India’s non-banking financial companies (NBFCs) are seeking a five-year transition period to adjust to proposed insurance commission caps from the Insurance Regulatory and Development Authority of India (IRDAI). The Finance Industry Development Council (FIDC), the industry body representing non-bank lenders, has proposed gradually reducing commissions from current levels of around 45–49% to 25% over five years instead of implementing the proposed lower limits immediately.
The request comes as IRDAI reviews a broader overhaul of insurance distribution economics intended to reduce acquisition costs, improve transparency and protect policyholders from mis-selling. Under the proposal, commissions on certain credit-linked insurance products could be capped at 2% for credit life insurance and 5% for credit health insurance. NBFCs argue that such reductions could make insurance distribution uneconomical, particularly in rural and semi-urban markets where lenders rely on branches, field staff and local distribution networks.
Key Takeaways
- Five-year transition: NBFCs want commissions to decline gradually from around 45–49% to 25% over five years.
- Proposed commission caps: IRDAI’s consultation framework includes limits of 2% for credit life insurance and 5% for credit health insurance.
- Distribution costs: FIDC estimates that distribution-related expenses account for approximately 32% of premiums.
- Rural insurance access: NBFCs warn that lower commissions could affect more than 1.4 million Point-of-Sale Persons (PoSPs) who depend on insurance sales for income.
- Premium payment proposal: Lenders also want permission to pay insurance premiums directly to insurers on behalf of borrowers.
- Rules are not final: IRDAI is reviewing industry feedback, with the consultation deadline extended to October 31, 2026.
Why Are NBFCs Asking for Five Years?
NBFCs distribute insurance through their lending networks, often offering credit-linked life or health insurance to customers taking loans. Insurance distribution can generate fee income for lenders while providing borrowers with financial protection against certain risks.
However, the proposed commission caps would substantially reduce the amount distributors can earn on some products. FIDC argues that an immediate change would leave lenders little time to adjust their operating costs, distribution agreements and business models.
In its October 24 submission to IRDAI, the industry body proposed a phased reduction from commission levels of around 45–49% to 25% over five years. The proposal mirrors the regulator’s own plan to give insurers time to adjust to lower expense-of-management limits.
NBFCs say their distribution costs include customer acquisition, branch infrastructure, technology, compliance and servicing. They also point to the operational work involved in processing documents and assisting families when a borrower dies and a credit-life policy needs to be claimed.
The industry’s argument is that commission reductions should reflect the time needed to reorganize these operations rather than forcing an immediate change in the economics of insurance distribution.
What Commission Caps Has IRDAI Proposed?
IRDAI released its consultation paper, Recalibrating the Economics of Insurance Distribution, on September 23, 2026. The proposed framework seeks to reduce insurance distribution costs and change how insurers compensate intermediaries.
The limits relevant to the current NBFC dispute include the following:
| Insurance distribution issue | Proposed approach |
|---|---|
| Credit life insurance | Commission cap of 2% for specified products |
| Credit health insurance | Commission cap of 5% |
| NBFC commission transition | Industry seeks a five-year phased reduction |
| Current commission levels cited by FIDC | Around 45–49% |
| Target commission level proposed by FIDC | 25% over five years |
| Insurer expense limits | Gradual reductions over five years for life and general insurers |
The exact application of individual caps depends on the product and final regulatory wording. The consultation proposals have not yet become final rules.
IRDAI’s wider proposal also seeks to bring additional payments, incentives and distribution-related expenses within a more transparent framework. It proposes tighter controls on volume-linked and reward-linked incentives for bank and NBFC employees selling insurance.
These measures aim to address concerns that high distribution payouts can increase insurance acquisition costs without necessarily improving the value customers receive.
Why NBFCs Say Distribution Could Become Unviable
FIDC estimates that distribution expenses account for about 32% of the premium, including customer acquisition, technology, compliance and servicing. If commissions fall sharply, NBFCs say the revenue available to cover those costs could become insufficient.
Consider a simplified example involving a ₹10,000 insurance premium:
| Scenario | Commission rate | Commission income |
|---|---|---|
| Current level at 49% | 49% | ₹4,900 |
| FIDC proposed transition target | 25% | ₹2,500 |
| Proposed credit life cap | 2% | ₹200 |
| Proposed credit health cap | 5% | ₹500 |
Illustrative calculations only. Actual payouts depend on the insurance product, applicable rules and distribution arrangements.
The example shows why the industry is seeking a transition period. At a 2% commission rate, the distributor would receive ₹200 on a ₹10,000 premium, compared with ₹4,900 at a 49% rate. The final economic impact would depend on the product’s applicable cap and the costs the distributor can reduce.
NBFCs argue that an abrupt change could force some lenders to scale down or exit insurance distribution. They also warn that smaller distributors may struggle to maintain the infrastructure required to sell and service policies.
The regulator, however, is seeking to reduce the cost of distributing insurance and improve value for customers. The policy challenge is to achieve those goals without unintentionally restricting access to useful insurance products.
Why Rural Insurance Distribution Is at the Centre of the Debate
NBFCs often operate in areas where customers have fewer insurance distribution options. Their local branches and field networks can connect borrowers with insurance products, including policies designed to protect loan repayments if a covered event occurs.
