIFC, HomeFirst and MMFS have a higher contribution of insurance distribution income to their earnings and would therefore be relatively more vulnerable than other peers.

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