Banks Brace for Insurance Commission Hit

Indian banks are anticipating a sharp decrease in their fee income following proposed caps on insurance distribution commissions. Smaller and mid-sized lenders are particularly vulnerable, with potential losses exceeding 50% of their bancassurance income, and up to 70% in specific product categories. The Insurance Regulatory and Development Authority of India (Irdai) has proposed product-wise limits and aims to prevent compulsory insurance purchases alongside loans.

Single-premium life insurance policies, a significant income source for banks when bundled with loans, may face a commission cap of 2%. Currently, commissions for these products have no fixed cap. Industry estimates suggest commissions for credit-life products can reach up to 45%. This could moderately affect overall fee income, with a more pronounced impact expected on private banks and smaller institutions.

Several banks have indicated the potential financial impact. Bandhan Bank projects an annual decline of around ₹200 crore in third-party income, while RBL Bank anticipates a minimum 50-60% reduction in its bancassurance income. Karur Vysya Bank estimates commission cuts of up to 70% on certain life insurance products. To counter these anticipated losses, banks are focusing on deepening insurance penetration, expanding mutual fund distribution, and growing other fee-based services like credit cards and trade finance.