FIDC has warned that more than 1.4 million PoSPs could be affected by lower commissions. These individuals often sell relatively small policies and may rely on commissions from individual transactions.
The industry says sharp reductions could make these sales less attractive, potentially reducing the number of people willing to distribute insurance in smaller towns and rural communities.
That outcome is not inevitable. Distributors may adapt by reducing costs, selling different products or changing their business models. However, if a significant number of intermediaries leave the market, customers could face fewer opportunities to receive information about insurance.
The issue is therefore not limited to NBFC earnings. It also concerns how India expands insurance access while keeping distribution costs manageable.
NBFCs Want Permission to Pay Premiums Directly to Insurers
Alongside the five-year transition, NBFCs have requested permission to pay insurance premiums directly to insurers on behalf of borrowers.
This request is linked to the broader debate about how insurance should be sold alongside loans. Under IRDAI’s proposed framework, compulsory bundling of insurance with loans would be restricted, subject to specified conditions and permitted arrangements.
The regulator wants borrowers to have greater choice and clearer information about the cost of insurance. Customers should not be led to believe that purchasing a particular insurance policy is always a condition for receiving a loan when that is not the case.
FIDC’s request for direct premium payments seeks to address the practical arrangements involved in distributing credit-linked insurance. How this proposal is reconciled with borrower choice, disclosure and restrictions on compulsory bundling will depend on the final rules.
For lenders, the outcome could influence both the administrative process and the commercial model used to distribute insurance.
What the Proposed Changes Mean for NBFCs and Insurers
The commission dispute could have different consequences across the financial services sector.
| Stakeholder | Potential impact |
|---|---|
| NBFCs | Lower insurance-related fee income and pressure to revise distribution models |
| PoSPs and other intermediaries | Reduced earnings per policy if commissions fall sharply |
| Insurance companies | Potentially lower acquisition costs, subject to changes in sales volumes |
| Borrowers | Potentially lower distribution costs and greater freedom to choose insurance |
| Rural customers | Possible changes in access if distributors reduce their presence |
| Regulators | Need to balance affordability, competition, consumer protection and distribution viability |
The impact will not be uniform. NBFCs that rely heavily on credit-linked insurance income may face greater pressure than lenders with more diversified revenue sources.
Insurers could benefit from lower distribution costs, but the overall effect would depend on whether sales volumes, product mix and customer demand change in response to the rules.
Some lenders may also seek to increase sales of individual protection products or develop other revenue streams to offset the reduction in commission income. Those adjustments will take time and may not fully replace existing earnings.
IRDAI Reviews Industry Feedback
The proposals remain under consultation. On October 26, 2026, Moneycontrol reported that IRDAI had received more than 650 submissions from stakeholders, including insurers, brokers, agents, banks, NBFCs and policyholders. The feedback deadline was extended from October 25 to October 31.
The regulator must weigh competing concerns. Distributors want enough time to adjust their businesses, while the regulator is seeking to address high acquisition costs and strengthen consumer protection.
The final framework could change following the consultation. Its timing, product-specific limits and transition arrangements will determine how quickly insurers and distributors need to adapt.
The Bigger Picture
The NBFC commission dispute illustrates the challenge of reforming insurance distribution in a market where intermediaries play a major role in reaching customers. High commissions can increase the cost of acquiring policies, but reducing them too quickly could also affect the commercial incentives that sustain distribution networks.
The final rules will need to balance lower costs with customer choice, insurance access and the financial viability of intermediaries. For NBFCs, the five-year transition request is an attempt to secure time to adjust. For IRDAI, the consultation offers an opportunity to determine whether a phased approach can meet its consumer-protection objectives without undermining insurance distribution.
FAQs
1. Why are NBFCs asking IRDAI for five years?
NBFCs want time to adjust their operating costs and distribution models after the proposed commission caps. FIDC argues that an immediate reduction could make some credit-linked insurance products uneconomical to distribute.
2. What commission caps has IRDAI proposed?
The current proposals include caps of 2% for certain credit life insurance products and 5% for credit health insurance. The final rules and their precise application remain subject to the consultation process.
3. What is FIDC proposing instead?
FIDC has proposed gradually reducing commissions from around 45–49% to 25% over five years, rather than implementing the lower proposed limits immediately.
4. How could borrowers be affected?
Borrowers could benefit if lower distribution costs translate into better-value insurance. However, if distributors reduce their presence or stop selling certain products, customers—particularly in rural areas—could have fewer opportunities to access insurance.
5. Have the new IRDAI commission caps become law?
No. As of October 26, 2026, the proposals remain under consultation. IRDAI has extended the feedback deadline to October 31, 2026, and the final framework may differ from the draft.
Looking Ahead
The next important development will be IRDAI’s response to the submissions received from NBFCs and other stakeholders. A decision on transition periods, commission limits and permitted premium-payment arrangements will shape how lenders, insurers and distributors prepare for the new framework.
For NBFCs, the priority is to adapt their insurance distribution economics while preserving customer access and maintaining viable operations. For the regulator, the challenge is to lower costs and improve policyholder protection without creating unintended gaps in insurance availability. The final rules will determine how these competing objectives are reconciled.
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